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GSK's $1B Paxil Problem Highlights Murky Disclosures From Euro Drug Companies

British drug company GlaxoSmithKline (GSK) has paid $1 billion to settle lawsuits related to Paxil. The fact that it was disclosed by Bloomberg and not the company itself illustrates how lousy financial disclosure rules are in Europe and why drug companies based there cannot be trusted to tell the truth about what is going on with their litigation liabilities and, by extension, the safety of their drugs.

Bloomberg got the $1 billion number by piecing together litigation records, analysts' reports and GSK's own partial statements on the issue. But compare the Paxil situation with those faced by Eli Lilly (LLY) and AstraZeneca (AZN). Both companies have been engaged in litigation that has cost them billions (over the antipsychotics Zyprexa and Seroquel, respectively). And both companies have disclosed the full legal bill attached to those suits. (It's more than $3.3 billion for Lilly and $1.1 billion for AZ.)

Those numbers were disclosed in both companies' earnings reports. Interestingly, Lilly disclosed them because it was required to report anything "material" by the SEC -- it's an American company and that's the law. Fines and prosecutions await American firms that fail to report bad news.

But AZ, like GSK, is a British company. It only disclosed the information in press releases it puts out under European guidelines -- the same rules covering GSK. So we can say that GSK interpreted those rules for Paxil one way, and AZ interpreted them for Paxil a different way. (And we should say kudos to AZ for biting the bullet and confessing.)

Here's exactly what GSK said about its Paxil liabilities in its last disclosure:

With respect to litigation alleging that use of Paxil during pregnancy resulted in birth defects, the first trial in the Philadelphia Mass Tort Program resulted in an adverse jury verdict on 13th October 2009, in the amount of $2.5 million (Kilker v. GlaxoSmithKline). No punitive damages were awarded. The company plans to appeal.
That's right: Less than 1 percent of the full level of liability was disclosed in Q3 2009.

That slipperyness is a problem. It means that investors and patients don't know if a European company's pill can be trusted, or if it contains an undisclosed, billion-dollar problem.

One possible conclusion from all this is that investors should take account of that extra risk and discount the price of European drug stock appropriately, and that doctors and patients might want to err in favor of American pills because they come with a more certain record as to their side effects. Right?

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