As a scientist, I'm all for full disclosure. But as an investor, I'd rather the companies I own do everything they legally can to make as much money as possible. They may take away my Ph.D. for this, but when torn between the two, my pocketbook will usually win.
Pfizer (NYSE:PFE) had a rough day in the media yesterday, following reports of a looming lawsuit that claims the company held back negative clinical trial data. Let's take a look at the ethical dilemma that Pfizer and the rest of the industry encounters, and how investors can use such situations to get a read on management.
The baby with the bathwater
Pfizer's problem revolves around clinical trials for its epilepsy drug Neurontin. It allegedly delayed the release, or never published the results, of studies showing that the drug was ineffective at treating several off-label indications.
While my scientist side is hurt -- even negative data is important in helping us understand things -- my investor side wonders what advantage the company would have in publishing the reports, as long as that's all it did? Neurontin was already on the market. Publishing the data wouldn't help it sell more product, and it could result in lower sales since the drug was being used "off label."
It's a doctor's choice to prescribe a drug for an indication not listed on the label. I don't think Pfizer really has a responsibility to let every doctor know that the drug failed to show an effect elsewhere -- again, as long as that's all it does. In essence, the doctor is running his or her own little clinical trial. If the drug isn't working for his or her patient,, move onto something else. On the other hand, if it's working, keep using it. After all, some patients do see a benefit during trials from a drug that ultimately fails.
And while off-label use varies widely between drugs, most drugs don't go there. For instance, Onyx Pharmaceuticals' (NASDAQ:ONXX) Nexavar had a stellar phase 3 trial in liver cancer, so you'd expect that sales would have increased instantly -- I mean, if I had liver cancer, I would have demanded that my doctor give me the drug. But sales didn't really pick up until after the FDA gave the drug its seal of approval nine months later.
A murkier issue
However, the question of releasing data becomes cloudier when it comes to new data questioning the efficacy of the approved use of the drug. Congress investigated Merck (NYSE:MRK) and Schering-Plough (NYSE:SGP) over whether or not they delayed releasing data from the Enhance trial, which ultimately showed that Vytorin was unable to reduce the level of plaque in an artery more than Zocor.
At some point, ethics need to trump the almighty dollar. Patients deserve the truth, even if it hurts the company's bottom line.
When things go too far
I'm all for companies doing every legal thing in their power to sell as many drugs as possible, but some actions don't really benefit the companies in the long run.
While doctors can prescribe drugs for indications for which the FDA hasn't approved them, it's illegal for drugmakers to market the drugs for such off-label use. Such activity has caused investigations and fines for many drugmakers, including Pfizer, Cephalon (NASDAQ:CEPH), and more recently, Eli Lilly (NYSE:LLY). While off-label marketing might push up sales in the short run, in the long run, the consequences of fines and bad publicity generally aren't worth it.
Withholding safety data is worse. But even here, drug companies seem to be in a no-win situation -- witness Merck and Schering-Plough getting flack for releasing some safety-related data early. Investors need look no further than the settlements for Wyeth's (NYSE:WYE) fen-phen and Merck's Vioxx to see how safety issues can affect a company's pocketbook. Imagine how much larger the settlements would have been, had the companies never let the public know about the issues.
What else are they hiding?
Here's the question I need to ask my investor side: Does Pfizer's alleged behavior help me understand management better? If it's allegedly willing to push the envelope to sell drugs to doctors and patients, what's to keep management from bending the truth about the potential market size of a drug that's about to be launched -- or worse, distorting its earnings?
Investors have to trust that management has the company's best interests at heart. However, the numbers don't always tell the whole story. Keeping aware of the big news affecting your company will help sharpen your skills at the subjective task of evaluating its management.
