What's the price of diabetes? If you're an Eli Lilly
Late Thursday, Lilly announced that it had decided to settle the majority of legal claims against the company concerning the anti-psychotic drug Zyprexa. The pharmaceutical company agreed to pay $690 million to resolve roughly 75% of the outstanding claims against it -- a figure that Lilly management estimates covers about 8,000 individuals. For the remaining 25% of claims, Lilly intends to fight it out in court.
The payment -- which will be accounted for with a charge in the second quarter -- will settle lawsuits that stem from claims that patients were inadequately warned about the risks that taking Zyprexa could lead to diabetes. Although labeling for the drug has included a warning concerning diabetes since its launch in 1996, the risk was characterized as "infrequent."
This is an unhappy pill to swallow, but Lilly is probably making the correct decision. It's not unreasonable to think that Lilly could have spent millions more fighting this battle in court and still ended up losing, perhaps having to pay an even larger settlement.
What's more, Lilly can easily afford this settlement. The company ended the last quarter with more than $5.6 billion in cash on the balance sheet. Furthermore, the settlement figure of $690 million is probably close to a ballpark estimate of the net income Lilly would get from three or four quarters' worth of Zyprexa sales.
This settlement probably won't surprise anyone in the pharmaceutical industry, but it's another obvious lesson concerning the risks that big pharma faces. Even though Lilly correctly described the risk of diabetes from Zyprexa as "infrequent," it is still being made to pay for it.
One can only wonder, then, what this means for Motley Fool Income Investor recommendation Merck
It's highly unlikely that any of these lawsuits will ever seriously threaten a company's ability to stay in business. After all, Wyeth
For more on the pharmaceutical industry, check these out:
- Once More With Merck
- Waiting for Sanofi's Next Act
- Glaxo Works to Stay on Track
- Standby Drugs Sustain AstraZeneca
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).