The Week's News Reinforces Some Points


Several news items from the past week reinforced some critical thinking about pharma and the industry's need to change strategic and tactical modes of its operations.

A section of a study by KMPG that appeared this month corroborates views expressed here in June  and again in August that pharma's focus on emerging markets will not save the industry from its current state of disrepair. 

The KPMG authors report that emerging markets will account for 37% of pharma's sales and 30% of pre-R&D operating margins by 2020, up from 18% of global sales and 12% of operating profit in 2010.  The problem is that the figure for 2020 operating margin represents a major slide from the 60% margins pharma achieved in the U.S. last year.  In other words, as emerging markets will represent a larger, faster growing piece of pharma's pie, the industry's profits will shrink.

We argued elsewhere that the legal counsel's offices at pharma companies are a ubiquitous presence and a suppressor of innovation.  Specifically, the lawyers suck the air out of operations - not for the legitimate purposes of maintaining legal and ethical compliance, but largely to keep fiduciary officers from having to give embarrassing testimony under oath.  Now the legal system itself offers up supporting evidence in the form of two stories.  One involves the particulars of a whistleblower suit that Pfizer settled last week; the other concerns a large fine that Abbott offered in hopes of settling a Justice Department investigation.  

Pfizer will pay a $14.5 million fine to settle claims  that it promoted its drug Detrol off-label.  It turns out that when one of the plaintiffs was still a Pfizer rep, she wrote a letter to the company's chief legal counsel at the time, Jeffrey Kindler.  Her letter strongly disagreed with sales managers who she said required her and other reps to receive formal training on promoting Detrol for unapproved uses.  Despite her efforts to act as a vigilant employee by informing the appropriate officer of an allegedly illegal practice, Pfizer continued training reps to skirt Food and Drug Administration regulations.  In short, while the putative justification for in-house counsels' intrusive and suppressive presence rests upon deterring illegal or unethical practices, they often fail to do so, even when the hard evidence lands on their desk.

Another civil settlement last week further supports this claim about the baleful role of legal counsel. In the case at hand, Abbott Laboratories offered to pay $1.5 billion for marketing its drug Depakote for off-label uses.  If the Department of Justice accepts Abbott's offer, it would probably constitute the second-largest fine ever paid by a pharma company for illegal marketing.  The only larger fine was the $2.3 billion that Pfizer paid in 2009, and that was for promoting several drugs off label after repeated warnings.  Some observers wondered why Abbott suddenly offered to make such a large payment when, last year, Johnson & Johnson paid a comparatively modest $81 million for promoting its Topamax off-label.  Peter Loftus at the Wall Street Journal provided a clue last week.

A federal judge last year ordered Abbott to disclose to prosecutors several email messages from the company's CEO. Abbott sought to prevent the U.S. Attorney in Virginia, who was probing the Depakote matter, from getting access to those documents.  Then, last week, Abbott made even bigger news when it announced it was going to divest its entire pharmaceuticals business and retain the Abbott name for its devices, diagnostics and nutritionals operations.  In this context it seems entirely plausible to speculate that the company's directors feared the stock market would respond poorly to the divestment and punish the stock if the CEO's credibility took a major hit as a result of emails showing his involvement in an ongoing, illegal practice.  Better to squeeze shareholders for $1.5 billion than to make the CEO look either foolish or crooked.

Another point discussed here and here  relates to the detrimental effects of pharma's finance departments establishing operational policies.  This recently received some corroboration from a story by the Inquirer's David Sell.  Sell's piece assessed the status of Johnson & Johnson's McNeil plant in Fort Washington, a facility responsible for numerous recalls of Tylenol and other over-the-counter  preparations.  Sell's sources claimed the problems that led to several product recalls stemmed from J&J's 2006 acquisition of Pfizer's Consumer division.  Following that point, according the sources, "the volume of work increased and staff decreased."

While that may be correct, corroboration of the point about finance emerges even though the story did not get into the larger context.  The recalls at the Fort Washington plant were among a series of more than 25 recalls at several J&J facilities, ranging from prescription drugs to devices, diagnostics, and OTC medications.  The common scourge that plagued all these divisions and led to the recalls was the edict from finance that Quality Assurance and Purchasing must use low-bid suppliers.  At J&J and elsewhere, finance rationalized this rule with the notion that since these are mere commodity services, the company can save money by defaulting, in the main, to low-cost bidders.  At some companies this finance-directed approach toward suppliers had its most egregious effects in marketing, while at others the result was most flagrant in clinical research.  Wherever the problem arose, the ultimate culprit was finance, which established the rules for operations management.

So sometimes the news of objective reality reinforces the arguments of critical thinking.  The larger gratification, however, doesn't come just from being right.  That happens when the object of one's concerns makes systematic and fundamental changes to set things right.

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