Despite Strong Earnings, SmithKline Falls on Drug Setback - TheStreet

Despite Strong Earnings, SmithKline Falls on Drug Setback

The company's stock dropped after its new diabetes drug got a negative opinion from an EU panel.
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Despite higher third-quarter earnings at

SmithKline Beecham

(SBH) - Get Report

, investors hammered the stock of the giant pharmaceutical company today because of a regulatory stumble for its new diabetes drug.

SmithKline's American depository receipts fell as much as 11% and were down 7 11/16 to 59 7/8 in midday trading. Investors reacted harshly to news Avandia, the British-based company's top innovation that is expected to bring in $1 billion yearly, had received a "negative opinion" from the

European Committee for Proprietary Medicinal Products

, an advisory panel for the

European Union

. The company did not discuss further the nature of the problem.

"We believe this is a temporary setback and in the coming months we will be working with the committee to address their concerns," Jan Leschly, SmithKline's chief executive, said in a statement. "We are confident that by the end of March we will have demonstrated Avandia's unique benefits in the treatment of type 2 diabetes to the CPMP."

The news caught investors off guard, but was another example of the problems that pharmaceutical companies face when developing new drugs. It brought to mind a similar incident recently with

Glaxo Wellcome

(GLX)

, SmithKline's pharmaceutical rival, which faced a setback with its new influenza drug Relenza.

"They (drug companies) walk on egg shells," said Sidney Taubenfeld, an analyst with

New Vernon Associates

, whose firm gives SmithKline's stock an accumulate rating. "Any kind of problem raises a specter of doubt."

Taubenfeld added that SmithKline should receive much of the blame for the stock market's reaction because it had touted Avandia as its drug of the future.

"They raised the bar themselves," said Taubenfeld, whose company is a research firm that does not do underwriting. But he added SmithKline can reapply with more information and he expects the drug to eventually be approved.

Avandia has been approved by the U.S.

Food and Drug Administration

and by regulatory authorities in 18 other nations. More than 250,000 patients in the U.S. have already used the drugs and haven't experienced adverse effects, the company has said.

On the earnings front for the third quarter, SmithKline reported a 16% increase in pretax profit to 467 million pounds, or $743 million, while earnings per ADR rose 15% to 5.5 pence, or 43.7 cents. That was closely in line with the consensus estimate of 44 cents from analysts surveyed by

Zacks Investment Research

.

"Looking forward, we are a company that is well positioned for continued growth," Leschly said in a statement. "As a result of our performance in the first nine months, we are on track to meet our goal of underlying earnings growth of around 13% for 1999."