Glaxo reaches tentative agreement to pay $3 billion to settle cases

by Ben Vernia | November 3rd, 2011

On November 3, GlaxoSmithKline plc announced that it had reached an agreement in principle to pay $3 billion to settle several pending cases and investigations, most significantly involving its marketing and promotion of the diabetes drug Avantin. According to GSK’s press release:

GlaxoSmithKline plc (GSK) today announced that it has reached an agreement in principle with the US Government to conclude the Company’s most significant ongoing Federal government investigations, specifically: the investigation into GSK’s sales and marketing practices begun by the US Attorney’s office of Colorado in 2004 and later taken over by the US Attorney’s Office of Massachusetts; the U.S. Department of Justice’s investigation of possible inappropriate use of the nominal price exception under the Medicaid Rebate Program; and the Department of Justice’s investigation of the development and marketing of Avandia.

The final settlement, which is expected to address civil and criminal liabilities, remains subject to negotiation of specific terms and is expected to be finalised in 2012. The settlement of $3 billion is covered by existing provisions and GSK expects to make payments under the final agreement in 2012. These payments will be funded through existing cash resources.

The GSK Board and management team have been focused on resolving these long-standing legal matters and reducing financial uncertainty for the Group and believe this agreement in principle to be in the best long-term interests of shareholders.

Commenting on the agreement, GlaxoSmithKline CEO Andrew Witty said: “This is a significant step toward resolving difficult, long-standing matters which do not reflect the company that we are today. In recent years, we have fundamentally changed our procedures for compliance, marketing and selling in the US to ensure that we operate with high standards of integrity and that we conduct our business openly and transparently. We reiterate our full commitment to ensuring appropriate promotion of our medicines to healthcare professionals and to the standards rightly expected by the US Government.”

Since 2008, GSK has established a new framework for compliance in the US, based on the company’s values, policies and established industry codes of practices. It is supported by a larger compliance staff and strengthened training programs that require certification by employees.

Other initiatives to drive change in commercial procedures have also been undertaken, including the implementation of a new incentive compensation system for its professional sales representatives who work directly with health care professionals. The new system eliminates individual sales targets as a basis for bonuses, and instead bases incentive compensation on the quality of the service these representatives deliver to customers to support improved patient health. The Company’s US Commercial Practices Policies now meet or exceed the US PhRMA Code governing interactions with healthcare professionals.

Because the agreement is not yet finalized, DOJ has made no announcement.

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