Avandia is not material

SENIOR doctors’ proposal to withdraw Avandia on safety grounds, which remains subject to an EU-wide final decision this month, would have little impact on the valuation of Glaxo. The market has long assumed declining future revenues and contribution to earnings from the diabetes drug.

The peak year for sales was back in 2007 when it joined the blockbuster drug class with sales of £1.2bn. Since then it has drifted down with sales of £771m last year and it goes out of patent in 2012-13. If the drug is withdrawn, Glaxo will lose around £770m in revenues, cutting around £500m from its bottomline – an amount the well diversified Glaxo can afford.

Yet, the legal uncertainty over Avandia is already hitting its shares – which are trading at a lower multiple than its European peer group. Now could be the time to pick up a bargain.