Today’s Managing Health Care Costs Number is $97 Million
Glaxo Smith Kline was fined $53 million by UK regulators for paying 2 generic companies to delay their entry into the market for the antidepressant Paroxetine (Paxil in the US, Seroxat in the UK).
Here are stats from the regulator ruling (which GSK has stated it will appeal) and from the WSJ article.
· GSK allegedly paid $50 million to two generic companies, Generics UK and Alphapharma Ltd, in exchange for their agreement to delay entry into the UK market by two years.
· GSK’s market for paroxetine was $130 million annually (90 million pounds)
· When generics were offered in the UK market, the price of the medication fell by 70%
My quick calculations:
· GSK paid or will pay a total of $103 million (in payments to the generic firms (2001) and fines (2016 or later).
· Over two years the value to GSK of delaying generics was $182 million (2*70%*$130m)
· The ROI for this pay for delay was therefore 77% (182/103).
But it’s even better than that. Given that the payment for the fine is at least 15 years later, at a 5% discount rate the net present value (NPV) of the decision in 2001 to pay the $50 million to the generic drug companies was $97 million! Calculations here
The generic companies did better taking the pay for delay, because it’s not likely they would have made more than $25 million in margin on the post-generic total available market of $39 million a year (30% of $130m). GSK is better off because virtually all of its excess revenue was margin. GSK could still prevail on appeal (or negotiate to decrease the fine), and the executives who green-lit the generic company payments were likely rewarded for this decision many years ago. The losers are the UK National Health Service, which overpaid by $182 million for this single drug over a two year period.
In fairness, the payment to the generic companies was to resolve a lawsuit –and it’s possible that GSK could have prevailed in court, and gained the benefit of the generic delay even without paying the $50 million.
Modest fines that are issued a decade and a half later and preserve ill-gotten margin do not serve as a meaningful deterrent to future anticompetitive behavior.
