In response to a growing body of evidence pointing to cardiovascular side effects associated with GlaxoSmithKline's (GSK) diabetes drug Avandia, the European regulatory agency suspended Avandia sales in Europe. The Food and Drug Administration increased warnings for Avandia but allowed the drug to remain on the US market. We expect the regulatory updates will only have a modest negative impact to our fair value estimate for Glaxo as Avandia sales have already fallen significantly (75%) from their peak to less than a billion dollars a year due to the increased cardiovascular concerns that emerged over the last few years. Further, with the drug's key patents expiring between 2012 and 2013, only a limited amount of time is left before generic competition. As a result, we estimate the new regulations will reduce Glaxo's total sales by just over $1 billion cumulatively between 2010 and 2013 or approximately 1% of total sales over the same time period.
From a legal standpoint, Glaxo had already settled the majority of Avandia suits claiming cardiovascular problems related to the drug (about 10,700 suits of the 14,000 claims) in July for $520 million. While a large number of claims is still pending, the FDA's decision to keep the drug on the market should help mitigate additional waves of new lawsuits. Further, since the majority of legal claims tend to come in the US, the European agency's decision to suspend the drug shouldn't materially increase new litigation.
There are several winners from the suspension of Avandia. Takeda's Actos should yield the most gains as Avandia users look for a replacement drug, considering Actos has a similar mechanism of action to Avandia without the cardiovascular problems. Merck's (MRK) Januvia and Bristol's (BMY) and AstraZeneca's (AZN) Onglyza could also benefit as doctors and patients seek other oral diabetes drugs with better side effect profiles.