Saturday, May 3, 2008

A Commenter's Largely-Rhetorical Questions -- and My Non-Rhetorical Replies

In these comments, below, I have been greatly enjoying a very civil, thoughtful discourse on the lessons-learned (and apparently, in some cases, not yet learned) from the ENHANCE data, and to a lesser degree, from the SANDS data. Do go look; but I did want to highlight one rather common theme (reiterated there) that I have read, and heard about, in many places -- it's a theme I suspect we will hear a lot more of, on this coming Thursday morning, May 8th. But, despite its prolific repetition, it is an error-riddled theme, in my opinion. Let's take a look:


Having taken on the responsibility for the entire world to research and develop medicines with monumental risk and enormous cost; which drugs unquestionably save millions of lives, is it fair to measure big pharma solely in terms of cost while ignoring beneficial effects? Does pharma have the responsibility to provide drugs for free? Why? How does their incredible investment get rewarded if so? Why do we not challenge top executives in every industry to bring their pay scale into line at 100x the lowest paid employee? Reference your examination of the $30 Million package for Mr. Hassan and other top Schering executives in 2007.

In my opinion, this formulation gets all the questions just exactly backwards. It presumes a state-of-affairs that will never exist. Allow me to elaborate.

No one demanded that pharma "take on this responsibility" -- these companies choose to do so because each wishes to make money (BTW that is, generally, a good thing!), and -- to a lesser-extent -- to improve human life. Now, most pharma companies manage to both, very, very well -- make a lot of money, and greatly improve human health. And, I applaud them for that.

This whole notion that it is "either/or" -- is beneath well-reasoned discourse on the subject -- pharma people are smarter than this, and the public increasingly is, as well. No reasonable person argues all drugs should be given away, for free [that rhetoric employs a classic-formulation of the "strawman fallacy"]. For many years, pharma has done well -- a good defensive play in lean times, and growing robustly in boom times -- so there simply are no reasonable, comprehensive and reliable data to suggest that pharma, as a US industry, is teetering on the edge of the abyss (save the anecdotes of its CEOs, all of whom, by the way, seek tort immunity for any FDA approved product) -- no, pharma is fine -- alive and well. It just needs to stop shooting itself in the foot, chasing ever-increasing margins for flagship franchise products (think ENHANCE, here).

And to your CEO compensation points, while reasonable people may disagree about whether $30 million is "too much", given Mr. Hassan's 2007 performance, I would never begrudge the public-company-CEO a "very fair -- very high -- compensation" for truly outstanding performance -- delivering immense (risk-adjusted) returns, and undertaking immense risks, well-managed -- warrants out-sized compensation. That, with all due respect, is the opposite of the path Mr. Hassan has travelled, for at least one full-year, now.

He simply has not performed.

He blames most of Schering's current woes on "unwarranted confusion", which, he says, has been "created by the press". That formulation of the problem cannot meet the "straight-faced" test. How can it be that a four year, $1 billion, 10 percent-of-the-workforce-elimination [oddly called a "productivity transformation program" -- if Mr. Hassan's remarks are to be believed, why is it not called a "CLARITY transformation program"?] or, "bath", more accurately -- is the remedy for "unwarranted confusion"? How can that be? If he actually believes his rhetoric, Mr. Hassan ought to simply pay his marketeers to clear up the confusion -- spend about $100 million to provide CLARITY -- do not fire 10 percent, spend $1 billion, and take four years to do so. C'mon, man -- just tell the truth -- like Mr. Clark (albeit partially) did, and [Ex-Merck CEO] Roy Vagelos, too (mostly) did.

Richard T. Clark, Merck's CEO (and Mr. Hassan's joint venture 50-50 partner on Vytorin/Zetia), to his credit, has come at least partially-clean: he admitted, last week, that the ENHANCE fall-out was not the fault of the press -- it was, and is the fault of pharma. That is right.

Mr. Hassan has, with all due respect, let his focus on the short-term, quarter-to-quarter variations in net-profits obscure the real science, here. Until 2012, on the real science, Mr. Hassan will be definitively unable to say, for certain, whether his "confusion" was "unwarranted". The science of IMPROVE-IT will tell him. But today, he tells us the confusion is unwarranted -- all the while, he hacks away mightily, at his organization, and its people, rather than simply take on a campaign to clarify "these peoples' misperceptions".

There was a time when that sort of disingenuous ledger-domain earned a public-company's CEO a pink-slip, and an active investigatory file-jacket at the local US Attorney's office, as well as the regional branch of the SEC [if not a multi-count indictment, followed eventually by an orange jumpsuit-fitting-session, courtesy the rest of the DoJ, and the FBI]. In short, this sort of behavior simply does not comport with a $30 million pay-day (made final in April 2008, for 2007 performance) from the Schering-Plough Compensation Committee, of the full Board of Directors.

Now, when the Schering Form 10-Q files with the SEC (on or before May 10), we will learn whether other governmental agencies are already as skeptical as I am of "the spin" placed on these facts by Mr. Hassan -- or whether, like those Yellowstone bears, they are just now coming out of winter hibernation, and rubbing massive paws over still-sleepy eyes, as they wearily react to Schering's handling of ENHANCE debacle, as set forth in the stock-and-CEO-statements-timeline-chart, above [clickable to enlarge].

We do know already that Connecticut, New Jersey, Washington state, and New York Attorneys General all have active investigations underway -- we also know there are at least 115 lawsuits, and two Congressional committee investigations, pending.

Mr. Hassan -- this is your wake up call. Listen to your brothers -- Messrs. Clark and Vagelos -- and come clean. It is well-past time for you to do so.

Finally(!), to be clear, I do not support some broad-brushed, rigid edict that a CEO should only make some ultimately-arbitary maximum-multiple of the hourly-workers' annual take. No, I support the propostion/edict of promptly firing "lilly-gilder"-CEOs [and encouraging law enforcement to fully-prosecute such "message-spinning and truth-shading", when it yanks $21.4 billion out of Schering's market cap -- see above graphic; click it to enlarge], all while truly-rewarding lions (ethical lions, mind you), like. . . well. . . lions.

But that's just me.


Anonymous said...

Well done.

The commenter's "largely-rhetorical questions" produced the discussion that needed to be had. The questions were intentional and seem to have been productive.

No one "demanded" the responsibility to be taken on to be sure, the point is made to remind consumers of pharmaceuticals that these companies add much to our health and these benefits should be measured by means in addition to cost.

It is not the commenter that proposes an "either/or" philosophy. Many "expect" pricing to be at some level that is often unreasonably low given the investment and risk without taking the health benefits into consideration. The discussion of "Big Pharma" is most commonly based solely on price. The moniker alone creates a suggestion that they can easily afford to subsidize.

There must be fair, not unbalanced reimbursement for the value received. (Hint: Perhaps a review of the insurance industry or pharmacy acquisition prices vs sales price is in order.) Retail pricing is always blamed on pharma when in fact, pharmacies are responsible as well. (Ask why pharmacies can suddenly offer a laundry list of drugs for $4.00...)

Perhaps there are several issues around compensation that could be explored. Certainly top execs deserve reward - we are capitalists after all. Especially constructive is the discussion of the pay package (of all executives) which is top heavy and exorbitant based on the results you cite. In addition, the philosophy of rewarding those that create success does not seem to extend to many past the top line, hence the suggestion that perhaps the top should be somehow connected to the middle and bottom layers of the company. A smart company would include, not exclude players that help make a success, would it not?

Between us there are multiple points of dialogue - The initial Enhance discussion and the behavior of the executives. Assuredly they are intertwined.

We leave the Enhance discussion to play out and IMPROVIT to lend the science of which you speak. The executives need your scrutiny. It is agreed that the pay structure is swollen and without accountability. Your musings on non-performance sees through the veil placed to disguise and distract. Yes, let's poke those sleepy bears and look forward to May 8.

Schering produces and sells quality products because of many fine employees. Actions of the executives that cause precipitous drops in value of the company, morale or pension fund should be held accountable and not just sent to golden parachute heaven.

Let's hope Mr. Hassan pays some attention.

condor said...

Thank you. Truly well-put.

I think, in a future post, I will take a much closer tour through what one pharma's (Schering's) real, risk-adjusted, cost structure actually looks like -- for I do think we are often misled into think that it is higher than it is. Said another way, I think the profit margin on many flagship pharma products is actually understated. we shall see.

Please do return, Anon.

The dialogue may only continue -- if more than one voice is speaking.

Otherwise -- mine is simply a monologue -- and that is ultimately rather boring (to all, not just me!). Heh.

Thank you.

Anonymous said...

It's a pleasure, to be sure. The quality of your analysis is interesting and thorough and for that I thank you. The presence of actual documents lend credibility and short bursts of humor/personality make it readable. In addition, the absence of gross, unacceptable language and inappropriate metaphors elevates this forum above others where course language is tolerated.

It all began with Zetia and the jumprope - the title of a new novel perhaps?

Until next time...Adieu

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