How GSK's CEO Ignored His Own Worries and Wasted $16B on a Failed Diabetes Drug

GlaxoSmithKline (GSK)'s $3.4 billion legal charge on the diabetes drug Avandia probably isn't the last of the costs the company will record against this drug. That means Avandia will probably be a lossmaker for GSK, proving that former CEO Jean-Pierre Garnier's 1999 failure to follow up on worries about heart attack deaths associated with Avandia was a strategic disaster for the company, costing it billions in actual dollars and billions more in lost-opportunity dollars.

When the dust has settled, GSK would probably have been better off stashing its development and marketing costs in a savings account rather than spending them on Avandia, some back-of-the-envelope math reveals.

The latest charge stems from the legal costs of a higher rate of heart attacks associated with the drug; it follows a $2.4 billion charge for the same reason last year. The $5.8 billion total is historically massive. By comparison, Eli Lilly (LLY) paid $3.9 billion in charges on the antipsychotic Zyprexa; and Pfizer (PFE) paid $2.3 billion on its now withdrawn painkiller Bextra.

Picking through GSK's disclosures, two things emerge:

  • The charges aren't over yet even though GSK suggested in previous statements that the "substantial majority" of its Avandia problems were dealt with.
  • When all is said and done, GSK will probably have lost money on Avandia even though it earned more than $16.3 billion in revenues during its lifetime.
Last year, when GSK announced the $2.4 billion charge, the company said:
... the substantial majority of the product liability cases relating to Avandia have now been settled.
That statement gave the impression that much of the company's problems were behind it. Indeed, before today, estimates of GSK's total ultimate liabilities were only around $1.1 billion. Today, the company sounds much less certain. The new charge relates only to an investigation by the U.S. Attorney's Office for the District of Colorado. The rest of the civil product liability litigation -- where the $1.1 billion estimate came from -- is ongoing, the company says:
... the company has continued to receive new product liability cases regarding Avandia in the United States. The number of new claims received is substantial and the Group has now completed its assessment of these additional cases and an estimate of likely future claims.
... there can, therefore, be no assurance that any losses that result from the outcome of any legal proceedings will not exceed the amount of the provisions reported in the Group's financial accounts by a material amount.
Uh huh. So, more to come.

Although the drug remains on the market it carries such onerous restrictions due to its heart attack risk that its revenues have been decimated. Here are the drug's historic revenues, culled from its annual reports:

  • 2010: £391 million (through Q3)
  • 2009: £771 million
  • 2008: £805 million
  • 2007: £1,219 million
  • 2005: £1,300 million
  • 2004: £1,100 million
  • 2003: £900 million
  • 2002: £809 million
  • 2001: £707 million
  • 2000: £462 million
  • 1999: £89 million (launch year)
  • Total: £10.2 billion ($16.3 billion)
Here are the estimated costs associated with the drug:
  • $5.8 billion in legal charges $1 billion in development costs (the average the industry claims it takes to get a new drug to market).
  • $3.7 billion in manufacturing costs (GSK's factory costs are about 24 percent of sales).
  • $4.7 billion in marketing costs (about 30 percent of sales).
  • $1.1 billion in future product liability costs.
  • Total: $16.3 billion
In 1999, shortly after the drug launched, Garnier asked his underlings:
"What exactly is the nature of the lipids problem with Avandia? ... Is this not connected to the cardiovascular deaths? Why in the first place did you have such a high number of CV deaths while other glitazones [similar competing drugs] did not?
The cost of Garnier's failure to follow up isn't just $16 billion in wasted revenue. It's reflected in GSK's stock price: In 1999 it was $62. Today it's trading around $39.
Related: Image by Flickr user purpleslog, CC.