UPDATE 4-Glaxo takes $2.4 bln charge, Avandia mostly settled

* Charge of 1.57 bln pounds equates to 1.35 bln after tax

* Company settles “substantial majority” of Avandia cases

* Charge also relates to Cidra plant and Paxil litigation

* Legal cost to largely wipe out Q2 earnings per share
* Shares up 2.2 percent

(Adds analyst comment on dividend yield, further share gains,
Q2 results date)

By Ben Hirschler

LONDON, July 15 (BestGrowthStock) – GlaxoSmithKline (GSK.L: ) expects
to record a legal charge of 1.57 billion pounds ($2.4 billion)
for the second quarter after settling the “substantial majority”
of claims relating to its controversial diabetes pill Avandia.

The move, designed to clear the decks of outstanding legal
issues, will wipe out most of the drugmaker’s expected earnings
for the three months to June but leaves it better placed to grow
profits in future.

The British drugmaker said on Thursday the charge would
cover not only settlements for Avandia but also other
long-standing legal cases, including an investigation into its
former factory at Cidra in Puerto Rico, and anti-trust and
product liability litigation over antidepressant Paxil.

The charge will cost 1.35 billion pounds after tax.

News of the hefty charge — equal to about 2.5 percent of
Glaxo’s market value — initially dampened an anticipated rally
in the shares after a U.S. panel voted to keep Avandia on the
market with new warnings on heart risks. [ID:nN14274445]

However, the stock gained ground in morning trade and was up
2.2 percent by 1200 GMT, outperforming a 0.8 percent advance in
the European drugs sector (.SXDP: ).

“Some people might baulk at the size of the charge but
probably most will say this is putting it all behind the
company, so we can now look to the continuing business and view
the stock on a more rational basis,” said Deutsche Bank analyst
Mark Clark.

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Instant view on FDA panel vote on Avandia [ID:nN14151765]

Graphic on Avandia vs Actos http://link.reuters.com/num57m

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The big legal hit will slash second-quarter earnings per
share by more than 26 pence, according to analysts, wiping out
most of the group’s profit for the period. Prior to the news,
the consensus EPS forecast had been 29.5 pence, according to
Thomson Reuters data. Glaxo will report results on July 21.

“It is a negative in the short term but longer term it is a
positive because from here we anticipate that EBIT (earnings
before interest and tax) will actually go up 2 to 5 percent
based on the company running these charges through now,” said
UBS analyst Gbola Amusa.

“They are closing the book on uncertainties upfront, which
makes for a cleaner organisation.”

Morgan Stanley analyst Andrew Baum said he anticipated
renewed interest in the shares from yield-hungry British
investors, given the expected dividend yield of 5.3 percent in
2010.

FALLING AVANDIA SALES

Glaxo did not specify the amount it was setting aside to
settle liability claims over Avandia, arguing settlement terms
were confidential.

Initially, analysts had feared it might have to spend as
much as $6 billion to resolve an estimated 13,000 U.S. Avandia
claims. But the favourable panel vote and recent reports of
modest settlements means some now see a bill of around $1
billion or less.

Avandia was once Glaxo’s second-biggest drug, with sales of
around $3 billion a year. Since 2007, however, it has been in
decline after it was first linked to heart attacks. It sold just
$1.2 billion in 2009.

Those sales are expected to keep falling as new restrictions
on its use are introduced, with the U.S. Food and Drug
Administration expected to follow the panel’s recommendations.
But investor concerns have been focused more on the company’s
legal liability than on the relatively modest impact of Avandia
to the sales and profit lines.

Glaxo said the resolution of the various disputes was a
significant step in clearing legal uncertainties.

“This represents a substantial proportion of GSK’s
outstanding litigation. This progress is helping us to reduce
financial uncertainty and risk for shareholders,” Dan Troy, the
drugmaker’s general counsel, said in a statement.

While it did not break out the other components of the
charge, Glaxo did disclose that the agreement in principle
relating to quality problems at the Cidra plant was for a total
of 500 million pounds, leaving 1.07 billion to cover claims for
Paxil, Avandia and other products.

A company spokeswoman said the latest 1.57 billion pounds
charge would be in addition to the company’s current balance
sheet legal provision of 2.3 billion pounds.

Avandia also faces scrutiny from the European Medicines
Agency, which has launched a new review into the drug’s risks
and benefits and will discuss the matter July 19-22 in London.
[ID:nLDE6680IZ]
(Editing by Dan Lalor and Michael Shields)
($1 = 0.6580 pound)

UPDATE 4-Glaxo takes $2.4 bln charge, Avandia mostly settled