Challenges Surround GlaxoSmithKline

The government "will not allow drug manufacturers to ignore our high public health standards for drug manufacturing," said John M. Taylor, a top FDA official, on March 4. "Once we discover a company is not following the standards ... we expect it to correct the deficiencies in an expedited manner."

Citigroup Smith Barney's Kevin Wilson says the FDA began investigating the plant in October 2003 and later issued two warning letters. It reinspected the plant in November 2004 and issued two more letters.

He predicts that Paxil CR and Avandamet won't return to the U.S. market until the third quarter of 2006. He adds that a "highly likely outcome" would be for the plant to operate under a consent decree, meaning GlaxoSmithKline must fix all problems before resuming production.

The plant also could be subject to periodic reviews by the FDA, and the company could be hit with big fines.

Wilson adds that it's possible the entire plant -- not just the two products -- could be ensnared in the consent decree. If so, that would affect products with an estimated $3.65 billion, or 9.5%, of corporate revenue for 2005, he says. The plant also makes a standard version of Paxil, a cousin of Avandamet called Avandia and a congestive heart failure drug called Coreg.

As a result, Wilson cut his 2005 earnings per share estimate by 8% to $2.71 and his 2006 EPS estimate by 7% to $3.11. (He owns shares; his firm has an investment-banking relationship.)

Prudential Equity Group analyst Tim Anderson cut his rating to underweight from neutral weight on March 4, just as the U.S. marshals were seizing GlaxoSmithKline's products. He told clients the company's shares had outrun his price target. He is less enthusiastic about experimental drugs, saying he is "not able to give GlaxoSmithKline credit" for these products, "mostly because we have yet to see concrete clinical data to help us assess these compounds."

Two weeks later, Anderson issued another report and reduced EPS estimates for 2005 and 2006 to $2.64 and $2.67, respectively. The consensus views, according to Thomson First Call, are $2.98 and $3.22, figures which Anderson says "are at risk." (He doesn't own shares; his firm doesn't have an investment-banking relationship.)

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