New Lawsuit Will Not Damage GlaxoSmithKline Stock
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
GlaxoSmithKline (NYSE: GSK) recently (and unsurprisingly in my mind) won a lawsuit against some of its former employees (namely sale reps who worked away from the company and basically attempted to convince businesses to purchase the company's drugs) who were suing it for overtime.
GlaxoSmithKline inherited the unwanted lawsuit from its predecessor, SmithKline Beecham. Luckily, this inheritance did not end up costing the company the significant amounts of money that it could have. The cost could have amounted to more than simply paying out the sales reps (estimated to number in excess of 90,000) out for years of overtime. The company would also have had to hire additional bodies in order to work through the numbers and determine who should get paid and who should not. The demand for administrative work involved would have been huge, but luckily the courts ruled in favor of the pharmaceutical company.
Of course this is a good thing for all pharmaceutical companies. If the decision had gone the other way we would have no doubt heard of many similar cases being launched. Fair Labor Standards Act (FLSA) states that 'outside' sales reps, i.e. sales reps that work away from the company's place of business in order to make sales, do not have to be paid overtime rates. There are a number of exceptions included in the act for sales reps in certain industries who are allowed to be paid overtime, but the judge presiding over the case ruled that there were none strongly in favor of exempting pharmaceutical sales reps from the rule. The bulk of these kinds of cases is now at an end and should not present a problem to any pharmaceutical company in the near future.
The situation was sparked when the Obama administration declared that it felt that around 90,000 sales reps had been treated unfairly and overtime back pay was due. The ruling of the federal court is then something of a rebuke of the administration and indicates that there is a certain level of dissent.
The logic is this: the sales reps only push the products - they do not actually make any sales. Therefore they cannot be said to be salesmen in the true sense of the word. In addition they tend to earn more than the minimum wage specified. Although the decision may seem clear cut to me, it is clear that not everyone agrees with the ruling. Even the court was divided 5-4. This was an extremely close call for GlaxoSmithKline and the company can be glad that it will not have to deal with the problem again now that it has been made an official rule that sales reps of this kind do not qualify for exemptions and will not be eligible to receive overtime at any point unless a significant change in the law is made.
Lets take a look at GlaxoSmithKline's competitors to get a better understanding of how it is positioned in the pharmaceutical market. Eli Lilly (NYSE: LLY) has seen its profits decline ever since the patent expired for its drug Zyprexa. This is not all bad news for the company, as it has also experienced far higher sales from some of its other drugs. The company is determined to ensure that its shareholders receive good returns on their investments. One of the ways in which Eli Lilly is working to achieve this is by buying back $420 million in shares. This will substantially boost shareholder returns. Hopefully, however, the company will soon be able to use alternative methods to avoid disappointing its investors.
Pharmaceutical companies that can identify problems in the health system and then instigate ways of dealing with those problems are probably the stocks that you want to keep an eye on. Recently Merck (NYSE: MRK) and Geisinger Health System have announced an "unusual pairing of medical and insurance providers." The aim of this alliance is to try to ensure that a higher number of patients actually adhere to the medication regimes that they are placed in than what they see at the moment. Hopefully the alliance will make a significant difference. At this point we are unaware of the finer details of the situation.
Johnson & Johnson (NYSE: JNJ) recently completed its acquisition of Synthes, a move that the pharmaceutical stock hopes will boost its profits. For the sake of the stock holders, that is what I hope as well. The acquisition is certainly a sparkling example of the company's striving to attain and maintain "leadership within attractive healthcare markets." For "attractive" read "profitable." This new transaction will boost Johnson & Johnson's presence in the orthopedic market, one where it has not yet made much of a splash. The company has suffered a lot lately and needs a revenue boost. Hopefully this is the answer to its problems.
One company that has experienced a major setback recently is Pfizer (NYSE: PFE). The pharmaceutical company was hoping that the FDA would approve its drug tafamidis meglumine for the treatment of TTR-FAP, or Transthyretin Familial Amyloid Polyneuropathy. This is an extremely deadly and rare genetic disorder characterized by full body paralysis and the destruction of the digestive system. The FDA, however, did not grant the drug approval and has requested that Pfizer provide further evidence and data regarding the drug before the decision is revisited, an additional trial will soon be conducted.
Needless to say, that GlaxoSmithKline is allowed to keep a huge portion of its money is great news for the company and its stock holders. This means more money for everyone concerned, except the former sales reps, of course. In addition, I think that this is a positive win for all pharmaceutical companies as it now means that a string of similar lawsuits is no longer imminent. GlaxoSmithKline should take the opportunity to invest its saved money into new products and work toward competing in expanding drug markets as its competitors are currently doing.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline and Johnson & Johnson. Motley Fool newsletter services recommend GlaxoSmithKline, Johnson & Johnson, and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.