Big pharma is a controversial industry. Along with tobacco companies, they are some of the most vilified businesses in the world. On one hand, large pharmaceutical companies invest heavily in producing breakthrough medicines. Since 2000, the 31 main companies of the sector spent a combined $550 billion on research & development, creating 400 new medicines in the process.
On the other hand, these companies have attempted to stop generic versions of HIV drugs from being made, used off-label marketing to promote the use of their drugs for unintended purposes, and repeatedly given doctors and pharmacies kickbacks in exchange for heavier promotions of their brands.
Catch-22
For investors, it’s a classical ethical conundrum – although big pharmaceutical companies achieve their exceptional breakthroughs through heavy investments and the expectation of profits, should they be allowed to bend the rules to achieve higher top line growth?
The industry’s supporters believe that drug companies are entitled to their profits, and that higher sales translate into higher investments in research. Meanwhile, opponents believe that the drug industry has gone too far, needlessly endangering patients through the aggressive promotion of drugs for unapproved uses.
Let’s take a look at three major lawsuits over the past four years, involving Pfizer Inc. (NYSE:PFE), GlaxoSmithKline plc (ADR) (NYSE:GSK) and Novartis AG (ADR) (NYSE:NVS), and evaluate the implications of these cases.
Pfizer (2009)
In 2009, Pfizer Inc. (NYSE:PFE) agreed to pay the U.S. government a $2.3 billion fine as a result of the off-label marketing of its arthritis drug Bextra for unapproved uses. The company was also required to pay $1.3 billion in criminal fines. Over the decade leading up to its historic settlement, the company had been fined by the U.S. government three previous times for similar reasons.
Pfizer Inc. (NYSE:PFE) was also found guilty of giving inappropriate kickbacks to doctors, such as resort packages and other expensive perks, for prescribing its drugs for their off-label uses. Although doctors and physicians are allowed to prescribe drugs for unapproved off-label use, companies are forbidden from advertising their off-label uses. This strategy of giving doctors kickbacks can turn poorly selling products into best-selling ones.
Pfizer Inc. (NYSE:PFE)‘s Bextra was originally approved by the FDA for the treatment of arthritis and arthritis-related menstrual cramps. However, it was also used as an off-label treatment for acute, non-arthritis related pain. In 2005, however, the FDA recommended that Pfizer Inc. (NYSE:PFE) withdraw Bextra from the market, citing the increased risk of heart attack and stroke.
In addition to Bextra, Pfizer Inc. (NYSE:PFE) also encouraged doctors to promote the anti-psychotic drug Geodon for the unapproved off-label treatment of depression, anxiety, ADHD, obsessive compulsive disorder, autism and post-traumatic stress disorder. In other words, it became a panacea for mental disorders.
Pfizer’s antibiotic Zyvox, epilepsy treatment Lyrica and several other drugs were also used for off-label purposes. At the end of the settlement, Pfizer was found guilty of improperly marketing 13 different drugs.
GlaxoSmithKline (2012)
Pfizer’s massive $2.3 billion fine held the dubious record of the largest U.S. healthcare settlement for three years, before GlaxoSmithKline plc (ADR) (NYSE:GSK) was hit with a $3.0 billion fine for the same bad behavior.
Between 1998 and 2007, GlaxoSmithKline used the same off-label tactics as Pfizer to promote Paxil and Wellbutrin, two of its best-selling products for adult depression, for unapproved uses. Paxil was administered to treat depression in children, while Wellbutrin was used to treat sexual dysfunction, substance addictions and ADHD. GlaxoSmithKline plc (ADR) (NYSE:GSK) also encouraged doctors to promote asthma medication Advair to mild asthma sufferers, although the drug was only approved for more serious cases.
Meanwhile, epilepsy medication Lamictal was given used to treat psychiatric conditions and neuropathic pain, while post-operative nausea drug Zofran was used to treat morning sickness in pregnant women. GlaxoSmithKline plc (ADR) (NYSE:GSK) also neglected to report negative safety data from its diabetes drug Avandia to the FDA, which was later found to increase the risk of congestive heart failure.
GlaxoSmithKline plc (ADR) (NYSE:GSK) also used the same tactics as Pfizer — resort vacations, hunting trips, concert tickets and more — to encourage doctors to prescribe their products for off-label uses. Despite pleading guilty, GlaxoSmithKline stated that the guilty verdict did “
not constitute an admission of any liability or wrongdoing in the selling and marketing of (its products).”
Novartis AG (2013)
Just when you thought that the heavy fines levied against Pfizer and GlaxoSmithKline plc (ADR) (NYSE:GSK) had taught the industry a lesson, the U.S. government recently hit Swiss drugmaker Novartis with two civil lawsuits within four days.
The charges are familiar — paying multimillion-dollar kickbacks to doctors for prescribing their drugs for off-label uses. This is not Novartis’ first clash with the U.S. government — it was fined $420 million in 2010 after the company pleaded guilty to encouraging doctors to prescribe the illegally marketed epilepsy drug Trileptal to patients.
This time, the U.S. government has charged Novartis for providing excessive kickbacks to doctors, such as expensive dinners, luxury fishing trips, and other packages in exchange for speaking endorsements at Novartis-sponsored events. The speakers allegedly received between $750 to $3,000 for their participation. The U.S. government claims that over a nine-year period ending in 2011, Novartis spent nearly $65 million on these promotional activities, which included 38,000 speaker programs.
Much of the case centers on Novartis’ two hypertension drugs, Lotrel and Valturna. Valturna was pulled off the market a year ago, after research showed that it could cause kidney failure, low blood pressure and high potassium levels. Novartis allegedly encouraged doctors to over-prescribe these two drugs at their promotional events.
In addition, Novartis has been charged with persuading thousands of pharmacies across America to switch drug treatments for kidney transplant patients to its own immunosuppressant drug, Myfortic. These pharmacies allegedly took kickbacks from Novartis, disguised as bulk rebates and discounts.
Novartis is now being sued by 27 states, the District of Columbia, Chicago and New York City for healthcare fraud, since many of these payments were paid through Medicare and Medicaid programs. The combined parties now seek triple damages from Novartis for the alleged fraud, which means that a settlement against Novartis could set yet another record for the industry.
The Bottom Line
Big pharma has long claimed that these incidents all merely reflect the “cost of doing business.”
While I believe that pharmaceutical companies should be free to promote the intended, FDA-approved usages of their drugs to doctors and pharmacies, I believe that off-label promotion is a slippery slope that borders on the unethical.
Despite these continuing regulatory threats, all three companies have performed exceptionally well over the past year in comparison to the broader market. In addition, they all pay dividend yields exceeding 3%.
Therefore, big pharma faces similar headwinds as big tobacco. Although the industry appears to be under constant regulatory pressure, it continues to grow as new research yields new medicines, which add to its top line growth. In conclusion, although big pharma companies are controversial, they are solid investments that tend to bounce back strongly even after being knocked down by multi-billion dollar fines.
The article Big Pharma’s Kickback Conundrum originally appeared on Fool.com is written by Leo Sun.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
