An Estimate of Pharmaceutical Industry Product Liability Costs

In a previous post I discussed the Generic Pharmaceutical Association's (GPhA) commissioned study of the potential costs of a proposed FDA rule that would allow generic drug manufacturers to update safety warnings and expose the manufacturers to liability. I criticized the methodology used by Alex Brill, of Matrix Global Advisors who authored the GPhA study. Brill arrived at an estimate of $4 billion annually in product liability costs and the GPhA has opposed the proposed rule change citing that figure. My critique of Brill's methodology was principally aimed at his use of early 1980's data for liability costs, and that data was not industry specific. Brill's estimate was thus based on data that would seem to be of very little use in understanding current liability costs or projecting future ones. So, with that introduction, let me explain how I arrived at my own estimate of liability costs for the branded prescription drug industry.

First, I used Westlaw's national jury verdict and settlements data base to search for all reported jury verdicts involving product liability for pharmaceuticals, from 2006 to 2011. I chose not to include more recent years as there is some possibility that newer cases might still be wending their way through the appellate process, and a seven year range seemed adequate. There have been no significant changes in product liability law for brand name manufacturers in that period, with the exception of the clarification of the preemption issue by the Supreme Court in Wyeth v. Levine, in 2009. The total jury verdicts for that entire period were just over one billion dollars- $1,002,019,231.91, or an average of just over $167,000,000 per year. While that average is the one that I will rely on for an estimate of total costs, it does contain some outliers that raised that total. A large proportion of that total came from two Nevada verdicts totaling $286 million in compensatory and punitive damages against Teva and Baxter. The liability was not for the drug itself, but for the packaging of injectable propofol in multi-dose containers although reuse was warned against and in fact resulted in multiple cases of hepatitis C transmission from a now-defunct endoscopy center.

Second, I attempted to estimate the cost of settlements based on the jury verdicts. As in most areas of law, including product liability, settlements outnumber verdicts by a considerable ratio. While reported settlements for that same period totaled just over $5 billion, that number is almost entirely comprised of the Merck Vioxx settlement fund of $4.85 billion, for an anticipated 27,000 claimants. The distorting effect of the Merck is difficult to account for, but it does provide an interesting figure of approximately $180,000 per case, including plaintiffs' legal expenses. If we assume that each reported jury verdict for that period represents 10 settled cases, then the 72 jury verdicts represent 720 settled cases (leaving Merck's once in a decade settlement fund aside for this purpose). Each of those settled cases is likely to represent another $250,000 in costs, using the average Merck settlement as an esimate of an average settlement and adding in defense legal fees. If 720 cases settled at that cost, over the entire six year period, that amounted to another $180 million in total costs, or $30 million a year in settlements, on top of $167,000,000 in annual verdicts. A rough estimate of $200,000,000 in annual product liability costs for the brand name pharmaceutical industry, exclusive of the Merck Vioxx litigation, is the result. The Vioxx debacle cannot be entirely dismissed, however rare such giant events are. I would estimate such massive potential liability to be a one per decade event, which would add $485,000,000 per year to brand name pharmaceutical costs, for a total of approximately $685,000,000 as a generous estimate of the average annual total liability expenses of the brand name pharmaceutical industry. Would the generic industry face four times that cost, as Brill assumes based on prescription numbers? It is doubtful that the sheer greater number of generic prescriptions would lead to proportionately greater costs. First, although many safety warnings are initiated during the generic period, the really big claims have almost always been for products withdrawn from the market by the original manufacturer, with the exception of the Prempro litigation. Second, the natural response to warning liability will be to increase monitoring and update warnings as soon as adverse event signals are detected. In any case of promptly issued new warnings, there is likely to be very little liability. I would be very surprised if the potential costs to generics even reaches the total estimate for annual brand name liability costs. $4 billion seems a completely unrealistic estimate, and less than $1 billion annually seems relatively generous.

One final note, while I have done my best to provide an objective estimate of brand name pharmaceutical liabilty costs, the parties that really have that data are, of course, the pharmaceutical manufacturers, Their unwillingness to disclose their costs leaves us to struggle to guess what those numbers really are. If the GPhA asked their insurors for an estimate, based on what Pharma is now paying (and they probably have) they have chosen not to provide real data, but instead rely on a questionable study to produce a questionable result. Two cheers for candor.

Thanks to my research assistant, Christina Tantoy, a student at California Western School of Law for her help in working on this data set.