A Huge, but Sketchy Merger
The announced merger and "tax inversion" of Pfizer and Allergan would be one of the largest corporate marriages in US history. It has drawn more than its share of criticism. For example, per the Los Angeles Times, former US Senator and Secretary of State, and current presidential candidate Hilary Clinton said "this proposed merger, and so-called inversions by other companies, will leave U.S. taxpayers holding the bag."
By creating the world's largest drug company, it could certainly further consolidate the US and global pharmaceutical market and raise already high drug prices. While Pfizer in particular has benefited from US funding of biomedical research, including training of researchers and development of research infrastructure, (see this New Yorker article by John Cassidy) making the company pseudo-Irish may be "unpatriotic," as President Obama said with regard to tax inversions in general (per the Washington Post).
The nature of the merger, creating a company that would be Irish for tax purposes, but effectively run out of the US seems at least intellectually dishonest. (Note that the CEO of its supposedly Irish component, Allergan, works out of Parsippany, NJ (per Bloomberg, here.)
The main beneficiaries of the merger appear not to be patients, or health care providers, or US taxpayers, but top company executives. As John Cassidy wrote,
It's hard to avoid seeing the merger as a cynical move designed to boost Pfizer's stock price and generate a windfall for the company's senior managers....
But the latest settlement by Allergan, which I was just about to write about before the merger was officially announced, is a reminder that the companies are a good fit in one sense. Both have long histories of shady behavior as marked by many legal settlements, and in some cases corporate guilty pleas and convictions.
The Latest Allergan Settlement
The beginnings of the latest Allergan settlement were noted back in July, 2015, but first not even connected to Allergan. According to the US Federal Bureau of Investigation (FBI),
A former district manager of Warner Chilcott Sales U.S., LLC (Warner Chilcott), a pharmaceutical company based in Rockaway, N.J., pleaded guilty today in U.S. District Court in Boston in connection with a scheme to deceive insurance companies and Medicare so that they would cover the costs of Warner Chilcott’s osteoporosis medications, Actonel and Atelvia.
The idea was to promote two of Warner-Chilcott's products, osteoporosis medicines Actonel and Atelvia, by evading insurance company requirements for physicians to justify their use, given questions about their benefits versus harms, and availability of generic treatments for osteoporosis.
Beginning in 2010 and throughout 2011, Podolsky directed the sales representatives in his district to fill out prior authorizations for physicians who prescribed Actonel and Atelvia using false clinical justifications as to why the patient needed Warner Chilcott drugs and submit them to health insurance companies. In some instances, Podolsky’s sales representatives reviewed patients’ medical charts to get the information necessary to fill out the prior authorizations, in violation of the Health Insurance Portability and Accountability Act (HIPAA). Podolsky also directed sales representatives to utilize a website to submit prior authorizations to insurance companies to disguise their identity as pharmaceutical sales representatives. Podolsky and the sales representatives that he supervised knew that they should not be involved in the preparation or submission of prior authorizations.
But Podolsky was not a lone wolf. At the end of October, 2015, the Boston Globe reported more fully on the scheme, and the large settlement made by Allergan, of which Warner-Chilcott was merely a subsidiary. US Department of Justice allegations involved top leaders of Allergan.
The drug reps bought the doctors lunches, dinners, drinks. They paid for speeches the doctors never made. And in exchange, the doctors prescribed drugs that boosted their sales.
Warner Chilcott, a unit of pharmaceutical giant Allergan PLC, will pay $125 million to settle these and other charges in an agreement announced Thursday by US Attorney Carmen M. Ortiz in Boston.
Ortiz said the company ran an elaborate scheme to prod doctors — including in Massachusetts — to prescribe its drugs in exchange for kickbacks.
Warner Chilcott’s former president, W. Carl Reichel, was charged in federal court for allegedly conspiring to pay kickbacks to physicians, and a Massachusetts physician, Dr. Rita Luthra of Longmeadow, was indicted for allegedly accepting payments.
Warner Chilcott illegally promoted at least seven drugs, including the osteoporosis treatments Actonel and Atelvia.
Court documents show that Warner Chilcott representatives promoted their drugs by wining and dining physicians and giving them money and gifts for participating in medical education events. These events often were held at 'upscale restaurants' and contained 'minimal or no educational component.'
The company made fraudulent requests to the federal government and to insurance companies to boost sales of their drugs, the US attorney’s office said, and employees also made unsubstantiated claims about the drugs’ benefits.
Note that the charges were of actions that went well beyond financial fraud. They included dishonest marketing and kickbacks to physicians. The alleged actions could have harmed patients, by inducing physicians to prescribe unneeded drugs with known adverse effects.
Note further that unlike many other legal settlements about which we have written in the past, this one did not allow the company to escape by just paying some money and then claim that it did not confirm or deny the charges. In this case, the company pleaded guilty.
Warner Chilcott has agreed to plead guilty to health care fraud. It will pay a $23 million criminal fine and $102 million to resolve false claims with state and federal governments. The case was brought by two whistle-blowers.
And as noted above, unlike many other legal settlements which did not entail any negative consequences for those who authorized, directed, or implemented the bad behavior, in this case a top executive (although not the highest executive in the overall corporate structure, and not a current executve) was charged with a crime and apparently actually physically arrested (although he has not been convicted of it, yet.)
Meanwhile, Reichel, the former Warner Chilcott president, was arrested in Boston on Thursday.
Prosecutors say in their indictment that Reichel designed a sales and marketing strategy to entice doctors to prescribe his company’s drugs with free dinners and bogus speaking fees. The physicians paid to give speeches often did not speak at all, and instead enjoyed expensive dinners with sales representatives, the indictment says.
Reichel left Warner Chilcott in 2011, according to a news release.
Furthermore, per a Forbes column, Mr Reichel was allegedly involved up to his proverbial eyeballs.
The Reichel indictment says that, while president of Warner Chilcott’s pharmaceuticals divisions from 2009 to 2011, he directed company sales staff to push physicians’ to prescribe its drugs by throwing money at doctors’ in various ways, such as expensive dinners for doctors and their spouses and 'speaker' fees to attend informal dinners without educational content.
Reichel also allegedly provided sales reps with a separate expense account to buy food and drinks for employees of physicians who prepared prior authorization forms certain insurers required to pay for patients’ drugs.
Reichel hired 'Type A crazy' sales representatives, as he called them, who were provided with 'limited training concerning compliance with health care laws and otherwise de-emphasized the importance of compliance to the sales force,' the indictment says.
Of course, the top executive in the overall corporate structure said the usual, as likely written by his public relations spin doctors,
Brent Saunders, the chief executive of Dublin-based Allergan, said in a statement: 'We take seriously our responsibility and commitment to abide by all US and international laws that govern the sales, marketing, education, and promotion of our products, and recognize the tremendous impact that this responsibility has on the customers and patients we serve.'
Finally, two other middle managers involved in the case entered guilty pleas, according to the Department of Justice.
Thus this settlement may be regarded as much tougher than many previous legal settlements involving big health care organizations.
However, its bearing on the huge Prizer-Allergan merger has apparently not so far been publicly discussed.
Allergan's Previous Track Record
It is not that the new Allergan settlement is a one-off. It needs to be viewed in the context of Allergan's previous history of misbehavior.
That history may be a bit obscure, especially because of Allergan's complex corporate structure. However, a Wall Street Journal article on the merger provided a bit of Allergan's corporate back story,
Allergan itself is the result of a number of mergers in quick succession. It started off as a generic-drug company called Watson Pharmaceuticals Inc. In 2012, Watson acquired Swiss rival Actavis Group and adopted that name. It also absorbed Warner Chilcott PLC and Forest Laboratories Inc. in multibillion-dollar deals.
Mr. Saunders was CEO of Forest Labs, and became CEO of Actavis after that deal. Shortly after, Allergan’s predecessor was put into play when Valeant Pharmaceuticals International Inc. made an unsolicited offer to buy the California company.
Actavis then stepped in as a white knight and bought Allergan, taking the company’s name.
Allergan and its predecessor companies have an interesting record of misbehavior. Just perusing Health Care Renewal one can find:
- Actavis was convicted and fined more than $170 million in 2011 by a Texas jury of misrepresenting prices to the state's Medicaid program (see this post.)
- In 2010, in case which included allegations that it paid kickbacks to physicians to promote its product, Allergan pleaded guilty to to federal charges of misbranding of Botox and agreed to penalties of about $600 million (see this post).
- In 2010, Forest Laboratories settled allegations that it deceptively promoted drugs, particularly that it promoted anti-depressant Celexa for children by partially by covering up negative trial results about it. This likely hurt patients, since anti-depressants like Celexa have been shown to have severe adverse effects, including suicidal ideation, for children. The company also was charged with giving kickbacks to physicians to promote drugs. The company pleaded guilty to a felony charge of obstructing justice, and two misdemeanors, including misbranding Celexa and illegal distribution of Synthroid. The company paid over $300 million in penalties and submitted to a corporate integrity agreement. (See this post) The Department of Justice threatened to disbar the CEO of Forest Laboratories, but then inexplicably backed off (see this post).
So the latest settlement by Allergan subsidiary Warner Chilcott is the fourth major settlement since 2010. The company and its predecessors have pleaded guilty to crimes, at least once to a felony, and settled cases involving allegations of kickbacks and deceptive marketing practices.
Pfizer's Previous Track Record
And things really get interesting when one considers Pfizer's track record, which seems much sorrier than Allergan's. Our latest post, about Pfizer misbehavior was only one month ago (October, 2015). A UK judge found that the company threatened health care professionals for using a generic competitor.
Many posts on Pfizer can be found here. The latest update of Pfizer's troubles since 2000 follows.
In the beginning of the 21st century, according to the Philadelphia Inquirer, Pfizer made three major settlements,
- In 2002, Pfizer and subsidiaries Warner-Lambert and Parke-Davis agreed to pay $49 million to settle allegations that the company fraudulently avoided paying fully rebates owed to the state and federal governments under the national Medicaid Rebate program for the cholesterol-lowering drug Lipitor.
- In 2004, Pfizer agreed to pay $430 million to settle DOJ claims involving the off-label promotion of the epilepsy drug Neurontin by subsidiary Warner-Lambert. The promotions included flying doctors to lavish resorts and paying them hefty speakers' fees to tout the drug. The company said the activity took place years before it bought Warner-Lambert in 2000.
- In 2007, Pfizer agreed to pay $34.7 million in fines to settle Department of Justice allegations that it improperly promoted the human growth hormone product Genotropin. The drugmaker's Pharmacia & Upjohn Co. subsidiary pleaded guilty to offering a kickback to a pharmacy-benefits manager to sell more of the drug.
Thereafter,
- Pfizer paid a $2.3 billion settlement in 2009 of civil and criminal allegations and a Pfizer subsidiary entered a guilty plea to charges it violated federal law regarding its marketing of Bextra (see post here).
- Pfizer was involved in two other major cases from then to early 2010, including one in which a jury found the company guilty of violating the RICO (racketeer-influenced corrupt organization) statute (see post here).
- The company was listed as one of the pharmaceutical "big four" companies in terms of defrauding the government (see post here).
- Pfizer's Pharmacia subsidiary settled allegations that it inflated drugs costs paid by New York in early 2011 (see post here).
- In March, 2011, a settlement was announced in a long-running class action case which involved allegations that another Pfizer subsidiary had exposed many people to asbestos (see this story in Bloomberg).
- In October, 2011, Pfizer settled allegations that it illegally marketed bladder control drug Detrol (see this post).
- In August, 2012, Pfizer settled allegations that its subsidiaries bribed foreign (that is, with respect to the US) government officials, including government-employed doctors (see this post).
- In December, 2012, Pfizer settled federal charges that its Wyeth subsidiary deceptively marketed the proton pump inhibitor drug Protonix, using systematic efforts to deceive approved by top management, and settled charges by multiple states' Attorneys' General that it deceptively marketed Zyvox and Lyrica (see this post).
- In January, 2013, Pfizer settled Texas charges that it had misreported information to and over-billed Medicaid (see this post).
- In July, 2013, Pfizer settled charges of illegal marketing of Rapamune (see this post.)
- In April, 2014, Pfizer settled allegations of anti-trust law violations for delaying generic versions of Neurontin( see this post).
- In June, 2014, Pfizer settled another lawsuit alleging illegal marketing of Neurontin (see this post).
- In 2015, a settlement by Pfizer of a shareholders' lawsuit stemming from charges of illegal marketing was announced (see this post).
Summary
So the proposed merger of Pfizer and Allergan would truly create a behemouth of bad behavior. The combined company would have a staggering record of legal settlements, guilty pleas and convictions involving deceptive marketing, fraud, kickbacks, bribes and anti-trust violations, and even an obstruction of justice plea and a RICO conviction. Yet the managers in charge of the two companies when the bad behavior occurred never had to suffer any negative consequences (although in one current case there is the possibility one executive might be convicted). Many of these managers have become amazingly rich during the course of their leadership. Is there any reason to think, absent any unexpected increase in the courage and resolve of government law enforcement, or any unexpected public protest, that the new company will not continue to misbehave as long as its executives are making money from the process?
The Pfizer Allergan merger is the true poster child for the amorality, and consequent dysfunction and decline of modern US and now global health care. As long as top managers of big health care organizations can act with impunity, can avoid all responsibility for their organizations' bad behaviors, and can personally profit wildly from their companies actions, the health care death spiral will continue. Will we continue to cry out in the wilderness, or will anyone else see the writing on the wall?
A musical moment to partially alleviate the gloom. "Your Cheatin Heart" sung by Hank Williams Jr.