PharmaGossip: Ed Silverman writes: Pfizer's Planned Compliance Fund May Have Far-Reaching Implications -- Seeking Alpha

Within days of agreeing to pay a whopping $2.3 billion to settle civil and criminal charges of off-label marketing several drugs, including the Bextra painkiller, Pfizer (PFE) was hit with a derivative shareholder lawsuit. Now, the drugmaker has agreed to settle the litigation by creating a $75 million fund that will be overseen by a new compliance committee comprised of board members who will oversee corporate governance.

The move may have far-reaching implications. That’s because the preliminary deal, which was reached late last week, makes a requirement that was not specified in the corporate integrity agreement Pfizer signed last year with the federal government. The CIA, which you can read here (pdf), requires a compliance committee, but this consists of a chief compliance officer and and members of a senior management, not board members (read the settlement here [pdf]).

“It’s a really significant development,” says Mark Lebovitch of Bernstein, Litowitz, Berger & Grossman, who was the lead counsel for the institutional investors and adds this will be one of the largest derivative shareholder settlements. “This will hopefuly become a model for the whole pharmaceutical industry. They all have one problem or another with off-label marketing and a lot of regulatory issues. We’re genuinely hoping it catches on. When a board takes ownership of these regulatory issues, hopefully you get better behavior.”

The lawsuit had accused specific Pfizer execs - including CEO Jeff Kindler, CFO Frank D’Amelio and Ian Read, who heads global pharma - along with each and every board member - of breaching their fidicuary duty by failing to detect and stop the illegal marketing activities, which resulted in the largest criminal fine in US history: $1.3 billion. And so a majority of the members of the soon-to-be-created compliance committee will be independent directors, as opposed to Pfizer execs. We should note, though, that in reaching this deal, Pfizer has not admitted to any wrongdoing.

“One of (the) core objectives in this litigation was to ensure that the defendants (and future Pfizer directors and officers) would never consider Pfizer’s payment of the largest criminal fine in history as a mere cost of doing business but, instead, would take the appropriate steps to prevent similar drug marketing violations from occurring in the future,” a court document (pdf) reads. “The committee will report to the full board, thereby ensuring that both the committee and the coard will be informed and educated about, and required to engage in direct oversight of, the specific drug marketing activities that led to the company’s prior problems.”

What will be involved? The settlement requires Pfizer to evaluate compensation policies for employees, speakers and advisory board members to determine whether they are consistent with compliance incentives. If there are future violations of marketing laws or any government regulatory action against Pfizer, the settlement requires the committee to determine whether incentive compensation of certain execs, senior managers, compliance officers or attorneys should be reduced or eliminated. And an ombudsman will be created to field concerns about retaliation or supervisory pressure to engage in unlawful promotion of Pfizer drugs.

The litigation appears to have been one of those moments when some people may have wished to be a fly on the wall. There were bitter fights over discovery; some 12 million pages of documents reviewed, many of which were redacted; expert reports submitted by former US Securities and Exchange Commissioners Harvey Pitt and Richard Breeden, who essentially declared that Pfizer execs and board members acted reasonably, consistently and in good faith without violating an earlier CIA from 2004; and depositions of numerous Pfizer brass including, of course, Kindler, who must make an interesting subject, given his legal background and imperious nature.

UPDATE: A Pfizer spokesman sends us this: “Pfizer’s directors and officers acted with integrity throughout this entire process, and we maintain strongly that plaintiffs’ case has no merit. When they became aware of the compliance issues that led to the settlement with the government in September 2009, Pfizer’s directors and officers took swift and appropriate action. We have decided, however, that it is in the best interests of the company and our shareholders to reach an agreement that allows us to put this matter behind us on favorable terms.

“Subject to court approval, the agreement includes measures that reinforce and build on existing provisions of our compliance program and that formalize actions the directors and officers undertook in connection with matters at issue in this case. Pfizer’s compliance program has long included mandatory training for every one of our employees, proactive monitoring and surveillance, and strict enforcement of all federal and state health care laws.”
Disclosure: None