Creating demand for drugs or medical devices isn't easy, so it's a common industry practice to hire a team of reps who go from practice to practice to raise awareness. These reps are often put under huge pressure to generate script growth, and they are legally allowed to provide healthcare providers with free food, free samples, and in some cases cash payments.
Often, these healthcare companies follow the rules that govern the industry, but they do occasionally cross the line and have been caught bribing healthcare providers. In the recent past, we've seen companies like GlaxoSmithKline (NYSE:GSK) and Insys Therapeutics (NASDAQ:INSY) do just that, causing them to pay huge fines.
In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Brian Feroldi to discuss some of the ways that drug companies create demand for their products and how new laws are helping to reshape the industry for the better.
A transcript follows the video.
This podcast was recorded on July 13, 2016.
Brian Feroldi: Medical device companies and drug companies need to create demand for their products. One of the ways 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.
Kristine 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 bout 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, 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.
Brian Feroldi has no position in any stocks mentioned. Kristine Harjes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.