When a healthcare company launches a new product to the market, it can be a huge challenge to get the word out. With millions or even billions of dollars riding on the line, healthcare companies will often go to incredible lengths to create demand.

One of the key ways that companies spread the word is by employing a small army reps who go from practice to practice to raise awareness. These reps are legally allowed to shower healthcare providers with free food, free samples, and in some cases cash payments, which creates the potential for a conflict of interest. In the recent past we've seen companies like GlaxoSmithKline (GSK -0.39%) and Insys Therapeutics (INSY) cross the line as they have actually bribed providers to prescribe their products, causing them to face huge fines.

In this episode of The Motley Fool's Industry Focus: Healthcare, Kristine Harjes is joined by Brian Feroldi to discuss some of the ways that healthcare companies create demand for their products.

What's legal, what's not, and how can this information help you make better investing decisions? Find out more in the video below. 

A transcript follows the video.

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This podcast was recorded on Jul.13, 2016.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's July 13th, and I'm your host, Kristine Harjes. For today's healthcare show, I've got Motley Fool healthcare writer Brian Feroldi on the line. Brian, welcome to the show! It's your first time on.

Brian Feroldi: It is! Thank you very much, I'm really happy to be here.

Harjes: Happy to have you here. Brian has a background in healthcare before he came to the Fool as a writer. Can you tell us a little bit about your experience?

Feroldi: Sure. I worked for a medical device company for the better part of a decade, and I did marketing and sales for them, but I spent almost 10 years as a rep for them, which is one of the topics we're going to be exploring in today's show.

Harjes: Exactly, you nailed it. With that experience in mind, we decided that, today on the show, we wanted to talk about how healthcare companies market their products. This is something that the average person might not be super familiar with. There's this whole world of marketing, with relationships between doctors and these drug representatives. And a large majority of it -- well, hopefully all of it -- is completely legal. I mean, you'd be really surprised what all is actually totally allowed.

Feroldi: I know when I first joined the industry, I didn't even know that drug reps existed. It was complete information overload to me. But yeah, I was shocked when I really dug deep into what goes on out there.

Harjes: What are some of the common practices?

Feroldi: Sure. In general, medical device companies and drug companies need to create demand for their products. One of the way that they do that is employ an army, in some cases, of reps and clinicians that cover a territory. Really, it's their job to go to doctors and healthcare providers in the area and create awareness and demand for their drug or product. There's plenty of ways that they can do that. But in general, they go from practice to practice all day every day, trying to get in front of doctors and talk to them about what their drug does and how it works and how it's different from competitors. 

There's a couple ways they can do so. They can provide promotional materials like brochures or discounted copay cards. In many cases, they buy doctors lunches or dinners or breakfasts. And, they also provide free samples to the practices.

Harjes: This is a pretty big-money industry. To me, that opens the door where there is a lot of potential for abuse here. You don't want anybody paying money under the table to promote their drug, say, off label. That's a big part of this too -- you can only spend this money on, say, buying a doctor lunch if you're marketing the drug for its approved uses, and that's it. And we've actually seen a couple of companies get into trouble for this in the past.

Feroldi: Absolutely. Beyond just providing lunches, healthcare companies can actually provide cash payments, in many cases, to doctors or healthcare providers. One of the ways they do so is they pay them to be a speaker for them. That's when the drug company sets up, say, a dinner program, and they pay one of these doctors to come in and talk about their experience using a drug. In many cases, they can get paid in thousands of dollars for one evening's work. There's been plenty of cases where doctors can earn over $100,000 per year just from doing this from just a single company. So, there's big money involved.

Harjes: With big money, you also sometimes get big fines if you cross these boundaries. One company that's had to face a pretty heavy about of fines is Insys.

Feroldi: Absolutely. News broke that some of their providers were essentially taking bribes where they would be doing speaker programs with nobody in the room. So, they would pay these providers thousands of dollars to come and talk to nobody, which was essentially a backdoor way of bribing them. The company and the healthcare professionals faced some big fines, and obviously, it's not a good practice.

Harjes: I want to be a fly on the wall in that room of that presentation, with the doctor sitting up there and saying, "Well, you know, we have Subsys, it can stop your pain ... hopefully this presentation is going pretty well ... "

Feroldi: It would be pretty fun.

Harjes: Another big name that has made the news for some less-than-perfectly legal marketing was GlaxoSmithKline. In China, actually, in 2014, they faced the largest-ever corporate fine for this kind of thing, which was almost $500 million. They had sales staff bribing physicians, all sorts of shady stuff. Interestingly, when I was digging into this in my research, I saw that the stock actually went up a little bit on the news of this fine. I think people were expecting an even bigger fine.

So, clearly, there are lawmakers watching out for this kind of thing. You have an entire act, the Sunshine Act, dedicated to preventing shady relationships between these drug reps and the doctors.

Feroldi: Yeah. The Sunshine Act was enacted in 2010. Really, the goal of it was to make these relationships publicly available. The goal was to increase transparency. Now, any food or payments that are made to doctors must be reported in, and in many cases, this information is made publicly available. It was really a great law, and it really helped change some of the bad practices that are out there.

Harjes: Did you, on in the field, actually see changes due to this act?

Feroldi: Absolutely. I had a number of providers that I would regularly provide lunches for. As soon as the bill went into effect, they said: "OK, we are stopping all lunch programs, we are not going to be accepting any food." This absolutely had its effect.

Harjes: So, with those doctors who said: "We don't want to do these lunches anymore," it wasn't because the lunches were necessarily illegal. Was it just that they didn't want to have to bother with all the reporting that was then required? 

Feroldi: Yeah, and it's not even them that has to do the reporting. It's the drug and medical device companies that track everything. So they don't even have to do it, it's just that the information becomes publicly available, and no doctor wants to have to answer to their patients about, "Why are you accepting money from XYZ drug company when you're also prescribing me their product?" That's just an uncomfortable conversation that I think many of them did not want to have.

Harjes: That's really interesting. That begs the question, why don't we just make this entire thing illegal?

Feroldi: That's a very common question. Drugs are very expensive, and patients absolutely hate the idea that their money is going toward practices like this. You understand why there's such aggression against these practices. But the unfortunate truth that this -- through reps -- is really how a lot of doctors get their information. A common pushback against that is "We have trade shows and there's journals. Can't the doctors get the information like that?" I can tell you firsthand that's not enough. Doctors are very pressed for time, they're under constant pressure to see patient after patient after patient. And I think patients do want their doctors to be up to date on the latest drugs that are out there, the latest devices. Plus, you know better than anybody how complex reimbursement is, for example, for drugs. So, that's just a whole world that reps can help shed some light on.

Harjes: Yeah, I agree there. You have these people who are experts in the drugs, and they can answer these really complex questions. I think speed is a big part of it, too. If you as a small company can't get the word out about your drug quickly, that's really going to hold you back, especially if you're spending a ton of money as it is trying to get this drug to ramp up quickly. All of the sudden, if you're not turning a profit as quickly, it's slowing down your research and development efforts.

Feroldi: Absolutely. The example I always give is, can you imagine, rewinding the clock to 2000, and you're Intuitive Surgical, who just got FDA approval for this da Vinci system, which has really transformed the way that surgery is done. Can you imagine being the first rep to try to market this device? Your sales pitch is going out there and saying: "Hey, would you like to buy my new device? It costs millions of dollars, it's going to take hours upon hours of training, that could possibly go wrong! And oh, by the way, a patient's life is on the line while you're doing this. Would you like to sign up?" I mean, without reps, I'm convinced the da Vinci system would not exist today, and really, we'd all be worse off.

Harjes: It would have been incredibly easy to just ignore the entire potential of robotic surgery if you didn't have these reps going out there and getting the word out. 

Feroldi: Absolutely!

Harjes: Another element to this story about how healthcare companies market their drugs, aside from just having representatives that talk to healthcare providers and doctors, you also have direct-to-consumer advertising. This is something that's pretty unique to the U.S. America is the only major market to allow direct-to-consumer -- DTC -- ads of prescription drugs. One of the companies that is really huge in this is Pfizer, which in 2014, was the first pharma to break $1 billion in annual DTC ad spend. The runners up, by the way, were about a third of that spend. They are the goliath of the TV commercial area. This is another interesting moral question -- should these companies be allowed to put a commercial on TV for a drug?

Feroldi: You see both sides of it. On the one hand, raising awareness for a disease state or drug, that could be a good thing. If a patient sees a commercial and says: "Hey, I might have that," and they go talk to their doctor and they can get help, you could argue that's a good thing. But on the flip side, it does hold potential to create artificial demand for a drug, where you could imagine a patient walking into a doctor's office and saying, "Hey, I saw this on TV and I want it." The doctor might not even think they're a good candidate for it, but they could feel some pressure to prescribe it just to make the patient happy.

Harjes: Absolutely. Pivoting the conversation a little bit to how investors can use this information, what does this all mean to an investor looking at a company and trying to decide whether or not they have a solid marketing effort and team?

Feroldi: Right. I learned firsthand that just because you launch a drug or a medical device, it could be great, it could be wonderful, but that doesn't mean it's going to sell well. There's truly a skill to marketing a device. It's something that's not always something that a company can get correct. I have three guide points that I look at when I'm investing to try to figure out ahead of time: OK, if this gets approved, what kind of chances does it have of seeing market success?

First question I ask is: does the company that's launching the product have presence in the disease state already? Or, a partner that is in the disease state? For example, if Novo Nordisk, who is kind of the big dog in diabetes, if they launched a new diabetes drug, they would have, in my mind, no problem getting the word out and getting to doctors, because they already have those relationships in place. But if you have a new company, or an established company that's trying to switch over to a brand new disease state, that can be tricky. That's something that they might not get right the first time.

Harjes: This is a lot of the times that you see you company partnering with another company on their marketing efforts. If you know going into it -- "I don't have any diabetes doctor relationships" -- then you can have a partnership where you'll forgo, maybe, a royalty on the sales for somebody else to take over for you and use their existing relationships and their marketing power.

Feroldi: Yeah, that's absolutely true. That's especially true for smaller companies. Employing sales reps is very expensive, and it makes a whole lot more sense to bring in a big partner with relationships already in place to help get the word out faster.

Harjes: Absolutely. What is the second thing you look for?

Feroldi: Sure. The second thing is, is there an unmet medical need? Is this a disease state where there's no other approved drugs? One area that I look at are orphan drug makers, which can charge huge premiums, and you can bet that their patients are watching the FDA decision and biting their fingers to see if it's going to go their way. That's automatic built-in demand.

Another company I have my eye on recently is called Acadia Pharmaceuticals. They just launched a drug called Nuplazid, which is going to be used to treat Parkinson's disease psychosis. This is a disease that there's really no great treatment options for currently. Acadia chose to launch the drug themselves, and I don't see any competition, so I think they'll have quite an easy time marketing it.

Harjes: Acadia is a really interesting story. This is a pretty huge indication. Parkinson's disease psychosis occurs in about 20% of Parkinson's disease patients. So a lowball estimate would peg that at around 200,000 Americans currently suffering. Meanwhile, this is a drug with a $23,000 annual price tag. You multiply that out, and you get some really big numbers, but realistically you might be looking at around a $4 billion annual peak sale. And they're not really up against any competition. Even though they are a pretty new company, a pretty small company, they should be able to very quickly build these relationships that we've talked so much about.

Feroldi: Yeah, that's the theory, right?

Harjes: Yep. We've got number one, for what investors should look for, is: does the company have a presence in the market already? Number two, is it meeting an unmet medical need, or are there no other approved drugs? What is the third?

Feroldi: This is the best-case scenario of all. This is when another company is going to do all the work for you for free. These are what I refer to as off balance sheet sales forces.

Harjes: That does not sound like it should be a real thing. (laughs)

Feroldi: These are very, very rare. When a company like this comes along, I definitely put it on my watch list. This is a case where a drug comes out, and it works either in combination with some other existing drug, it makes that drug work better. I know you and Todd have talked a lot on the show about Portola Pharmaceuticals, and their factor Xa inhibitor antidote. You can bet that if that does hit the market, Johnson & Johnson, Pfizer, Bristol-Myers, they will be screaming from the rooftops about the drugs approval. Portola won't have to do anything.

Harjes: You know I love Portola Pharmaceuticals. I'll also add to that -- we've talked about them a ton, so I won't go too in the weeds here -- but these companies, the big guys, have already been handing Portola money to develop this factor Xa inhibitor antidote. You would think they're also going to be more than willing to hand out more money to get this drug off the ground.

Feroldi: Absolutely. Another one I think you talked about on the show is Ophthotech. Their drug Fovista works in combination with other drugs that are already on the market. Novartis' Lucentis, Avastin. It really makes those drugs work better, so same story. If Ophthotech can get approval for Fovista, you can bet those big boys will be pushing it.

Harjes: For sure. Brian, is there anything else you wanted to get out there for listeners before we close the show? Maybe an example of what could go wrong in the marketing of a drug?

Feroldi: Sure. Doing this the right way is really tough. We've seen a couple of cases where companies tried to launch on their own, and they didn't have the relationships and place. It can be exceptionally hard to be a small company and try and take on an established market. One recent example is Keryx Biopharmaceuticals. Their drug is called Auryxia, which is used to increase serum phosphate levels in patients with chronic kidney disease. This drug was launched in 2014. It was going up directly against Sanofi's Renvela. Doctors really weren't shy about prescribing it. And there really wasn't much Keryx could do to raise awareness for it. We just heard recently that they were going to be increasing their sales force by 50% in order to get the word out.

Harjes: That's definitely not a cheap decision.

Feroldi: Not at all.

Harjes: Thanks so much for your thoughts today, Brian. It was fun having you on the show.

Feroldi: Thanks for having me!

Harjes: Listeners, I want to let you know about something kind of fun and Foolish that's going on in our office right now. Tom Gardner, our co-founder and CEO, is walking five marathons in five days on his treadmill desk, which, this being the healthcare show, I figured this is something I should probably tell you guys about. He lost a bet about the market dropping 10% at some point in 2014. After losing this bet, he now has to walk these five marathons. But he's not just doing it, but making it into a big charity effort to raise money for DC Prep, which is a school that provides awesome college prep education in historically underserved areas of D.C. They're a great organization. They are perfectly aligned with the Fool in that both of us believed that learning has no limits. If you want more info, or to support Tom in this walk, check out our campaign page at 131.fool.com.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell based solely on what you hear. For Brian Feroldi, I'm Kristine Harjes. Thanks for listening and Fool on!