Very recently, Pfizer had to pay the highest amount ever, more than $2 billion dollars, to settle civil and criminal allegations in regards to federal violations ruling drug sales. This pharmaceutical giant was accused of promoting the painkiller Bextra and three other drugs illegally, because it offered doctors benefits such as speaking fees and trips to resorts.
Although it is an important monetary amount, the price that Pfizer will pay indirectly due to lost shareholder value will be huge and more important than the dollar value.
A new research called “Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value” has put a price on the intangible costs a company has to pay when employing these dark marketing practices. In order to do this, the research studies the declines in the financial market value of pharmaceutical companies that have been accused of dishonest marketing by the FDA.
In this case the amount Pfizer had to pay drew attention to the risks of employing deceptive marketing campaigns and served as an example to other pharmaceutical companies
. It is possible that this outcome may help the industry by restoring some credibility towards pharmaceutical companies, which may effect the market value in the longer term.
This case is a prime example to illustrate how the FDA and the Justice Department are watching the industry with a view to protecting consumer interests.
The research recognizes that most marketing managers and researchers concentrate in finding ways to increase shareholder value instead of thinking about the consequences of dishonest marketing, which could end up costing much more. Instead of focusing on value creation, this study evaluates marketing from a value destruction point of view.
The study states that pharmaceutical companies have been spending money on promotion at an annual growth rate of 10.6% since 1996, reaching $3 billion in 2005, and that since 1997, when the FDA allowed for direct costumer marketing, the average annual growth has been of 14.3%. Merck, for example, in the year 2000, spent more on Vioxx than was spent on the megabrands Budweiser and Pepsi.
The reason why pharma companies invest so much on marketing is because R&D is not delivering enough new products. However, the question the authors ask is whether or not the punishment the industry is receiving is sufficient to discourage dishonest practices?
In the case of this example it would seem so.
A comparison of the stock prices before and after the exposure, resulted in important negative returns: a 1% drop in market value/$1 billion loss of shareholder value.
The indirect costs of negative events can really harm a company’s market value and will eventually lead to sharp investor’ response.
Three types of dishonesty were defined:
– Omission of risk information
– Effectiveness claims without support
– Superiority claims without support
The level of value lost due to one or another varies, however it was found that in cases where the less capable of understanding medical treatments and more vulnerable populations were the victims, the market consequences were worse.
The authors recognize that even though the FDA could catch dishonest companies, many may gain lots of added value from deceiving marketing practices before being caught. In fact, many think the risk is worth it, since advertising has grown around 270% and the number of citations has decreased around 85%. This makes pharma companies believe that the gamble may well be worth the risk.
Life sciences consulting firms strive to help companies be their best in an honest and responsible way. Find someone who can really help your company succeed without sacrificing others’ lives, your personal integrity and your company’s reputation.
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