Key points:
1. The U.S. Justice Department fined Pfizer $2.3 billion for illegal marketing practices: taking doctors on golf trips, paying for massages, and the like to encourage off-label prescriptions of popular drugs.
2. With such a hefty penalty, conventional wisdom would say Pfizer’s market perception should suffer. By objective measures, that is not happening.
3. Pfizer has insulated its corporate brand by positioning its blockbuster drugs as the stars and not marketing itself. That seems to be working—for now.
Remember the dad in My Big Fat Greek Wedding?
used Windex for everything. He went so far as to carry around a bottle at all times, spraying things (and people) at comically inopportune times. Clearly, neither the FDA nor our friends at S.C. Johnson and Company in Racine, Wisconsin, endorse Windex for the treatment of cold, flu, arthritis, and acne. The depiction was so ridiculous that most (reasonable consumers) wouldn’t take it seriously.
Now, let’s change the scenario.
Imagine you are recovering from a surgical procedure. Let’s pick appendix removal, but it could be anything. Clearly, you’re in pain, and your attending physician prescribes a medication—in this case, Bextra. She tells you to take the prescribed dosage as needed and come back in three weeks.
Let me ask you something: In that scenario, do you look up the drug name in the formulary? Did you learn your doctor just prescribed well beyond the recommended dosage? Did you also learn that Bextra was not approved to treat post operative pain? That is was really an arthritis drug? And a Cox-2 inhibitor? The same Cox-2 inhibitor class of drugs you’ve heard about?
But your doctor knows best, right?
Did you also know your doctor goes out to lunch each week with the Pfizer rep?
Do you still think your doctor has your best interests at heart?
The Justice Department didn’t think so.
About six weeks ago, federal prosecutors leveled the largest-ever penalty for the illegal promotion of several Pfizer drugs (Viagra, Zoloft, Lipitor, and Bextra, among others). The statement went on to say Pfizer was the classic “repeat offender,” and this is the fourth such settlement in as little as 10 years for a grand total of over $13.3 billion in penalties.
Details notwithstanding—Bextra was voluntarily pulled from the market in 2005, and the specific charges relating to this drug were leveled against subsidiaries Pharmacia and Upjohn—there is little question this the practice of “off-label” promotion is (at best) “dirty marketing.”
But the real question remains: Does it really hurt Pfizer? Put another way, is the penalty sufficient to change corporate behavior? Is even a record-breaking penalty fair?
There are a number of different ways we can approach this question. Let’s start with the Pfizer balance sheet.
As of the end of second quarter 2009, Pfizer had $2.244 billion in cash on the books. That seems oddly reminiscent of the $2.3 billion fine, and it may have been used by the Justice Department to calculate the penalty.
This fine wipes out all the company’s strictly liquid assets. Seems fair. However, although $2.3 billion is no chump change, Pfizer doesn’t keep most of its money stuffed in the proverbial mattress. Short-term assets topped $71.5 billion for the same period. Now, the fine is just more than 3 percent. Hmm, perhaps not so fair. All assets: $139.3 billion. Fine: 1.65 percent.
OK, so maybe comparing the fine as a percentage of assets doesn’t quite do it justice. How about comparing it against what Pfizer earns. That could be better. Pfizer dropped $8.1 billion to the bottom line in the second quarter. That puts the fine at about 28 percent of net income. Not immaterial. If I were a shareholder—especially a big institutional investor—I might be perturbed.
Cash aside, what Pfizer should be most concerned about is the fine’s effect on intangibles: its market perception. Market capitalization is driven by shares outstanding multiplied by the share price at any given time. And if the market were concerned about Pfizer’s actions (and its ability in the future to market its next blockbuster), it surely would be reflected in the share price.
Well. Let’s see what happened. In the six weeks since the story broke, Pfizer’s stock rose about 3 percent. In fact, their stock matches similar jumps in the stock for industry competitors Merck and GlaxoSmithKline.
Huh. So investors didn’t really care. They likely see the fine as hefty but not unusual given the company’s track record—more or less a cost of doing business.
But that’s not helping answer our question, is it?
One could make the argument that actions like this could eventually cascade on Pfizer, causing some sort of “tipping point” that plunges the company into the drink. They would point to the double-edged sword of prescription drug consumer marketing, and the fickle tastes of the mass market. If people stop trusting Pfizer drugs, they might stop asking their doctor for them.
But I don’t buy it. I think all is likely to be forgotten once the next big thing comes around.
And what’s more, Pfizer has perfectly executed a classic brand insulation strategy. Instead of branding drugs as the “Pfizer Viagra” or “Pfizer Lipitor,” it’s just “Viagra” and “Lipitor.” As long as the general public doesn’t link the two (and studies show they don’t), Pfizer is in the clear. Investors will understand the link. So will doctors. But the rest of us largely won’t. That, I think, is the key reason Pfizer is likely to come out of this reasonably clean.
Of course, who knows what will happen in the new era of consumer-generated media. This lack of transparency (and “ownership” if you will) may catch up with the company faster than they think. It just hasn’t just yet.
In the meantime, I know I’ll be reading more labels and asking more questions.
Perhaps, unfortunately, I won’t place so much trust in my doctor’s intentions.
I am not sure that’s a good thing.
Like it or not, welcome to consumer-driven health care. Bring your helmet.
Related links
Associated Press Article
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