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Glaxo's Avandia Hits The Bottom Line--Hard

Shares of GlaxoSmithKline this morning are getting hammered because the company announced it expects earnings per share to fall by a mid-single digit percentage this year. Analysts thought they'd grow by three percent.

The stock's at a new three-year low and if it closes down more than eight percent or so, this could end up being GSK's worst one-day percentage drop in six to eight years. The disappointing guidance is primarily due to two things--Glaxo will have four drugs go generic this year and sales of its most profitable drug, Avandia for diabetes, remain under pressure.

And although Glaxo CEO JP Garnier argues that the surprising news yesterday about a higher risk of death in intensively treated diabetics "completely exonerated" (those are Garnier's words) Avandia, some analysts and doctors fear the halted study could make some patients stop taking or to cut back on their meds.

During a media briefing in London, which I listened to on the web, Garnier was extremely outspoken. Keep in mind he's retiring in May, so maybe that's why I think he showed more candor than normal.

He said things like, "We're facing an even tougher environment than we were a year ago. It wasn't easy to start with and it's getting harder. The problem of balancing (drug) risk and benefit is here to stay. (It) is not disappearing tomorrow. And we better be ready as a company to deal with this."

Last year, the Food and Drug Administration put two "black box" or stiff safety warnings on the Avandia label over heart risks. But as I blogged about earlier this week Garnier, too, believes there's a risk of "safety fatigue", a term coined the other day by Miller Tabak healthcare analyst Les Funtleyder. In his opening remarks Garnier said, "Black boxes are becoming trivial. It used to be a very rare event. Now, there's so many of them that they don't make the same impact with the medical profession, which is a pity."

You can watch my interview with Glaxo CEO JP Garnier in the video clip. You'll notice the gremlins (we are always at the mercy of the technology, especially in live TV) were hard at work on the audio line and because he had other interviews booked immediately following the one on CNBC we had to cut it short. Also, with the satellite delay, there's no room for the give-and-take I like when you're face-to-face.

Also weighing on GSK shares is an ongoing delay in the potential FDA approval of its cervical cancer vaccine, Cervarix, to compete with Merck's Gardasil. Garnier says he's pretty sure it's going to go before an FDA Advisory Committee. In the meantime, the company plans to file its response to FDA issues over the vaccine in the second quarter and says data should come out this year of a 1,000-patient head-to-head study of Cervarix versus Gardasil.

Garnier calls the market for the shots "gigantic". However, he says it's "impossible" to give a reasonable forecast about when Cervarix might get launched in the U.S. Pharma analyst Tim Anderson at Bernstein writes in a research note to clients today that a best case scenario is FDA approval toward the end of this year. "Delays with GSK's Cervarix benefit Merck's Gardasil," he says. Perhaps, it's no coincidence then that as I write this MRK is one of the few big pharma stock trading higher this morning.

Questions? Comments? Pharma@cnbc.com

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