GlaxoSmithKline, Avandia and multi-billion dollar legal fees

British pharmaceutical group GlaxoSmithKline (GSK) has taken a financial wallop to the tune of £2.2 billion ($3.5bn) in legal costs. This blow more than wipes out the company’s 2010 fourth quarter earnings of £1.45bn ($2.3bn).

A portion of the fees have gone towards the resolution of law suits linked to the diabetes drug Avandia. The majority of the charge is thought to correspond to the settlement of an investigation by the Attorney of the District of Colorado into the company’s practices dating back to 1997.

GSK has not broken down how the charge was accrued to prevent lawyers calculating the average amount paid to claims associated with Avandia. Such a figure would be a significant bargaining advantage for future litigators.

Avandia had been one of GSK’s big sellers, netting £1.4bn in 2006. Fears over its safety, specifically its potential to increase the risk of heart failure, and subsequent restriction of sale by European and US regulators meant this income dropped to £771m in 2009.

The investigation by Colorado’s district attorney is burrowing into purported aggressive sales practices including alleged ‘off-label’ marketing: the illegal practice of offering drugs as therapies for conditions they have not been licensed for.

A history of charges

According to a report published by Public Citizen, a US watchdog, GSK tops the drug company league table for penalties paid to the US government. Since 1990 the industry has forked over £12.5bn ($20bn) of which GSK has contributed £2.8bn ($4.5bn), even before this latest charge.

The report describes increasing frequency and scale of charges levied by US government bodies. The watchdog suggests this is due to a higher degree of scrutiny and stringency of US officials and is calling for “a more robust response than the government’s current practice” to combat the rising number of infringements.

As a consequence of significant legal charges, Public Citizen’s calls for greater regulation or the wave of bad publicity that has hit the company, GSK has announced changes in sales practice. US sales representatives will no longer be paid by commission but on the basis of their scientific knowledge, customer feedback and overall performance of their team.

Andrew Jack of the Financial Times believes this is a consequence of the “’arms race’ in aggressive marketing” that has built up between pharmaceutical companies. It is a product of the highly competitive market in the US. This stems from mergers of recent years that have produced enormous corporations like AstraZeneca with a turnover in 2009 of £20.8bn ($32.8bn), GSK, 2009 turnover of £28.4bn ($44.8bn) and Pfizer £31.6bn ($50bn). This has restricted space to manoeuvre in a hotly contested and lucrative market.

Take the hit and stay in the black

Evidently GSK can easily stomach the loss of its fourth quarter income for 2010. The ease with which a company of this size can weather regulatory investigation and litigious consumers does to some degree support Public Citizen’s call for more punitive treatment of transgressions. GSK claims new practices and tougher scrutiny has made their sins a thing of the past.

It is precisely this enormous turnover that enables these companies to invest in drugs in the first place. From wonder weight loss treatments to life-saving vaccines, Big Pharma does not peddle snake oil. Keeping pharmaceutical companies’ balance books in the black will ensure brilliant minds continue to hunt out medical breakthroughs.

The on-going saga of GSK, Avandia, and Big Pharma’s battle with regulation is emblematic of the relationship governments have with all big businesses. Politicians are sure that corporations boost the economy but are keen not to allow criminal acts; corporations stretch rules as far as they can without harming their profits.

For those fortunate enough to live in our ivory tower of the West it is too easy to conflate the argument to a battle between the forces of good in the public sector and the forces of evil in the private sector. You may see commerce as vulgar and the corporate world as cutthroat and dirty but in this global free market the innovation of pharmaceutical companies benefits us as a society and individuals.