About this Author
DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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« Making the Move From Industry to Academia | Main | Eroom's Law »

March 7, 2012

Eight Billion Dollars Apparently Isn't Enough

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Posted by Derek

You'd think that 8 billion dollars would be enough to get some attention. But that's how much drugmakers have paid in fines in recent years, and the regulatory agencies are wondering if anything's changing. This USA Today article has the details.

The fines, as many readers here will know, are for a range of offenses - Medicare reimbursements, off-label marketing, kickbacks from the sales force, and so on. And as things stand now, the government has really only two options when it comes time to lower the boom: fines, and the threat to remove the company from eligibility to sell via Medicare. But that second one is really sort of an empty threat, since most large companies are (for now!) selling drugs that are quite valuable to the Medicare patient population. So new techniques are being sought:

To try to change that trend, the government announced in 2010 that, rather than exclude an entire company, investigators would go after individuals within a company. [Gregory Demske at HHS] said his organization, the Justice Department and the Food and Drug Administration have come up with some ideas to use within the scope of the rules — such as taking away a company's patent rights as a condition of a settlement. That could begin with cases being investigated now, he said.

Now, that might get some attention, for sure. We'll see if it happens, because you can expect the industry to fight this as hard as possible. To that end, the article notes that $200 million was spent on lobbying last year by the drug and medical device industries. One first thought might be "Two hundred million! That's a lot of money!", but mine was "Two hundred million! Why, that's nothing compared to the issues involved. . ." Marginal Revolution has had some posts about lobbying and money in politics, mostly wondering why there isn't more of it than there is. With that kind of bang-for-the-buck, I wonder the same thing.

Comments (16) + TrackBacks (0) | Category: Regulatory Affairs | The Dark Side


1. DCRogers on March 7, 2012 12:55 PM writes...

The best laws are those that never actually come into force but generate a reliable stream of campaign revenue. For example, the Medicare Doctor's Reimbursement law is genius: the cuts will never actually happen, but because they need to be waived every year, it allows for a nice shake of the MD money tree.

'Going Nuclear' by revoking patents is not a credible threat given the stakes.

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2. DL on March 7, 2012 1:40 PM writes...

I always thought that fines as a percentage of profit would be an interesting idea. Especially since it should directly impact shareholder return.

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3. Hap on March 7, 2012 1:55 PM writes...

1) $200M is, what, 0.2% of revenues? That is really cost effective.

2) If you really want to stop something from happening, don't the fines have to cover the full benefit of the violation divided by the probability of being caught? By that definition, the fines probably are too low.

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4. ayatollah_of_the_outcomes on March 7, 2012 2:02 PM writes...

When a company messes up its financials the CEO is up for arrest. Works quite well in terms of compliance. (10,000s of publicly traded companies vs.

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5. Anonymous on March 7, 2012 2:05 PM writes...

When a company messes up its financials the CEO is up for arrest. Works quite well in terms of compliance. (10,000s of publicly traded companies vs. 10s of arrests / year) Something similar (jail time for the CCO) should work

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6. NoDrugsNoJobs on March 7, 2012 2:10 PM writes...

The federal government operates the equivalent of a shake-down industry, consider the fines the price you pay to operate in our system. The attorney generals of states have shaken down every possible industry they can. They really don't want to bring criminal charges because then people will fight back and many of the Govt cases will dissolve like used toilet paper. Instead, they settle for hundreds of millions and the company adjusts by cutting its research budget and increasing the size of its regulatory forces and we have more lawyers and less scientists. Everybody is happy, especially the lawyers...oh, maybe not so much we scientists. IMO of course

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7. johnnyboy on March 7, 2012 2:35 PM writes...

Sorry #6, but I personally really don't see this as government over-reach, or 'shake-down' as you like to call it. What I see is pharma marketing departments trying every thing they possible can to sneak around the rules. One of the most dispiriting things about working in pharma research is having to convince laymen of the good the industry can do, when you have marketing constantly abusing the system, getting caught, then doing it again. Trying to say "well, that's the marketing people, that's not us researchers" is rarely a satisfying argument.

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8. Anonymous on March 7, 2012 3:43 PM writes...

So if it takes on average ~$1 billion R&D to develop a new drug, then the industry threw away 8 potential blockbusters. Feeling my pride swell.

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9. Tim on March 7, 2012 4:58 PM writes...

"So if it takes on average ~$1 billion R&D to develop a new drug, then the industry threw away 8 potential blockbusters."

Not if more than $8 billion were earned through the misdeeds.

Investing in activity that costs $8 billion, but yields much more than $8 billion in additional profits is a better payback than investing $8 billion in R&D looking for *potential* blockbusters.

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10. NoDrugsNoJobs on March 7, 2012 5:27 PM writes...

JohnnyBoy - do you really think all the bad guys work in pharma and all the good guys work in Government? Can you show me an industry that doesn't rely on marketing? How many industries have their marketing more regulated than pharma? Is marketing bad, or only pharma marketing? Have you ever wondered why we don't pay those kinds of fines in Europe or Canada? Is it that we are unethical here and ethical there?

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11. BigSky on March 7, 2012 5:34 PM writes...

The part of the article that I found most interesting is that Iowa's #2 Ranking Minority Senator on the Finance Committee has introduced a bill blah blah blah. The way I read that is Grassley saw the issue as a way to sit himself on the street-side with a hat in his lap soliciting donations as he 'considers' his bill. He's gonna reap a ton of dough from lobbyists as they advise him of the error of his ways. And then the bill will disappear, never to be heard from again. But that's the whole point of the exercise.

So yeah, the carpet-siders at some Pharma companies are recidivist shakedown artists... just like the people who would regulate them.

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12. Biotechtranslated on March 7, 2012 8:47 PM writes...

I don't want to sound like some sort of conspiracy freak, but the gov't plays along with this behavior. The massive settlement Pfizer paid back in 2010 resulted in a company being banned from doing business with Medicare, but it wasn't Pfizer, it was a corporation created to be the sacrificial lamb. A company that actually doesn't sell any drugs.

"Here's what happened. Instead of charging Pfizer with a crime, CNN reports the feds charged a Pfizer subsidiary, Pharmacia & Upjohn Co. Inc., which was created to plead guilty. Pfizer owns Pharmacia Corp., which owns Pharmacia & Upjohn LLC, which owns Pharmacia & Upjohn Co. LLC, which owns Pharmacia & Upjohn Co. Inc. This unit was incorporated in Delaware on March 27, 2007, the same day Pfizer agreed to plead guilty in a kickback case against a company Pfizer had acquired previously."


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13. Peej on March 7, 2012 9:30 PM writes...

I dont know if Derek is too shy or hates self promotion (or more likely too busy), but he didnt bother to tell us he has written an article for The Atlantic:

Nice work! I really enjoyed it. At least when you get severed one day you have a second career lined up as a writer!

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14. emjeff on March 8, 2012 8:19 AM writes...

Between all the restrictions on marketing and now the new restrictions imposed by the Sunshine Act, the pharma industry now has less freedom to operate than any other industry. I wonder when we are going to say "enough is enough" and start to defend our constitutional rights?

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15. hibob on March 8, 2012 11:23 PM writes...

@Biotechtranslated: Defense corporations run into the same problems when they defraud the military - they're supposed to be banned from further contracts. But they're not about to ban Boeing. Do they use the shell corporation trick as well?

@DL: "I always thought that fines as a percentage of profit would be an interesting idea. Especially since it should directly impact shareholder return."

Oddly, the year they get fined as a percentage of profit is always the year they decide to take the loss on all of those bad investments and have no profit ... I'd say a multiple of the total dollar amount of the sales involved instead.

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16. Validated Target on March 9, 2012 3:41 PM writes...

When the Vioxx scandal hit the news, the events unfolded almost identically to Lilly's Oraflex in 1982. Denial, denial, denial, maybe, maybe, ... partial admission, ... lawsuits. You could write ONE story and swap out names, dates and quotes, like a Mad Libs. They have learned NOTHING (except how to avoid the criminal charges). Extrapolating further, there should be another NSAID COX-inhibitor scandal in 2020 or so.

@2: I think a percentage of Market Cap should also be considered.

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