On Friday, Bristol-Myers Squibb reported that it agreed to pay a $389 million settlement to end allegations that it illegally promoted the antipsychotic Abilify for use in children.
This settlement is interesting for two reasons:
1. $389 million is a very large sum.
2. $389 million is a very small sum.
Clearly, as an existential financial fact, $389 million is a vast quantity of cash. Larger than a lottery win. Enough to buy Manhattan’s most expensive residence — a $50 million townhouse — several times over.
So this should be a significant punishment for BMS, yes?
Er … No.
It’s actually only 2% of the company’s 2007 revenues, which were $19.3 billion. The company will probably write off the fine as a “one-time charge.” (It is due to report its 2Q08 revenues on July 24.) And Wall Street will ignore the loss of cash by building in the fact that it is unlikely to ever happen again (i.e. by “pricing in” the bad news and concentrating on the overall progress of its business.)
To paraphrase Warren Buffett, Who do they think is paying for these one-time charges — elves?* That’s $389 million that won’t be distributed to BMS shareholders in their dividends this year, for starters.
But there’s an even worse problem here: Pharmaceutical companies who break the rules are often bigger than their enforcers, even when the enforcer is the federal government.
Here’s a typical example. Pfizer admitted to acquiring a company it knew to be selling human growth hormone illegally to vain middle-aged weirdos who want big muscles and bigger libidos. Federal law requires a 5-year prison sentence for anyone convicted of that activity. But Pfizer pled guilty and paid only $34.7 million in fines — or just 0.07% of its $48 billion in revenues that year. The settlement was announced on April 2, 2007. Was the stock price affected? No. There was no significant change in PFE’s stock price over the period when the settlement was announced.
This is an important finding: When the fines levied to deter bad behavior are so small in proportion to the finances of the actors comitting the bad behavior, you know you will have an inevitable enforcement problem. Why should CFOs warn their CEOs and marketing chiefs against breaking the law when they know that the punishments (although “large”) are so small that the market won’t notice?
How did it get this way?
Simple. These companies are not really “drug” companies, in the sense that a layman would understand it. Rather, they are financial conglomerates that are the product of a long chain of previous mergers and acquisitions. There was a time when BMS would have been really hurt by a $389 million hit. But that time was prior to 1989, when the former Bristol-Myers Co. merged with Squibb Co.
And Pfizer is a chain of smaller companies, including Warner Lambert and Pharmacia. Now, it is so massive that its criminal transgressions amount to a mere rounding error in its accounts.
Which … ironically … goes some way to explaining why Big Pharma is constantly beset by plaintiffs’ lawyers, who all know that is it easier to settle than fight …
*If anyone can point me to the original quote, I’d love to link to it.