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How drug companies pull MDs' strings
October 20, 2009, Tuesday
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ON September 2, Pfizer agreed to pay US$2.3 billion to settle civil and criminal allegations that it violated federal rules governing drug sales.
The pharmaceutical manufacturer was charged with illegally promoting its pain-killer Bextra and three other medications by offering doctors speaking fees and subsidized trips to resorts, among other benefits. The settlement was the largest ever levied against a US company.
While the amount of the settlement is significant, the indirect costs to the company may be even higher over time in terms of lost shareholder value.
A new research paper now puts a price on the less tangible costs to a company's value that can arise when marketing efforts backfire. Titled "Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value," the paper examines declines in financial market value experienced by drug companies that have been the target of deceptive marketing citations by the US Food and Drug Administration.
The paper's authors are Diana C. Robertson, a Wharton legal studies and business ethics professor; Sundar Bharadwaj, a marketing professor at Emory University's Goizueta Business School and currently a visiting professor of marketing at Wharton; and Martha Myslinski Tipton, a marketing professor at Singapore Management University.
Robertson applauds the Pfizer penalty because it is large enough to draw attention to the potential risk of overly aggressive marketing and may serve as an example to others.
"We don't know if the Justice Department is making an example of Pfizer to keep others from engaging in this behavior, but usually it does have that kind of outcome," says Robertson.
The settlement, adds Bharadwaj, may actually help the entire drug industry by restoring credibility to pharmaceutical firms and thus enhancing their sales and long-term value.
In their research, to be published in the November 2009 Journal of Marketing, the authors examined 170 FDA letters citing inappropriate marketing practices, including promotion of drugs for so-called "off-label" uses - conditions for which the product was not officially approved by the FDA.
The paper also points out that spending by pharmaceutical companies on product promotion totaled nearly US$3 billion in 2005 and has been growing at an average annual rate of 10.6 percent since 1996. Ever since the FDA allowed drug companies to expand direct-to-consumer (DTC) marketing in 1997, spending on advertisements to reach patients has grown at an average rate of 14.3 percent.
For example, the paper cites research showing that Merck's DTC promotional spending in 2000 on Vioxx - an arthritis drug that eventually was withdrawn over safety concerns - exceeded advertising dollars spent by the corporate parents of Budweiser and Pepsi to support each of their megabrands.
"For a number of pharmaceutical companies, spending on marketing is greater than on R&D, which indicates that these organizations are under pressure to provide returns because R&D is not paying off as well," says Bharadwaj.
"They use marketing to help them. The question we have is, given the actions they take that are in violation of regulations, does it hurt the firm or help the firm?"
The authors conclude that deceptive marketing incidents which are uncovered lead to "significant negative abnormal returns."
The decline amounts to a drop of 1 percent in market value, which translates into an US$86 million loss of shareholder wealth for a median-sized firm in the study sample.
In the case of Pfizer - whose market capitalization was nearly US$98 billion in June 2009 - the loss would have been about US$1 billion.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
The pharmaceutical manufacturer was charged with illegally promoting its pain-killer Bextra and three other medications by offering doctors speaking fees and subsidized trips to resorts, among other benefits. The settlement was the largest ever levied against a US company.
While the amount of the settlement is significant, the indirect costs to the company may be even higher over time in terms of lost shareholder value.
A new research paper now puts a price on the less tangible costs to a company's value that can arise when marketing efforts backfire. Titled "Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value," the paper examines declines in financial market value experienced by drug companies that have been the target of deceptive marketing citations by the US Food and Drug Administration.
The paper's authors are Diana C. Robertson, a Wharton legal studies and business ethics professor; Sundar Bharadwaj, a marketing professor at Emory University's Goizueta Business School and currently a visiting professor of marketing at Wharton; and Martha Myslinski Tipton, a marketing professor at Singapore Management University.
Robertson applauds the Pfizer penalty because it is large enough to draw attention to the potential risk of overly aggressive marketing and may serve as an example to others.
"We don't know if the Justice Department is making an example of Pfizer to keep others from engaging in this behavior, but usually it does have that kind of outcome," says Robertson.
The settlement, adds Bharadwaj, may actually help the entire drug industry by restoring credibility to pharmaceutical firms and thus enhancing their sales and long-term value.
In their research, to be published in the November 2009 Journal of Marketing, the authors examined 170 FDA letters citing inappropriate marketing practices, including promotion of drugs for so-called "off-label" uses - conditions for which the product was not officially approved by the FDA.
The paper also points out that spending by pharmaceutical companies on product promotion totaled nearly US$3 billion in 2005 and has been growing at an average annual rate of 10.6 percent since 1996. Ever since the FDA allowed drug companies to expand direct-to-consumer (DTC) marketing in 1997, spending on advertisements to reach patients has grown at an average rate of 14.3 percent.
For example, the paper cites research showing that Merck's DTC promotional spending in 2000 on Vioxx - an arthritis drug that eventually was withdrawn over safety concerns - exceeded advertising dollars spent by the corporate parents of Budweiser and Pepsi to support each of their megabrands.
"For a number of pharmaceutical companies, spending on marketing is greater than on R&D, which indicates that these organizations are under pressure to provide returns because R&D is not paying off as well," says Bharadwaj.
"They use marketing to help them. The question we have is, given the actions they take that are in violation of regulations, does it hurt the firm or help the firm?"
The authors conclude that deceptive marketing incidents which are uncovered lead to "significant negative abnormal returns."
The decline amounts to a drop of 1 percent in market value, which translates into an US$86 million loss of shareholder wealth for a median-sized firm in the study sample.
In the case of Pfizer - whose market capitalization was nearly US$98 billion in June 2009 - the loss would have been about US$1 billion.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
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