Glaxo Catches the Nondisclosure Bug

It's never pretty when big companies make small-time mistakes.

That's what investors and analysts are left with in the aftermath of a

Food and Drug Administration

panel recommendation against

Glaxo Wellcome's

(GLX)

flu drug

Relenza

.

The thing that irks some people is that Glaxo didn't tell Wall Street about a large failed North American study of the drug. The company had made data public from two large international trials of the drug at a big scientific meeting last year. Those trials gave strong, statistically significant data showing the drug worked. But the company didn't disclose the North American results -- until an FDA panel meeting Wednesday. Jeez, two out of three ain't bad. Wall Street is so, like, demanding.

Even as long ago as November, the North American study was turned down for presentation at the

Infectious Disease Society of America

meeting, according to Glaxo. But Wall Street didn't know about that till after the Wednesday panel meeting.

"Yeah, it's a blunder" to have not told the investment community, says one big pharmaceutical money manager who has no position in Glaxo. "I knew

the trial existed and assumed it was OK."

The lack of disclosure underscores the risks of investing on the basis of data shown at major scientific meetings. It's always an incomplete picture. The FDA panel's rejection of Relenza reinforces the point that drug companies, especially Big Pharma, reveal what they like to Wall Street. Expecting that they paint the complete picture -- all the trials, the side effects, the statistics -- is like hoping that, say, trial witnesses will tell the whole truth and nothing but.

"There's some sense of balance here that could have been better," says Jeff Chaffkin, a drug analyst for

PaineWebber

, which rates Glaxo a neutral and hasn't done any banking for it. "There's no doubt they built up expectations for

Relenza. Something wasn't as tight as it should have been."

He points to the larger issue: "Companies do this all the time. They show pieces rather than the whole."

Glaxo doesn't think it was a material issue to discuss the failed trial with Wall Street. For one, says Frank Murdolo, head of U.S. investor relations, Glaxo isn't giving up on the drug, which is part of a class that analysts believe could reach several hundred million dollars a year in sales in four years or so. The advisory panel may have rejected it, but the FDA could approve it, though the agency rarely ignores its advisory panels' suggestions.

Also, the company is conducting several studies in high-risk patients like young children, asthmatics and elderly patients, as well as for flu prevention. (The three earlier trials were for treatment of flu in adults, with only a small portion of high-risk patients.) Glaxo has four trials that it could make public by the fall, and it hopes that the data from these studies could help it win approval.

Murdolo says it is Glaxo's policy to reveal trial results only in conjunction with a peer-reviewed study publication or presentation at a scientific meeting. Unfortunately, since there's a well-characterized scientific bias toward publishing and presenting positive studies, this policy puts investors at a disadvantage. Most large drug companies have similar guidelines for releasing study data but often depart from them when the study result is material.

Murdolo, the IR chief, says, undeniably, that the FDA typically requires two randomized, controlled trials for approval, and that's why Glaxo was -- and is -- hopeful for a recommendation for approval. The panel, it turned out, was more concerned that the drug didn't seem to work in the U.S., the country in which the drug was being considered for approval, than pleased that it worked in two major international studies.

The issue now is how trustworthy and complete Glaxo has been and whether it will damage the company in the future. The company says it was surprised and disappointed with the panel vote, but whether it should have been is another question. "Glaxo shouldn't have been that surprised by this: It was a 13-to-4 vote. That's pretty bad," says PaineWebber's Chaffkin.

Glaxo trades at a price-to-earnings ratio of around 36 times 1999 earnings, right in line with the eight major U.S. drug companies. That's despite the fact that its five-year earnings per share growth rate is only 10%, under the industry average. Overall, the performance of its stock has been dramatically worse than the group's. Over the last year, the

Amex Pharmaceutical Index

is up 30%, while Glaxo is up 17%. Over the last five years, the index has risen 389%, while Glaxo climbed 210%.

Part of the reason it's done that well is that it's a stock the Brits gotta own, though why is a mystery to U.S. investors. What is it, a perverse sense of nationalism? "I view it as a weird U.K. stock, where the people in the U.K. own it to death," says the money manager. "I don't own the stock because it looks expensive."

And with episodes like the Relenza rejection, it may be hard to blame him.