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  • Many Pharmaceuticals Accused Of Fraud Have Unusually Poor Corporate Governance 0 comments
    Aug 17, 2012 4:53 PM | about stocks: PFE, ABT, JNJ, GSK, AMGN

    The pharmaceutical industry has grown notorious after collectively paying out multi-billions amid allegations of fraud. But many among those to receive fines stand out from the others, and continue to expose their investors to possible losses related to regulatory problems.

    When the government announced a health care fraud prevention and enforcement action initiative in May 2009, Attorney General Eric Holder said that tens of billions in Medicare and Medicaid funds were lost to fraud every year. Since then, regulators have recovered more than $10.2 billion related to such matters. While warning that the government would be "turning up the heat on perpetrators who steal from the taxpayers and threaten the future of Medicare and Medicaid," Health and Human Services Secretary Kathleen Sebelius had added the caveat that most "providers are doing the right thing and providing care with integrity."

    Indeed, most North American and Western European companies in the diversified and biotech sector exhibit typical characteristics. Around 60% of those we monitor are rated "C" on their corporate governance overall and half have financial statements reflecting AGR scores that indicate average accounting and governance risk.

    In contrast, several companies that have experienced scandals in recent years are also among those with lower ratings. In September 2009 regulators announced that Pfizer Inc. (PFE) and its subsidiary Pharmacia & Upjohn Company Inc. agreed to a $2.3 billion settlement of fraudulent marketing charges; the New York-based global giant is rated "F" and its AGR score is 1, suggesting it has higher accounting and governance risk than 99% of comparable companies. In another example, the U.S. Department of Justice said May 7 that Abbott Laboratories Inc.(ABT), which is rated "F" and has an AGR of 22, agreed to pay $1.5 billion to resolve allegations that it illegally promoted the drug Depakote. Johnson & Johnson (JNJ) has developed an impressive record of run-ins with regulators, including its tentative $2.2 billion settlement with the Department of Justice over its promotion of Risperdal, according to the Wall Street Journal and a regulatory filing on August 1. The New Jersey company is rated "F" and has an AGR score of 26. Amgen Inc.(AMGN) recorded a $780 million hit to its earnings during the three months ended September 30, 2011 that was tied to investigations into its marketing practices, and the Thousand Oaks, Calif.-based company is rated "D" and has an AGR of 17.

    To be sure, some of those to receive fines have average ratings. For example, GlaxoSmithKline plc(GSK) had to pay $3 billion after allegations that the U.K. manufacturer marketed the drugs Paxil and Wellbutrin for uses not approved by the U.S. Food and Drug Administration, including the treatment of children for depression and of other patients for ailments ranging from obesity to anxiety. Unlike others that have experienced such large penalties, Glaxo is rated "C." Its AGR score of 52, which indicates higher risk than 48% of comparable companies, has improved from a 28 as of June 2010.

    As regulators call out pharmaceutical companies for misconduct, it seems logical that the people affected will take steps to avoid having such problems again in the future. Which ones will succeed in the coming years remains an open question. In the meantime, the few to experience scandals in recent years have not helped the industry's reputation.

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a corporate governance specialist.

    Themes: pharmaceutical Stocks: PFE, ABT, JNJ, GSK, AMGN
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