Tuesday, 3 July 2012

Another UK firm, another scandal

It was hard to read the US judgement against the UK pharmaceuticals firm Glaxo Smith Kline without a deep sense of shame. The firm perpetrated the largest case of fraud in US healthcare history. That is quite an achievement, given the outrageous behaviour of other pharmaceuticals firms.

The firm illegally promoted antidepressants by paying off US doctors through lavish entertainment, free holidays disguised as conferences, and cash payments disguised as consulting fees. One Sales Rep described one the Glaxo products as the “happy, horny, skinny pill”. I know, it sounds like the wonder pill that every teenager needs. Glaxo tried to get doctors to write a prescription for every teen in America. They marketed their drugs by taking doctors on diving trips, golfing holidays, balloon rides, deep-sea fishing and tours of the Bacardi rum distillery. It was a "dope up a teen and get a free holiday" deal.

The fine might seem commensurate with the crime. The firm will have to pay over $3 billion. However, who is being punished here? This money will come out of the profits of the firm, which would have be distributed to shareholders in the form of dividends and tax revenues to the various government where Glaxo operates.

The only crime committed by the shareholders was to buy equity in a firm that was secretly buying off doctors to over-prescribe happy pills. I might be wrong, but I doubt that information was made available to the shareholders when they were purchasing their Glaxo stock. The shareholders didn't sanction this behaviour. That was an internal decision, presumably motivated by bonuses and generous remuneration packages.

The US government will receive the proceeds from the $3 billion fine. But it would have received a large chunk of that cash anyway. Absent this huge fine, the UK government would have received part of these proceeds in the form of taxation. Now that will not happen. Returning to the question, who was punished; UK taxpayers and hapless investors seems to be the answer.

Ultimately, this isn't the sort of punishment that deters bad behaviour. The sales reps have probably moved on to other firms. As for the Glaxo Management, perhaps the company sacrificed a few unwanted executives. But is there any reason to think that the company wouldn't pull a similar scam again? I don't think so.


dearieme said...

Call me a cynic, but the pharma firms all misbehave like this: the likelihood is that the American courts will treat foreign firms more harshly - so beware, Brits, Swedes, Swiss, Krauts.

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Stevie b. said...

And now the nurses' regulator is apparently useless, putting patients at risk.
What's next - are we all useless for electing useless politicians?

droog said...

This money will come out of the profits of the firm, which would have be distributed to shareholders in the form of dividends and tax revenues to the various government where Glaxo operates.

1. Last year's GSK's net profit was over 5 billion dollars. This fine can be spread over a few years. Making 4 billion instead of 5 for three years is hardly a crime against shareholders.

2. The whole point of owning stocks in a corporation is that shareholders assume a level of risk and uncertainty for the benefit of not being personally liable for misconduct. Shareholder's won't risk going to jail over these excesses, but they buy that safety by putting money into a publicly owned behemoth rather than their privately-owned firm/farm.

3. The Board of Directors is supposed to put a check against the practices of the executives. Unfortunately these days most BoDs are stocked with Yes Men and flunkies who do the CEO's bidding. If shareholders allow for this tool of influence to not work in their interests they should not complain. If they choose to believe the reports issued by the same managers instead of outside reports that is their problem. Also, they should fire as many people as they see fit instead of letting the CEO pick a few scapegoats. In other words, exercise your owner's rights. If your executives are behaving in a way that will cost your 3 billion you may want to rein them in. Or not. It's your money, Mr Shareholder.

4. I'm curious how much of the money "lost" to nations outside the US would have turned into tax revenue. Pension funds would not offer much in taxes as there are usually tax exemptions to encourage the system. Wealthy individuals, as we have recently seen and discussed, have a vast range of ways to avoid paying tax in the UK for revenue made in the USA. I suspect this problem may not be much to fret over.

Speaking more broadly, this relates to the problem of the corporate system being hijacked by the executives. Customers are preyed on and shareholders are muscled out by greedy managers who define the rules of their compensation and then game the system to achieve this. Then, if they smell a scandal they sell their shares ahead of the rest and make a killing. The problem has been more evident and scandalous among the banking sector, but other sectors of the economy are not immune to the rot. I'd love to see what these executives did with their stock options at key moments of this tale.

It doesn't add up... said...

The US has plenty of form for this kind of thing. The shooting of BP over Macondo for $20bn was of the same ilk, while protecting the others who might have liability. Now Bhopal.... well, there was no responsibility there, was there?

Alice Cook said...

Droog I agreed with everything you said. However, I still ask the question, in what sense is this fine a punishment. It is a redistribution but I can't see who really feels the pain.


droog said...

Oh, yeah, I agree. These measures aren't a like-for-like replacement for prosecution and convictions. Fines and settlements are appeasement measures, to a certain extent. The fines involved often fall well below the profits made from the miscondut (don't know if 3billion falls in that category, though). You'd get industry-wide changes a lot faster by locking up a few bad apples.

Alice Cook said...


For example, the Barclays fine was just a blip on the balance sheet. The forced exit of Bob diamond must have made other execs think hard about their own vulnerability.