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Glaxo's Avandia Nose Dive: What It Means

Shares in the world's second biggest drug company, GlaxoSmithKline , are giving back all of yesterday's gains in early trading this morning. That's because sales of its embattled diabetes drug, Avandia and other Avandia-related products took a huge dive in the third quarter. Down 48% in the U.S. from the same time last year.

American revenue for Avandia alone fell 43% sequentially--from the second quarter to the third quarter. The once $3 billion-a-year pill is under fire over heart safety concerns which could soon lead to a so-called "Black Box" warning--the Food and Drug Administration's most serious. On the conference call, GSK CEO JP Garnier said the FDA is "very unpredictable" and until the agency's decision is handed down it's simply too soon to say whether Avandia becomes--as he put it--"a slow-erosion type product" or whether sales will rebound.

For now, Glaxo says Avandia sales will be down again next year. The company reports that Avandia's market share of new and total diabetes drug prescriptions has gone from nearly 12% earlier this year when the highly controversial Avandia heart study was published down to about 5% two weeks ago. Glaxo is in the middle of what's considered a gold-standard clinical trial to specifically measure the heart side effect of Avandia, but the results won't be available for quite some time.

In the meantime, though, Glaxo is launching a $3 billion cost-cutting program that will unfold over the next few years. The downsizing campaign, which Glaxo is branding as "Operational Excellence", will include an as yet unspecified number of layoffs. That is helping the company maintain its forecast for 8-10% earnings growth this year. Glaxo also hopes to offset the Avandia loss and other drugs that are going generic soon with up to 25 potential new product launches between this year and 2009.

Interestingly, unlike the American drug companies which are seeing a boost from the weak dollar--i.e. Pfizer said foreign currency exchange added $300 million to its topline in Q3--Glaxo, based in the UK, says its results took a 5% hit from the dollar.

Garnier is retiring next May and earlier this month Glaxo named his successor. In an interview on "Squawk Box" this morning I asked him if that made him a lame duck and reluctant to saddle his replacement with an acquisition integration. He denied that he's a lame duck and said he'd work with CEO-designate Andrew Witty on any potential deals, but he wouldn't address any specific speculation--i.e. buying Biogen Idec which last week put itself on the market.

Speaking of BIIB, I misspoke during the chit-chat session on "Squawk Box" this morning with Jack Welch following my interview with Garnier. I had Biogen Idecon my brain because I had just asked the Glaxo CEO about buying that company and so I inadvertantly said that BIIB, in Welch's hometown, had just announced it was laying off more than 3,000 people. Right city, wrong company. It's Boston Scientific that is cutting headcount.

It also didn't help that I hadn't yet had my grande, skim, no whipped, two Splenda mocha. Amgen is the big biotech company that is handing out pink slips. It reports earnings after the closing bell today. Once again, watch the sales numbers for the anemia drugs Aranesp and Epogen.

Questions? Comments? Pharma@cnbc.com