Questor share tips: GSK a buy despite drug fears

The UK's largest pharmaceutical company missed out on the stock market rally yesterday as its diabetes drug Avandia came under renewed scrutiny.

GlaxoSmithKline

£12.49 -19½p

Questor says Buy

For investors and Glaxo-SmithKline, it was an uncom-fortable day as fierce statements emerged against a drug that in 2007 was GSK's second best-selling product.

Not only was Avandia the subject of a Panorama programme on Monday called 'A risk worth taking?' but the British drug regulator, The Medicines and Healthcare products Regulatory Agency (MHRA), yesterday said the drug "no longer has a place on the UK market".

The concerns are over Avandia's links to heart problems, with the European Medicines Agency (EMA) holding an extraordinary meeting on Wednesday to decide whether the drug should remain on sale across the continent.

Despite the uncertainty over Avandia, however, Questor sticks by its recommendation of GSK shares.

The focus on the diabetes drug is not new. Sales of Avandia have fallen since a study published in the New England Journal of Medicine in 2007 showed a 43pc increased risk of heart attacks from the drug.

GSK has consistently rejected claims over drug's safety – insisting that "no other diabetes medicine introduced in the last 10 years has such an extensive safety database" – but Avandia sales have fallen from £1.4bn in 2006 to just £462m last year.

Indeed, some analysts took the drop in GSK's shares yesterday as an opportunity to upgrade the stock. Analysts at Citi said the MHRA's comments "adds little to the debate" while Merrill Lynch said GSK had effectively "drawn a line under Avandia litigation risks" after taking legal provisions in the last quarter and after an advisory panel to America's Food and Drug Administration recommended that the drug should stay on the market, albeit with new warnings or restrictions.

European sales account for about a quarter of total Avandia sales and the risk of the EMA pulling the drug off the market has long been recognised. However, this conclusion is not certain. Although the UK regulator says it has put forward its case "robustly", it is only one of 27 member states.

Questor is attracted to GSK because of the stability of its dividend and the growth prospects in its emerging markets and consumer healthcare divisions. The concerns over Avandia do not change this – the drug accounted for only a small proportion of GSK's 2009 sales of £28.4bn.

The company, under the guidance of Andrew Witty, chief executive, is emerging from a difficult few years of expiring patents. It is focused on diversifying away from a "white pill/Western market" reliance, a sector which now accounts for just a quarter of sales. With the shares trading on 11.8 times 2010 earnings and a 4.7pc yield, BUY.