Glaxo facing £1.5bn bill after it settles 'majority' of Avandia cases

The move, designed to clear the decks of outstanding legal issues, will wipe out most of the pharmaceutical giant's expected earnings for the three months to June but leaves it better placed to grow profits in future.

Glaxo yesterday said that the charge would cover not only settlements for Avandia but also other long-standing legal cases, including an investigation into its former factory at Cidra in Puerto Rico, and anti-trust and product liability litigation over antidepressant Paxil.

Paxil had been linked by some to birth defects, while Avandia had been associated with a higher risk of heart disease.

News of the hefty charge - equal to about 2.5 per cent of Glaxo's market value - initially dampened an anticipated rally in the shares after a US panel voted to keep Avandia on the market with new warnings on heart risks.

However, the stock gained ground to close up 21.5p at 1,203p.

Deutsche Bank analyst Mark Clark said: "Some people might baulk at the size of the charge but most will say this is putting it all behind the company, so we can now look to the continuing business and view the stock on a more rational basis."

The big legal hit will slash second-quarter earnings per share by more than 26p, according to analysts, wiping out most of the group's profit for the period. Prior to the news, the consensus EPS forecast was 29.5p. Glaxo will report results on 21 July.

UBS analyst Gbola Amusa said: "It is a negative in the short term but longer term it is a positive because from here we anticipate that earnings before interest and tax will actually go up 2 to 5 per cent based on the company running these charges through now. They are closing the book on uncertainties upfront, which makes for a cleaner organisation."

Morgan Stanley analyst Andrew Baum said he anticipated renewed interest in the shares from yield-hungry investors, given the expected dividend yield of 5.3 per cent in 2010. Glaxo did not specify the amount it was setting aside to settle liability claims over Avandia, arguing settlement terms were confidential.

Initially, analysts had feared Glaxo might have to spend as much as $6bn (3.9bn) to resolve an estimated 13,000 US Avandia claims.

The drug faces another review by the European Medicines Agency at a conference starting on Monday in London.

Avandia was once Glaxo's second-biggest drug, with sales of about $3bn a year.

Since 2007, however, it has been in decline after it was first linked to heart attacks. It sold just $1.2bn in 2009.