GlaxoSmithKline

The £2.2bn legal charge gives the chief executive a clean slate

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As at other pharmaceuticals companies, plenty of ghosts haunt the corridors at GlaxoSmithKline. The conduct of the British drugmaker’s sales and marketing staff dating as far back as 1997 is being investigated in the US; a $750m settlement only recently closed the book on manufacturing problems at a now-closed facility; and legal claims continue to roll in relating to its diabetes drug Avandia, the former darling of the company, which has been withdrawn in Europe and heavily curtailed in the US.

Sick of the spectres of past deeds, chief executive Andrew Witty has unleashed his version of a ghostbusting proton pack – a £2.2bn charge to cover legal expenses.

This was unexpected but investors rightly have not panicked, with the share price falling 2 per cent on the news. Sure, the charge, among others during 2010, means GSK’s 2010 earnings per share of 9.3p will be about 90 per cent lower than 2009, on Goldman Sachs’ estimates. But the £2.2bn charge is conservative and represents an effort by Mr Witty, who has been in the top job less than three years, to draw a firm line underneath the company’s litigation history. This provision guards against potential future litigation, not just claims that have already been brought.

Neither should investors worry that the components of the legal charge have been kept secret. To publish detailed split figures would only have helped plaintiffs’ lawyers. Furthermore, even if the expenses related to this non-cash charge come through in lumps, the company generates £6bn of free cash flow each year, enough to keep dividends flowing without straining the group’s working capital.

Most of GSK’s patent-cliff troubles are history. With a decent pipeline of new drugs and the financial impact of its legal troubles dealt with, Mr Witty can at least start 2011 with a clean slate.

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