GlaxoSmithKline (GSK) Fined $3 Billion for Criminal and Civil Misconduct

This week, pharmaceutical giant GlaxoSmithKline (GSK: Charts, News) was fined $3 billion in the third largest health care fraud settlement in U.S. history. It is also the largest criminal-civil fine ever levied against a single drug company.

The London-based company plead guilty on criminal charges of promoting several of its popular medications for unintended uses, as well as neglecting to disclose important safety information. In a civil settlement, GlaxoSmithKline was also found guilty of improper marketing practices by providing doctors with expensive gifts - including hunting trips, resort vacations, high-end speaking tours and concert tickets- in exchange for illegal product promotions.

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The majority of the wrongdoing spans between 1998 and 2007. Five years ago, (GSK: Charts, News) allowed the U.S. government to monitor its actions when allegations of misconduct initially arose. "Today brings to resolution difficult, long-standing matters for (GSK: Charts, News)," stated GlaxoSmithKline CEO Sir Andrew Witty. "Whilst these originate in a different era for the company, they cannot and will not be ignored." As part of the settlement, (GSK: Charts, News) has agreed to be monitored for five more years to ensure that further wrongdoing does not occur. Acting Assistant Attorney General Stuart F. Delery had stern words for the company. "For far too long, we have heard that the pharmaceutical industry views these settlements merely as the cost of doing business."

GlaxoSmithKline is not the first to face costly criminal and civil charges. In recent years, the pharmaceutical industry has undergone rapid consolidation, which has increased the stakes in a cutthroat game of acquiring the next hot product before existing patents expire. A popular tactic is to cozy up to well-reputed doctors to convince them to promote additional, unapproved uses for FDA approved medication - an illegal practice known as "off-label marketing". This strategy has helped many large pharmaceutical companies turn around poorly selling products into best-sellers. Prior to (GSK: Charts, News)'s record-setting fine, Pfizer PFI held the dubious title with its $2.3 billion fine to settle criminal and civil charges related to improperly marketing 13 different drugs, in addition to encouraging doctors to promote its products with resort packages and other perks.

(GSK: Charts, News) was found guilty of illegally using off-label marketing to promote two of its most popular products - Paxil and Wellbutrin. Paxil, an adult medication for depression, was illegally promoted to treat depression in children for five years, between 1998 and 2003. Wellbutrin, a medication for major depressive disorders, was also illegally promoted as a treatment for sexual dysfunction, substance addictions and ADHD, between 1999 and 2003. Between 2001 and 2007, (GSK: Charts, News) neglected to report safety data from its diabetes drug Avandia to the FDA, which was later found to increase the potential of congestive heart failure.

Other (GSK: Charts, News) products tainted by off-label marketing include Advair, Lamictal and Zofran. Advair has been a popular medication for mild asthma, although it was only approved for more serious cases. Lamictal, an epilepsy medication, was promoted as a treatment for psychiatric conditions and neuropathic pain. Zofran, a medication for post-operative nausea, was given to pregnant women to treat morning sickness.

These serious offenses have increased the Justice Department's role in prosecuting fraud in the pharmaceutical industry. Most major companies, including (GSK: Charts, News), have been brought down by whistleblowers. Groups of U.S. attorneys in Boston, Philadelphia and San Francisco - all pharmaceutical and biotech strongholds - have been particularly vigilant in taking on these whistleblower cases.

Despite pleading guilty and being charged $1 billion for criminal violations and $2 billion for civil ones, GlaxoSmithKline stated that the $3 billion settlement does "not constitute an admission of any liability or wrongdoing in the selling and marketing of (its products)." (GSK: Charts, News) also stated that the Justice Department's results "draw unwarranted conclusions from disputed facts."

Shares of (GSK: Charts, News) have been largely unaffected by the news. The stock is up 7% over the past twelve months, and has traded sideways for most of the past decade. (GSK: Charts, News) attracts income investors with its hefty dividend yield of nearly 5%, a common practice among pharmaceutical companies. The stock trades at 10.7 times forward earnings with a 5-year PEG ratio of 1.98.

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Published on Jul 5, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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