GlaxoSmithKline’s (NYSE:GSK) fourth quarter earnings were less than stellar as the British drugmaker’s profits were squeezed by legal charges for diabetes drug Avandia and declining sales of its products due to generic competition.
GSK reported a net loss of $1.12 billion for the fourth quarter of 2010. The company, which has its U.S. headquarters in Research Triangle Park, took a $3.4 billion charge in the quarter to set money aside for Avandia legal costs.
Despite the recent settlement of an Avandia lawsuit filed by the family of a North Carolina man who died, GSK still faces thousands of lawsuits regarding the drug, whose links to cardiovascular risks led regulators in Europe and the United States to place heavy restrictions on the former blockbuster drug. GSK estimates that in the last four years, Avandia sales have dropped by $1.6 billion. Besides the Avandia woes, the company faces stiff generic competition for herpes drug Valtrex and asthma product Advair, among others. The company estimates that more than $6.4 billion in sales have been lost to generic competition in the last four years.
Yet GSK’s stock price gained on Thursday. In mid-afternoon trading, the company’s stock was actually up 3 percent.
Why was the stock doing so well amid such bad financial news?
First, investors were cheered by a share buyback program that GSK announced.
CEO Andrew Witty has overseen a series of cuts at the company, all in an effort to restructure the company and make it a more streamlined, efficient operation. In the GSK’s earnings announcement, Witty said that the improved efficiencies are helping drive cash generation. With an improved cash position, Witty said GSK would increase returns to shareholders. With that, he announced the company would spend between $1.6 and $3.2 billion buying back shares, resuming a share buyback program that was suspended in 2008.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
A Wall Street Journal blog post notes that GSK’s cuts may be good for shareholders but they’re not good for people who need treatments and cures for diseases. The Journal points out that 2010, R&D spending was down 3 percent compared to 2009. GSK and other pharmas have been turning to smaller pharmaceutical companies and biotechs to serve as their R&D arms. The big pharmas either license compounds in later stages of development or they acquire the companies outright. R&D is expensive. It can mean millions of dollars and years of time spent all for uncertain results.
It’s a safer strategy for pharmaceutical companies to pare back their R&D spending. But if companies continue to putting money into stock buybacks rather than R&D, it will also mean that fewer new and innovative new drugs will make it to the market.
