Why GlaxoSmithKline PLC Shrugged Off Alli's Recall

GlaxoSmithKline issued a voluntary recall for its OTC weight-loss pill Alli last week. Will this recall have a material impact on GlaxoSmithKline's business?

Mar 30, 2014 at 4:30PM

GlaxoSmithKline (NYSE:GSK) announced a voluntary recall in the United States and Puerto Rico of its over-the-counter, or OTC, fat-blocking pill Alli last Thursday, after consumers in seven states reported that they had bought bottles containing pills that were not the FDA-approved weight-loss product. Alli is an OTC version of Roche Holdings AG's prescription drug Xenical, containing about half as much as orlistat, the active ingredient, as Xenical. Both drugs are meant to be taken in conjunction with a healthy diet and exercise.

Despite the headline-grabbing nature of this news, GlaxoSmithKline's shares reacted almost indifferently, even ending the week in positive territory. That's saying something, especially in a week where the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) fell 6.76%. So, why did GlaxoSmithKline's shares shrug off this bad news?

Alli -- a history of problems and disappointments
In 2011, GlaxoSmithKline announced that it was actively shopping Alli, along with other non-prescription brands, to potential buyers. This news was certainly disappointing for investors, because the drug was originally believed to have blockbuster potential when it was launched in 2007. Even so, Alli's sales peaked around $337 million in 2009, and had fallen sharply to $93 million by 2011. This major drop is thought to be the result of a 2009 Consumer Reports article stating that, a Freedom of Information Request filed with the FDA produced information that orlistat appeared to be linked to an increased risk of rectal bleeding, as well as kidney, liver, and thyroid problems. Following the report, the FDA revised the label for products containing orlistat to include new safety information about cases of severe liver injury. Alli's new label specifically contained a new warning about "rare reports of severe liver injury."

Complicating matters, Roche had manufacturing problems with orlistat in 2011 that greatly reduced the supply of Alli, and even kept the drug from being included in a deal with Omega Pharma for a host of GlaxoSmithKline's OTC health care brands in Europe. Since 2011, GlaxoSmithKline has stopped breaking out Alli's sales in their financial reports, showing how far the drug has fallen in the eyes of management. 

New drugs, new problems for Alli
Although Alli remains the only FDA-approved OTC weight-loss drug, it is undoubtedly facing competition from the new generation of prescription-based meds, namely Arena Pharmaceuticals' (NASDAQ:ARNA) Belviq and VIVUS's (NASDAQ:VVUS) Qsymia. Moreover, Orexigen Therapeutics (NASDAQ:OREX) and Novo Nordisk could both have additional anti-obesity drugs on the market by the end of the year. Because the obesity market has proved to be a tough nut to crack for pharmaceuticals in general, this slate of new prescription drugs could make it even harder for medications like Alli/Xenica in terms of commercial performance, given their modest weight loss and problematic side effects. Indeed, Belviq thus far appears to be a relatively safe weight-loss option, whereas Qsymia can lay claim to superior performance in terms of weight-loss than all other commercially available pills. In sum, Alli's sales are probably going to continue to head lower, as more and more pharmaceutical options with superior weight-loss and safety profiles become available.

Foolish wrap-up
Recalls for consumer goods can have a dramatic affect on a company's share price due to the cost and loss of revenue involved. In this case, GlaxoSmithKline's shares barely moved on the news, in part, because Alli has become a minor player in their consumer health care commercial portfolio, and the future of the drug is uncertain due newer drugs coming on the market. Although Alli's sales haven't been reported recently, it's also important to remember that GlaxoSmithKline is a huge company and they could probably mothball Alli altogether without much impact on their bottom line. Specifically, the company booked a stately $8.83 billion in profits after taxes in 2013. So, you shouldn't expect much overhang from the recall of Alli going forward. 

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