GSK Concludes USD3-Bil. Settlement with US Government

United Kingdom pharma giant GlaxoSmithKline (GSK) has reached an agreement with the United States government, multiple states, and the District of Columbia concluding the federal government investigations. As per the final settlement, which was agreed to in principle in November 2011, GSK will make a USD3-billion payment. This settlement includes USD1 billion in criminal fines and USD2 billion in civil fines. This payment is to be funded by the company's "existing cash resources".

The investigation into GSK practices for nine drugs was initiated by the attorney's office of Colorado in 2004 and was subsequently taken over by the Massachusetts US Attorney's Office, focusing on GSK's sales and marketing practices of nine products; as well as the US Department of Justice (DoJ). The DoJ's investigation was focused on the "possible inappropriate use of nominal price exception under the Medicaid Rebate Programme" and the "marketing and regulatory submissions of Avandia (rosiglitazone)".

As part of the agreement that has been reached, GSK entered into a corporate integrity agreement (CIA) with the US Department of Health and Human Services' Office of Inspector General. The purpose of the CIA is to build further on GSK's compliance programmes. The CIA additionally covers part of GSK's manufacturing operations under the company's previous settlement in 2010 pertaining to GSK's former manufacturing facility in Cidra, Puerto Rico.

Furthermore, as part of the terms of the settlement, GSK is to plead guilty to misdemeanour violations under the Federal Food, Drugs and Cosmetic Act pertaining to "certain aspects" of Paxil (paroxetine) marketing for paediatric use. It is also to plead guilty on misdemeanour violations of Wellbutrin (bupropion) in certain indications, as well as for not adding information regarding the commencement and status of certain studies for Avandia in the company's periodic and annual reports, which it submitted to the US FDA.

As part of the settlement, the company has not accepted any liability or wrongdoing in the selling and marketing of Lamictal (ropinirole), Zofran (ondansetron), Imitrex (sumatriptan), Lotronex (alosetron), Flovent (fluticasone propionate), Valtrex (valacyclovir), Avandia, or Advair (fluticasone + salmeterol) products, nor in its nominal pricing practices.

The company further stated that resolution has been reached within the existing pre-tax provision, thus leading to USD150-million lower after-tax costs. These are to be recorded to the non-core tax charge in the second quarter of 2012. The company is expecting to utilise the tax benefit that has occurred due to recording an additional pre-tax provision of USD180 million, however. This is to be recorded as a non-core charge in selling, general and administrative expenses during the second quarter of 2012.

Outlook and Implications

The current settlement had been agreed in principle in November 2011 (see United Kingdom - United States: 3 November 2011: GSK Settles Federal Government Litigation in US). The size of the settlement is staggering, however. It is the highest ever healthcare fraud settlement in US history, according to US deputy attorney general James Cole.

The above settlement, which ends GSK's most significant ongoing government investigation, was related to the company's previous marketing and sales practices. It was in particular related to the sales practices of nine of its products, the potential inappropriate use of nominal price for the Medicaid rebate programme, and the marketing and regulatory submissions for the company's Avandia products. On the positive side for GSK, the settlement also covers the civil investigation of the "alleged underpayment of rebates that were required under the Medicaid Drug Rebate Program". The signing of the CIA, however, as well as the adoption of new compliance, marketing, and selling policies by the company—such as a new incentive compensation programme from January 2011 for GSK sales professionals who work with healthcare professionals—points to the company's intent and need to address its marketing and sales issues. According to the company's chief executive officer, Sir Andrew Witty, the changes the company has made are to ensure that "the company's programmes and activity are well controlled".

The USD3-billion settlement closes the chapter on the company's ongoing federal investigations for these drugs. Although the company does not expect the payment to have a major impact on its total earnings, the potential further compliance, marketing, and selling changes may have an impact on the company's costs.

The current settlement further signals the Department of Justice's intention to crack down on pharmaceutical companies with regards to their marketing and selling practices in the US. The creation of the Health Care Fraud Prevention and Enforcement Action Team in 2009, which has in the last three years facilitated settlements, fines, and judgments worth more than USD10.2 billion, has made the marketing environment for pharmaceutical companies in the US considerably more risky.