Did Glaxo Violate Corporate Integrity Agreement With China Trainwreck of Scandal?

Did Glaxo Violate Corporate Integrity Agreement With China Trainwreck of Scandal?

July 25th, 2013 // 1:47 pm @

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The continuing train wreck of scandals at GlaxoSmithKline in China, such as bribes done by senior executives and clinical study failures, have led to investor anxiety, but shares are largely trading in the same range as before all the trouble started in May. GSK has said it is not possible to fully gauge the financial impact of the scandals. At this time, China generates only a few percentage points of the firm’s total revenue.

But we think there is one way that this scandal mess could hurt Glaxo. As one part of the $3 billion settlement in 2012 to resolve charges that it sold drugs for unapproved FDA use and for hiding clinical trial results, the firm signed onto a corporate integrity agreement. This mandated that GSK create an internal compliance program to watch over business practices.

Any violation of the agreement could cause the DHHS in the US to look to exclude GSK from any contracts with Medicare and Medicaid. That is a very big business and any trouble regarding the CIA could cause investors to panic.

GSK CEO Andrew Witty got a question about this on a conference call yesterday about the latest earnings. When asked if the China scandals would affect the CIA, Witty ducked the question.

According to the HHS OIG, CIAs in the US mainly concern US laws, especially related to Medicare and Medicaid. But if the conduct that happened abroad did violate US laws, then the situation would be evaluated by DHHS.

So, an effect on the CIA can’t be ruled out at this time.

We can’t say at this time what the effects could be on GSK’s ability to bid on Medicare and Medicaid business. Generally, the feds do not want to go after a whole company, especially a big one that sells a lot of important drugs that are not easy to get from other sources.

Still, the notion that the US feds are aware of the China scandals probably has GSK concerned, and this will continue for a good while. Maybe DHHS will just try to exclude a few executives instead of the whole company?

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