Pfizer's fine is the largest health care fraud settlement in U.S. Justice Department history. But that $2.3 billion total stands small compared to the $44.2 billion in pharmaceutical sales the world's largest drugmaker rang up last year.
"$2.3 billion looks like a lot of money," [Dr. Adriane Fugh-Berman, a Georgetown University associate medical professor] said. "But these are highly profitable drugs. It will not take them very long to make up that deficit."Well, yes and no. In 2008, I made this same argument: That settlements between the Department of Justice and drug companies amounted to loose change and were therefore ineffective. However, to say that the $2.3 billion Bextra fine is "loose change" is going too far. $2.3 billion is a lot of money, even in Pfizer's universe. It reduced the company's Q4 2009 net income by 90 percent, for instance.
But it is true to say that the stock market largely shrugs off significant settlements as if they didn't happen. Look what happened to Pfizer stock over the period of the settlement provision being made in January and today:
Here's Cephalon's announcement that it was paying a $425 million fine for its marketing. Its net income in Q3 2008, when the fine occurred, was $112 million (although it does have a settlement reserve built into its income statement).
To do this properly, you'd need to build a database of dozens of settlements and historic stock prices and run a regression analysis. But I'd be willing to bet that the result would be that settlements are not a significant mover of stock prices compared to overall price movements generally. (Note that I haven't said a word about the wider movement of the markets, which these companies' prices seem to follow.)
Clearly, if you read Wall Street analysts' reports, you often find that they regard settlements as one-off events that shouldn't affect their overall models too much.
So there's a self-reinforcing delusion going on here: Companies know that they can increase revenues by promoting drugs off-label. They also know that the fines can be significant. But they're pretty sure that Wall Street will either ignore the fines, or weight the extra revenues more heavily than than the fines. So the incentives still lie in favor of off-label marketing.
Which, when you look at that $2.3 billion Bextra settlement, is a scary thing to contemplate.
UPDATE: Lo and behold, Investors Business Daily agrees with BNET. Here's the money-quote:
"You can tell by the lack of stock market response that the market had looked at this as the cost of doing business," said Les Funtleyder, analyst at Miller Tabak & Co. "From a financial point of view, it wasn't material."
- Previous BNET coverage of Bextra:
- Pfizer Rep Describes Pushing Zyvox With Flawed Data
- Pfizer's West Side Story: How "the Sharks" Sold Bextra Off-Label
- 10 Amazing Facts About Pfizer's $2.3B Bextra Settlement
- Pfizer Exec Gets 6 Months' Home Confinement for Off-Label Bextra Sales
- Pfizer's Off-Label Bextra Team Was Called "The Highlanders"
- Pfizer Exec: Company Approved of Off-Label Bextra Promotion
- Document Shows Rogue Bextra Operation Inside Pfizer
- Pfizer District Sales Manager Guilty of Altering Off-Label Celebrex Documents
- Federal Prosecutor Warns Drug Companies on Off-Label Promotion: "This Must Stop"
- How Pfizer Hid a $2.3 Bill. Bextra Settlement in Plain Sight