Are Investors in Pharmaceutical Companies being Duped or Rewarded?

With the continuing investigations and charges of pharmaceutical companies for off-label and other illegal promotional activities with the subsequent meaningless fines and settlements being levied, (relative to the revenues generated by the alleged illegal activities) one has to wonder whether investors are being duped or rewarded.

If investors were aware of the fact that the blockbuster drugs that pharmaceutical companies are touting could not generate the same billions of dollars of revenue if the company had to stick to labeled claims for promotion and depend primarily on indicated uses, would they invest to the same extent?  In the spirit of full disclosure (think SEC), should companies be required to disclose that off-label promotion and use is part of their strategy (not just a possibility) and a major source of revenue that carries the risk of regulatory and legal action if the company is caught or charged and forced to go through expensive legal proceedings that could result in costly settlements?

Or, with the nominal settlements and fines being levied, are investors being rewarded for recognizing the clever business savvy of the pharmaceutical companies that know how to play the game with full understanding that they have little downside and huge financial upsides for ignoring the regulatory and legal constraints on pharmaceutical advertising and promotion?   We’re not talking about the activities of the one-off maverick sales or marketing person. We’re talking about the orchestrated initiatives where pharmaceutical companies know about  and develop plans to take advantage of the bigger market and revenue opportunity if they encourage and illegally promote their product for off-label uses.

Here is another way to look at this.  What if fines and settlements resulting from illegal promotional activities also required pharmaceutical companies to disgorge (forfeit) all product related revenues (attributed to illegal activities or not) during the period in which the alleged illegal activities occurred?

Would investors be as interested in investing or as forgiving of the companies that had to forfeit their revenues for illegal activities?  How many investors would expect disclosure up front if forfeiture of revenues was a real possibility from the planned off-label promotion?

Without getting into whether companies would legally fight rather than ever “settle” if disgorgement of revenues was a possibility, until the fines and penalties approach the revenues generated from the illegal activities, there is no disincentive ( these companies have already decided to ignore any concerns for patient safety), and every incentive, to continue to take advantage of the nominal financial downsides.

At the very least, however, there ought to be a disclosure requirement so that investors can make informed decisions, which for some investors might include investment choices based on supporting ethical and legal business practices.

4 thoughts on “Are Investors in Pharmaceutical Companies being Duped or Rewarded?”

  1. According to Michael Schulman, Seeking Alpha, Dendreon’s management are a group of plodding neanderthals with IQs in subidiot range because they priced Provenge too low to encourage physician’s to prescribe it off label. This despite fines coming down this week for companies like AZ, Pfizer, etc. Geez, with investment counselling like this – why would we expect investors not to be duped? Investors should in fact avoid donkey-managers who would not actively position their product to be sold off label. We may need more hand cuffs and bigger jail cells to accomodate all investment types, to go along with Big Pharma CEOs, corporate complicance officers, legal, and sales and marketing execs. Hang ’em It will tech ’em a lesson.

    Schulman post:

  2. bigredbruce,
    Very interesting commentary. Just goes to show how analyst and investor pressure can try to impact business decisions. I believe corporate management is responsible and should be held accountable for their decisions, actions, and behaviors, regardless of the influences and pressures they may be under. Thank you for the contribution.

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