Why Do Pharma Abuses Persist? It’s the Business Model, Stupid.

Pharmaceutical group AstraZeneca recently reached agreement with the U.S. government to pay over half a billion dollars for its improper marketing of schizophrenia drug, Seroquel. CEO David Brennan told the Wall St. Journal that off-label marketing (the effort to sell drugs for unapproved uses) “is a much bigger issue in the last few years as a result of the government’s position on this.”  In other words, the feds are beginning to apply the law. “It’s always been sensitive,” he said. “But now it’s even more sensitive because we’re beginning to pay fines.”

No one ever made a better argument for vigorous enforcement.

Many of the best known pharmaceutical names have found themselves in legal and reputational trouble similar to AstraZeneca’s—and many for similar reasons. In January of last year Eli Lilly settled allegations of off-label promotion of anti-psychotic drug Zyprexa for $1.415 billion. The $515 million criminal component of the fine was the largest individual corporate criminal fine ever. Lilly’s record lasted only 8 months, however—until Pfizer settled allegations of improper marketing of its painkiller Bextra for $2.3 billion, of which $1.1 billion covered criminal behavior.

AstraZeneca’s Seroquel was initially approved in 1997 and took in $4.5 billion in 2008 alone. The company agreed to a one-time fine of $520 million. That’s a terrific deal. So good, in fact, that it makes clear the reason drug companies persist in these abuses: It simply makes economic sense to do so. Fines at the frequency and level they’re imposed are a reasonable business expense.

While drug companies can’t market drugs for unapproved (off-label) use, physicians can prescribe them for anything they want. So it’s not hard to understand why drug companies pay doctors lucrative speaking fees to recommend off-label use at professional conferences. And because revenues from drug sales enable the companies to fund large and diverse research projects, big-name researchers have little trouble seeing the logic of lending their names to academic papers that endorse the products of companies that support them—whether or not those researchers have participated in the work themselves.

Merck’s practice a number of years ago of withholding negative research on its Vioxx painkiller resulted from decisions by executives for whom such behavior would most likely be unthinkable in their private lives. You could argue that, because of the pervasiveness of such practices, an individual company HAD to play the game in order to compete not only for customers, but investors.

The final analysis of our current economic crisis will certainly contain the conclusion that much of the financial and business world decided at the same time to engage in wildly immoderate practices. They nearly brought the world down, and the markets were there to record the fall moment by moment. But there is no market to chart the experience of individual patients who are administered medications as a result of manipulated communication in the healthcare professions. CNBC reporters are seldom present at hospital bedsides.

How long will drug companies engage in these practices? As long as the ratio of penalties to rewards makes it economically rational to do so. AstraZeneca’s Mr. Brennan said it all.