Glaxo Profit to be Hurt by Manufacturing Problems

Loss of revenue from two key drugs in the United States because of manufacturing problems is set to lop at least 2 percent off GlaxoSmithKline Plc's (GSK) profit in 2005, industry analysts said on Monday.

Some believe it could be as much as 6 percent, based on a worst-case scenario of continuing drug supply restrictions.

Shares in Europe's biggest drugmaker fell a further 1.2 percent on fears over the fallout of the problems at its Cidra plant in Puerto Rico, which is the sole source of supply of both drugs for the U.S. market. The stock lost 2.2 percent on Friday.

The Food and Drug Administration (search) said on Friday it was seizing batches of antidepressant Paxil CR (search) and diabetes medicine Avandamet made at the factory because of quality problems.

ABN AMRO analyst Adrian Howd said annual U.S. sales of the two products totaled around $1 billion and there was a risk they would be off the market for the rest of the year, which would reduce 2005 earnings per share by around 2 percent.

Credit Suisse Boston said it expected no further U.S. sales of Paxil CR or Avandamet (search) until a likely reintroduction of both drugs early in 2006, slicing 3 percent off 2005 earnings.

Lehman Brothers took a more gloomy view. It predicted earnings would be hit by 3 percent, assuming the issue was resolved in six months, but 6 percent if it dragged on for a year.

Michael Leacock of Nomura said the loss of Paxil CR would have the greatest financial impact, since the controlled-release medicine was easily substitutable by generic versions of shorter acting Paxil.

Overall, Leacock cut his 2005 net income forecast by 90 million pounds ($172 million), or 2 percent, and warned investors not to expect a speedy resolution.

"Manufacturing issues can take considerable time to sort out ... formulation change will require considerable validation and testing and we estimate it will be up to six months before supplies of these two drugs are back to normal," he said.

The loss of Avandamet supply is viewed as less significant since GSK is still able to manufacture and market Avandia (search), one of the key components of the two-in-one tablet, he added.

Morgan Stanley analysts also took a dim view of the problems at Cidra, which they noted had been rumbling on for some time.

"The seizure in the U.S. of supplies of Avandamet and Paxil CR, which we estimate represent 4 percent of total pharma sales, looks ominously like a long term problem emerging," they said in a note.

The fact that U.S. marshals had stepped in to seize supplies of the drugs also suggested that the patience of the regulator had been stretched too far and significant delay in supplies looked likely, they said.

Morgan Stanley recommended that investors switch into other European drug stocks, such as Novartis AG or AstraZeneca Plc, arguing that market optimism about a near-term recovery in GSK's profit growth and the pipeline had been dented.

A spokesman for GSK reiterated that the company was doing all it could to resolve that manufacturing issues as quickly as possible but that it was too early to assess the financial impact of the seizures.

Shares of SkyePharma Plc, a drug delivery specialist which developed the controlled-release technology used to make Paxil CR, bounced back 6.3 percent to 55-1/4 pence after plummeting 13.7 percent on Friday.

WestLB, which predicted Paxil CR would be back on the U.S. market in the fourth quarter, said the initial market reaction had been overdone.

($1=.5245 Pound)