GMI Ratings Governance Issue | GlaxoSmithKline plc

GlaxoSmithKline plc must pay $3 billion in the largest health care fraud settlement in U.S. history, underscoring that companies expose themselves to the risk of denting shareholder value by breaking the law. Moreover, the price tag for getting caught is tough for investors to predict.

Regulators alleged that the U.K. pharmaceutical manufacturer marketed the drugs Paxil and Wellbutrin for uses not approved by the U.S. Food and Drug Administration, including the treatment of children for depression and of other patients for ailments ranging from obesity to anxiety. Glaxo agreed to plead guilty to such charges and pay $1 billion in criminal fines as a result, the U.S. Justice Department said on Monday. Glaxo has an additional $2 billion penalty to resolve civil allegations that its marketing and payments to physicians caused the submission of false claims to federal health care programs.

“Today’s multi-billion dollar settlement is unprecedented in both size and scope,” Deputy Attorney General James M. Cole said in a statement. “At every level, we are determined to stop practices that jeopardize patients’ health; harm taxpayers; and violate the public trust.”

The Health Care Fraud Prevention and Enforcement Action Team, a U.S. government effort to crack down on fraud, waste and abuse in Medicare and Medicaid, was created in May 2009. Over the past three years the Justice Department has recovered more than $10.2 billion in health care fraud matters.

While it’s impossible to know whether others will someday face even more daunting, multi-billion fines, Glaxo wasn’t necessarily the drug maker most susceptible to such consequences. The British pharmaceutical company actually looks decent compared to peers in an industry grown notorious in the wake of recent litigation. Glaxo has a C rating on its corporate governance overall and its financial statements reflect an AGR score of 52, indicating higher accounting and governance risk than 48% of comparable companies. It looked worse in June 2010, when Glaxo’s AGR score was 28.

Glaxo said in a statement Monday that its recent fine stemmed from an investigation begun by the U.S. Attorney’s office of Colorado in 2004 and later taken over by the U.S. Attorney’s Office of Massachusetts into its sales and marketing practices. In the meantime, Glaxo has made changes over the last few years such as adding compliance staff. And in January 2011 it began rewarding its sales reps for the quality of their services to support improved patient health, rather than with bonuses based on sales targets.

“Today brings to resolution difficult, long-standing matters for GSK. Whilst these originate in a different era for the company, they cannot and will not be ignored,” said Sir Andrew Witty, who became Glaxo’s CEO in May 2008. “On behalf of GSK, I want to express our regret and reiterate that we have learnt from the mistakes that were made.”

Glaxo has not only noticed its mistakes, but also paid for them, as its $3 billion fine amounts to 57% of its profit during all of 2011. Indications are that neither Glaxo nor its investors had expected this penalty; the company had in January 2009 announced that it would take a relatively mere $400 million hit on its earnings related to the Colorado investigation. Glaxo later announced on January 17, 2011 — Martin Luther King Day — that it would have to reserve $3.4 billion for legal costs. The next day, as U.S. investors returned from vacation, Glaxo’s stock fell by 2.5% to $35.16 per share.

GMI has been warning since at least July 2011 that Glaxo is at higher shareholder class action litigation risk than 95% of all rated companies in Western Europe.

Some investors might say that they can tell whether the cost of pending litigation has already been priced into a company’s shares, but in doing so, they assume they can know what government regulators will do. Glaxo’s CEO Witty has probably learned already from that mistake.

Region:  Western Europe
Industry: Healthcare
Sector:   Pharmaceuticals – Diversified
Market Cap: GBP 73,256.5mm (Large Cap)
ESG Rating:   C
AGR:   Average (52)

, , , , , ,