October 26, 2010
Glaxo to Pay $750 Million for Sale of Bad Products
By GARDINER HARRIS and DUFF WILSON

GlaxoSmithKline, the British drug giant, has agreed to pay $750 million to settle criminal and civil complaints that the company for years knowingly sold contaminated baby ointment and an ineffective antidepressant — the latest in a growing number of whistle-blower lawsuits that drug makers have settled with multimillion-dollar fines.

Altogether, GlaxoSmithKline sold 20 drugs with questionable safety that were made at a huge plant in Puerto Rico that for years was rife with contamination.

Cheryl D. Eckard, the company’s quality manager, asserted in her whistle-blower suit that she had warned Glaxo of the problems but the company fired her instead of addressing them. Among the drugs affected were Paxil, an antidepressant; Bactroban, an ointment; Avandia, a troubled diabetes drug; Coreg, a heart drug; and Tagamet, an acid reflux drug. No patients were known to have been sickened, although such cases would be difficult to trace.

In a rising wave, recent lawsuits have asserted that drug makers misled patients and defrauded federal and state governments that, through Medicare and Medicaid, pay for much of health care.

Using claims from industry insiders, federal prosecutors are not only demanding record fines but are hinting at more severe actions.

Suffering a research drought, drug makers have laid off thousands of employees. Some of those dispatched have in turn filed whistle-blower lawsuits that can lead to criminal investigations.

Justice Department officials announced the settlement in a news conference Tuesday afternoon in Boston, saying a $150 million payment to settle criminal charges was the largest such payment ever by a manufacturer of adulterated drugs. The outcome also provides $600 million in civil penalties. The share to the whistle-blower will be $96 million, one of the highest such awards in a health care fraud case.

When asked whether any individual could be charged in addition to the corporation charges, Carmen M. Ortiz, the United States attorney for Massachusetts, would say only that the investigation was not yet complete.

GlaxoSmithKline released a statement saying that it regretted operating the Puerto Rico plant in violation of good manufacturing practices. The company said the problem had involved only one plant that was closed in 2009. American shares in the company fell 0.35 percent on Tuesday.

Tony West, the assistant attorney general in charge of the department’s civil division, said hundreds of such lawsuits were awaiting federal review.

“We’ve opened more investigations, we’ve recovered more taxpayer dollars lost to fraud, we’ve had more convictions, higher penalties and fines in the last two years than we’ve had in any other two-year period,” Mr. West said in an interview.

Whistle-blowers who win earn a cut of the eventual fine. Ms. Eckard will collect $96 million from the federal government, and she will collect additional millions from states.

The suits, all filed under seal, have for years been rising in size and scope, but the collective threat to the industry has been largely unnoticed because the growing mountain is obscured by a wall of judicial secrecy. Each successful claim begets more suits, with more being filed almost every week.

The suits are filed under a federal law originally intended to stop Civil War hucksters from selling rancid meat to the Union Army by paying bounties to tipsters. The pharmaceutical industry has become the law’s most successful target because the government now buys far more pills than bullets, and because fraud in health care is common.

Health care cases accounted for some 80 percent of the $3.1 billion recovered by the Justice Department under the false claims act last year, the Taxpayers Against Fraud Education Fund, a nonprofit whistle-blower advocacy group in Washington, reported on Monday. Most of the money is typically returned to the programs in which false claims were filed, like Medicaid and Medicare.

The Food and Drug Administration and the inspector general of the Health and Human Services Department both announced recently that they would pursue charges against executives personally under a strict liability provision of the law, something that has not been done since 2007 when the three top executives of Purdue Pharma were convicted, sentenced to probation and personally fined $34 million while Purdue paid $600 million.

The rule allows executives to be prosecuted and barred from government sales even if they were not aware of specific violations.

Legislation could make such claims easier to win. Last month, the House of Representatives passed a bill that permits executives to be barred even if they have left the company where the fraud occurred and that permits the inspector general to prosecute parent companies for the sins of subsidiaries.

Pfizer alone has settled four whistle-blower cases since 2002, and it paid a $2.3 billion fine last year, the largest in history. Whistle-blower cases have become so routine that Wall Street no longer takes much notice of individual suits, while the growing trend remains hidden.

When GlaxoSmithKline announced in July that it was setting aside $2.4 billion for legal costs, including enough to pay for the investigation into its Puerto Rico problems, the announcement was greeted with a yawn.

Still, the case may lead to a collective industry shiver because it opens a new frontier for whistle-blower suits. Nearly all previous cases against the industry involved illegal marketing. This is the first successful case ever to assert that a drug maker knowingly sold contaminated products.

“This case will change the way drug makers run their factories,” Ms. Eckard’s lawyer, Neil Getnick, said.

Some of the antidepressant Paxil CR produced at the plant was ineffective because a layer of active ingredient split from a layer of a barrier chemical during manufacturing, the government said, and some lots contained only the barrier chemical.

“The harm is really in the public’s confidence in the health care industry,” Ms. Ortiz said. “When you go to a pharmacy and you buy a drug, you expect that drug is what it purports to be and you don’t expect it to have any micro-organisms or not be sterile or not have the power or have too much power.”

Ms. Eckard’s role in the case began in August 2002 when GlaxoSmithKline sent her to Cidra, south of San Juan, to lead a team of 100 quality experts to fix problems cited by an F.D.A. warning letter a month earlier.

This was GlaxoSmithKline’s premier manufacturing facility, producing $5.5 billion of product each year. But Ms. Eckard soon discovered that quality control was a mess: the water system was contaminated; the air system allowed for cross-contamination between products; the warehouse was so overcrowded that rented vans were used for storage; the plant could not ensure the sterility of intravenous drugs for cancer; and pills of differing strengths were sometimes mixed in the same bottles.

Although F.D.A. inspectors had spotted some problems, most were missed. And the company abandoned even the limited fixes it promised to conduct, the unsealed lawsuit says. Ms. Eckard complained repeatedly to senior managers; little was done. She recommended recalls of defective products; recalls were not authorized. In May 2003, she was terminated as a “redundancy.”

She complained to top company executives, but she was ignored even after warning that she would call the F.D.A. So she called the F.D.A. and sued. The agency began a criminal investigation and used armed federal marshals in 2005 to seize nearly $2 billion worth of products, the largest such seizure in history. Unable to fix the plant, GlaxoSmithKline closed it in 2009.