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XMFHelical (< 20)

Pharmaplasia - Review



November 16, 2010 – Comments (2) | RELATED TICKERS: GSK , JNJ , PFE

Over in Motley Fool Pro, on the board assigned to the GlaxoSmithKline holding, a poster asked a question critical to healthcare investing (the underlying purpose of this blog).

" Are there any ethical pharmaceutical companies out there or are they are evil and corrupt?"

I don't take this lightly.  The context of the question was the press around the 3/4 of a billion dollar settlement GSK made in the wake of a whistleblower lawsuit surrounding manufacturing deficiencies in their Puerto Rico plant, as described in the Wall Street Journal article.  This is just one example of the multitudes of bad press pharma companies have had of late regarding poor quality considerations (JNJ) and billion plus dollar settlements for marketing activities.  The 2010 list of marketing settlements is a who's who of big pharma, and 2009 saw announcements of the whopper settlements from Pfizer ($2.3B) and Lilly ($1.5B).  Off marketing settlements are beginning to look like 'the cost of doing business', but are seriously unethical in my opinion, and should involve more than merely fines (perhaps any settlement above a certain value should trigger an immediate criminal investigation).

How did we come to this, and is there hope that these companies will behave differently moving forward.  That is the subject and basis for the book Pharmaplasia written by Michael Wokasch.  The book does a very good job of describing the history of the pharma industry, with emphasis on the past 20 years and the conditions under which the companies chose to pursue marketing tactics with such questionable ethics.  Among them was the need to carve out markets for products similar to those of other companies. Also the cash generation that can be obtained by encouraging physicians, who have great freedoms to prescribe, to use drugs approved for one indication for a related one, based on a lower level of proof of efficacy.  Limited, and shrinking, time tables for the generation of these revenues prior to a drug becoming generically available add to the revenue generating pressures. A detachment of management from the science behind the business was another contributing factor.

Be encouraged that things are changing, slowly but surely, and for the better IMO. An increasing call for comparative effectiveness diminishes the ability to market (and incentive to develop) me too products don't have clear benefits over existing drugs. Also, clarification of pharma relationships with physicians and reduced access & perks, and pricing scheme restrictions are changing the game as well (some high profile jail time would help though).  The information flow, which was at one time entirely out from the pharma companies is also changing, as information from insurers mandated post market studies, better inform the public and physicians in ways not so controlled by the manufacturing companies.  A few high profile jail terms would help as well in my opinion.  There is still a long way to go, and the role that pharmaceutical companies played in educating the medical community does need to be replaced / altered in some fashion, as it did (in my mind) drive to an overall good despite the misdeeds.

I would also hate to see the profit incentive, and thus the incentive to pursue innovation, removed from the industry.  It can, and in my mind will, stagnate it, and affect the venture funding of biotechnology.

All these topics are well covered and discussed in 'Pharmaplasia'.  For those interested or involved in the industry, it is an important book to read, and I'm very glad I did.  In my CAPS port, I am bullish on most all big pharmas (sorry Merck, you'll need to settle with JNJ before you get the green thumb, that reverse merger tactic with Schering was BS).  The issues described, lack of recent drug approvals (compared to historical rates), and questions on the industry future, have made most of the companies cheap, especially in comparison to past metrics.  Megamergers are also not a sign of a healthy industry in my opinion.  But, I remain long term optimistic, and still consider many of these companies as foundation holdings due to solid dividends and cash generating ability.  My real (Helical) port should probably have a better position in big pharma than it does (just JNJ), but I do own more in my IRA (GSK and JNJ), and the Helical port will likely lean more toward aggressive investing (but never crazy biotech investing).


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2 Comments – Post Your Own

#1) On November 16, 2010 at 12:50 PM, zzlangerhans (99.55) wrote:

Anthropomorphizing corporations with human qualities is ridiculous. Public corporations are in existence to promote the best interest of their shareholders, which as a general rule means maximizing present and future profits. Boards and management will decide whether profits are best maximized by adopting an "ethical" or "morally responsible" strategy or otherwise. If any CEO or board of directors chooses to supplant the most profitable strategy with their own personal ethical or moral standards, they will inevitably be punished by the shareholders and likely terminated.

The answer to problems such as you have described is not to supllicate or pressure public corporations to be ethical or morally responsible, but rather legislation and sanctions. It is the responsibility of government and regulatory agents to protect the public, not corporations.

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#2) On November 16, 2010 at 2:18 PM, XMFHelical (< 20) wrote:


As a scientist, I have been trained to avoid inappropriate personification in my writing.  It took some work, but I got over that.  It may be inappropriate, but is rarely ridiculous, and often serves an effective metaphorical purpose. 

But aside from that, the assumption that corporate ethics are only defined by the legislated defined regulatory framework is BS. Companies, their boards and management, do indeed have a primary responsibility to shareholders, and acting ethically is most definitely one of them.  Think of it as risk reduction if you must.  Shareholders may well punish them for it (and it may result in them being acquired by 'the bad guys'), and it may reduce their bonuses, but the converse should also be true.  I have yet to read the risk section of a 10-K and see 'we may incur risks associated with our unethical efforts to drive profits' (at least not in an unlawyered up form).

Regulations are almost always reactionary, and often have unintended consequences.  Ethics aren't, or at least shouldn't be, and don't.


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