Glaxo could face $6bn Avandia liability, says UBS

GlaxoSmithKline could face a liability of up to $6bn following problems with its diabetes drug Avandia in the US, according to City followers of the company.

Analysts at UBS said the risk came from the filing of more than 13,000 lawsuits in the wake of criticism by a US congressional committee. UBS's Gbola Amusa said:

Last week, in the wake of a critical Senate report on Avandia, the FDA [US Food and Drug Administration] is scrutinizing Avandia's cardiovascular risk profile. As US Avandia contributes 1% to sales, our concerns are solely on personal injury lawsuits. Experts we polled suggest Glaxo's liability is in the range of $1bn to $6bn. We expect liability below the midpoint of this range and note Glaxo has underperformed by around $2.5bn already.

We believe the data on Avandia supports the recent AHA/ACC conclusion that Avandia should continue to be used. That said, non-scientific political pressure from Congress will likely be as important as science at FDA in the coming months; and, product withdrawal, if it occurs, could put GSK at the top end of our liability range. Bellwether trials start from 1 June and will help narrow our liability range.

But although UBS has cut its price target on Glaxo from £15.50 to £14.75, it has kept its buy recommendation:

Booming fundamentals override our shorter-term concerns. To us, consensus Glaxo long-term estimates are implausibly low and suggest upside of around 25% on 2015 sales on a market under-appreciation of emerging markets and Japan. We conservatively apply a 5% discount on our factors to account for Avandia liability.

Glaxo is currently down 16p at £12.29.