Pfizer Stock Shrugs Off $2.3B Bextra Fine; Can Anything Deter Off-Label Promotion?

Pfizer's $2.3 billion settlement with the government over its mismarketing of Bextra "pales" next to the company's annual revenue, making off-label promotion "easier" in the future, according to an AP story published over the weekend:
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:

Sure, the stock takes a dip, but that's more attributable to Pfizer's acquisition of Wyeth than it is to the fine. And already it's made up most of its ground.

A similar situation happened when AstraZeneca announced in July that it was potentially facing $600 million in unpaid legal bills from its Seroquel litigation. Its Q2 profit was $2.3 billion.

If you can spot the impact of that liability on AZ's stock, let me know.

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).

Sure, there's sharp dip after the Sept. 29 disclosure, but the ground is made up within a month or so.

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."