Is $750 Million Enough to Get Your Attention?

In the largest criminal (and civil) payment for the manufacture of adulterated drugs, GlaxoSmithKline yesterday agreed to pay $750 million to settle complaints that it had knowingly sold contaminated and/or ineffective products.

The complaints all stem from a plant in Cidra, Puerto Rico, since closed. (News articles from the New York Times here, The Guardian here, National Public Radio here; there are many, many more.)

In a statement, a GlaxoSmithKline (GSK) senior vice president said, "We regret that we operated the Cidra facility in a manner that was inconsistent with current Good Manufacturing Practice (cGMP) requirements and with GSK's commitment to manufacturing quality. GSK worked hard to resolve fully the manufacturing issues at the Cidra facility prior to its closure in 2009 and we are committed to continuous improvement in our manufacturing processes."

This is an apology? And what is "cGMP" anyway -- not making people sick when they use your product?

So ... just how serious were those "manufacturing issues"? NPR's Scott Hensley termed some of the "sobering":

• Nausea medicine Kytril and antibiotic ointment Bactroban could have been contaminated with bacteria.
• A special coating on Paxil CR pills cracked, leading to medicine that wasn't effective.
• Tablets of Avandeamet, a diabetes drug, were sometimes too strong or too weak.
• Different medicines were mixed up in the same bottles.
  

How were these "sobering" issues first uncovered?

Following a Food and Drug Administration (FDA) warning letter in 2002, Cheryl Eckard, then a GSK global quality assurance manager, was sent to the Puerto Rico plant to lead a team of 100 experts to fix the cited problems.

According to Gardiner Harris and Duff Wilson's article in the New York Times,

[Cidra] was GlaxoSmithKline's premier manufacturing facility, producing $5.5 billion of product each year. But Ms. Eckard soon discovered that quality control was a mess: the water system was contaminated; the air system allowed for cross-contamination between products; the warehouse was so overcrowded that rented vans were used for storage; the plant could not ensure the sterility of intravenous drugs for cancer; and pills of differing strengths were sometimes mixed in the same bottles.

Ms. Eckard complained to her supervisors, and was ignored. Instead, she was fired. A ten-year GSK employee, she turned to the FDA and sued the company. The complete complaint can be found online here; it does not make for pleasant reading. Ms. Eckard will receive $96 million, one of the highest whistle-blower awards for health care fraud.

The three-quarters of a billion dollars that GlaxoSmithKline is paying to settle the charges is the largest ever paid for the manufacture of adulterated drugs, but is only the third highest that drug companies have paid in the last two years. Pfizer agreed to pay a total of $2.3 billion in September 2009 to settle charges relating to Bextra, Zyvox, Lyrica, and other drugs (I wrote about that settlement, here), and Eli Lilly agreed to pay a total of $1.4 billion in January 2009 to settle charges related to its Zyprexa drug.

The key difference in the GSK case is that nearly all prior settlements dealt with illegal marketing issues (e.g., in the Pfizer case, a government investigation showed that Pfizer actively promoted off-label use of Bextra, by providing all-expenses-paid trips, and even kickbacks, to doctors). As the Times article noted, this GSK case "is the first successful case ever to assert that a drug maker knowingly sold contaminated products." (emphasis added)

It should also be noted that 2009 profits were up 20% over the previous year (Financial Channel article here), to 5.5 billion pounds (some $8 billion). At which point $0.75 billion doesn't sound so bad. According to Market Watch, third-quarter 2010 sales and profits are down, larger due to lower sales of Avandia (a troubled diabetes drug) and Valtrex (used to treat certain herpes infections). The company had in July set aside $750 million in anticipation of reaching an agreement with the government regarding the Cidra manufacturing complaints.

I have written before that the starting point of business ethics is contractual: I agree to provide a fair product (or service), and you agree to pay me a fair price. After that, the arguments can start.

When it comes to pharmaceuticals, the floor below which we must not go is: It's safe; it's effective; it's not contaminated; it's what I say it is.

GSK went down to the sub-basement on this one. Very senior heads should roll.

My Back Hurts -- Pass Me One of Your Vicodins Please

If you're taking illegal drugs at work, and test positive on a random drug test, you'll be fired. What if you're taking prescribed drugs for pain or anxiety?

Should you be fired for testing positive for those prescription painkillers?

It's actually a more complicated issue than it might sound.

What if you're taking prescription painkillers so that you can get back to work? What if you're taking painkillers as a result of injuries sustained on the job? What if you're taking a painkiller that was prescribed to one of your colleagues, who offered you one of his pills because your back hurts, and you forgot to bring your medication with you? What if ...

I'll stop here -- there are endless variations possible, but you get the picture.

Katie Zezima and Abby Goodnough have a long article in today's New York Times about how prescription drug testing may pose a new kind of "quandary" for employers, some twenty years "after the Supreme Court first upheld the right to test for drugs in the workplace."

It used to be that companies only tested for illegal drugs, but more and more companies are testing for prescription painkillers, anxiety medication, and more.

In one example in the Times story, a 22-year employee (not a 22-year-old, but someone who had been with the company for 22 years) was fired for taking a medication which had been prescribed by her doctor for back pain because she had tested positive for that drug, which the company, "which makes car parts, had suddenly deemed unsafe."

Now trimming car window molding, which was this woman's job, is not an office job. There is far more dangerous equipment around the factory floor than staplers. Employees may be working in closer proximity than the next cubicle, and if someone on the line has an accident or is impaired, there is substantial risk to those nearby. (Note: this particular employee is suing for discrimination and invasion of privacy, and her company would not comment for the article, citing the ongoing lawsuit.)

But how impaired is too impaired? In this tough economy, a lot of people who have jobs will do anything to keep those jobs. If it means popping a bunch of pain pills to keep working on the line, they will do that.

The employee who was fired said that "she understood [the company's] safety concerns but believed the company should have worked with employees who take prescription drugs rather than fire them. She said,

If the medicine they're taking is not good for them or the workplace, then there should be some sort of program where they can teach us how that affects you or see if something can be worked out. But that was not an option for us.

The automotive parts manufacturer decided that it wanted to "provide a safe environment" and would consider all drugs "unsafe if its label included a warning against driving or operating machinery, but doctors say many users function normally despite such warnings."

I can understand that the manufacturer preferred to have a blanket policy: All drugs of this type will be banned. Such a policy is easier to explain, easier to administer, and should be easier to defend in a court of law (although we'll have to wait and see whether it can be successfully defended). But is it ethically better?

In general, I don't like hard-and-fast rules for how to treat people because people themselves aren't "hard and fast". Some people respond better to "carrots" and some react better to "sticks". In the case of medications, different people react to different medications differently. Some people get "up" on "downers"; some people get slow and logy on "uppers".

Moreover, the Times article points out that setting rules about prescription drug use at work can easily run afoul of the Americans with Disabilities Act which "prohibits asking employees about prescription drugs unless workers are seen acting in a way that compromises safety or suggests they cannot perform their job for medical reasons."

Other employees at the plant said in interviews that there were some people there who used illegal drugs, and that some passed around prescription drugs (along the lines of, "Sorry, I don't have any Tylenol for your headache, but I'll give you one of my OxyContins.").

With an employee who has been working for you for 22 years -- assuming you're really worried about line safety ... don't you think you could have found a different, non-line position for her?

I wouldn't mind a "no illegal drugs" blanket rule, and I wouldn't mind a "no prescription drug sharing" blanket rule. But firing people for using a properly-prescribed drug properly, without any evidence that it's affecting their ability to perform their job?

That's going too far.

Fool Me Once...

I'm not a health-care industry analyst, so why am I writing about Johnson & Johnson for the fourth time this year?

It's to say, "I told you so."

And I'm not happy about it.

Back in January (here), I wrote about how long it took McNeil Consumer Healthcare, a J&J division, to respond to consumer complaints about odd smells in some bottles of over-the-counter medications. At that time, I wrote,

As a consumer, I have plenty of generic non-branded choices for pain relief. Unless I have a good reason to trust J&J to provide me with a higher level of product quality, why would I pay extra for Tylenol or Motrin?

I wrote again about McNeil in March (here), about the steps the company was taking to address the funny-smell problem (traced to chemicals leaching from wooden pallets that were used to transport and store product packaging materials), and contrasted the company's behavior with the "gold standard" comments J&J got in 1982 for its Tylenol recall.

And then in August, news broke of more problems, this time at the DePuy Orthopaedics unit and Acuvue contact lens. It was the ninth product recall for J&J this year. In that post (here), I quoted an investment banker who follows the company:

No. 1, is there a systemic issue at J&J? No. 2, is this [the DePuy hip-replacement recall] reflective of that systemic issue? And, No. 3, is there more to come?

I also noted that all these recalls were starting to affect J&J's bottom line.

And now it seems to be affecting consumer behavior.

Andrea Gardner, for American Public Media's Marketplace program today, reports that more and more parents are realizing that "there is no boogieman in the [generics] bottle", which could have a huge, long-term impact on companies like J&J.

Gardner notes (full story here) that she usually bought generics for herself, but bought branded products to care for her infant. With the recall of Infant Tylenol in April, she turned to generic acetaminophen. Will she go back when production ramps up again?

Gardner quotes a pharmaceutical industry analyst, who thinks that she, and other mothers like her, will return to the fold. There will be "a barrage of ads from J&J in 2011 and '12, with a message of trust, and changes made in the wake of the recall," he believes.

But: today's New York Times reports that McNeil is now voluntarily recalling eight-hour Tylenol caplets made at its Fort Washington PA plant, before that plant was closed.

Can a massive advertising campaign really make consumers forget everything they've heard this year? Fool me once.... Fool me twice.... Fool me thrice....

At some point, consumers can't be fooled anymore.

In Whose Universe Was Robo-Signing a Good Idea?

Given that all 50 state attorneys general are looking into current foreclosure practices (full article from New York Times here), it seems likely that some of the practices weren't OK in the legal universe.

Taking "hair stylists, Walmart floor workers and people who had worked on assembly lines" and making them "foreclosure experts" without any formal training, as reported by AP's Michelle Conlin (full story here) certainly isn't OK in the ethical universe.

But ... beyond all that? ... it was stupid in the corporate universe too.

Of depositions released Tuesday, Conlin writes,

The depositions paint a surreal picture of foreclosure experts who didn't understand even the most elementary aspects of the mortgage or foreclosure process -- even though they were entrusted as the records custodians of homeowners' loans. In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.

If it weren't so pathetic, it might be funny.

If you're a bank with a whole lot of mortgage loans that might or might not, well OK, probably are, bad ... wouldn't you want people looking at the documents who could figure out which ones were really really bad and which ones might be salvageable?

I wrote last month about the recurring problem of a passion for new sales as opposed to servicing and satisfying the customers you have, and part of this problem is related to that one. In the go-go years, banks spent billions to build their mortgage machines. With the market on a seemingly nonstop upward rise, actually servicing mortgages became an afterthought.

But when the bubble popped, a new army of trained employees was needed, and the banks were very slow to hire such talent. Enter the robo-signer (for those of you who haven't been following this story closely, some bank employees were signing off on literally thousands of foreclosure every month without reviewing the files, as is legally required. To keep up with the flow of paperwork, they just kept signing -- a robot could have done it just as well.).

The Times' Eric Dash and Nelson Schwartz note that "banks had few financial incentives to invest in their servicing operations... A mortgage generates an annual fee equal to only about 0.25 percent of the loan's total value, or about $500 a year on a typical $200,000 mortgage. That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans." (click here for full story)

So once again, we see that incentives work ... as long as we know what exactly we're incentivizing.

And one might argue that, if the cost of a foreclosure is so much higher than the profit, it might pay to do the triage and find as many homeowners whose loans could successfully be modified as possible....

The scandals are going to get worse, I fear, before they get better. Felix Salmon's Reuters blog makes a strong case that the investment "banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back."

Maybe I should have gone to law school.

Good Analysis, Bad Method

I nearly wrote a blogpost last week about customer service, or the decline thereof, based on a nice piece by James Suroweicki in The New Yorker (click here for full story), He accurately analyzes a problem I've been railing against for a lot of years:

The real problem may be that companies have a roving eye: they’re always more interested in the customers they don’t have. So they pour money into sales and marketing to lure new customers while giving their existing ones short shrift, in an effort to minimize costs and maximize revenue. The consultant Lior Arussy calls this the “efficient relationship paradox”: it’s only once you’ve actually become a customer that companies put efficiency ahead of attention, with the result that a company’s current customers are often the ones who experience its worst service. Economically, this makes little sense; it’s more expensive to acquire a new customer than to hold on to an old one, and, these days, annoyed customers are quick to take their business elsewhere. But, because most companies are set up to focus on the first sale rather than on all the ones that might follow, they end up devoting all their energies to courting us, promising wonderful products and excellent service. Then, once they’ve got us, their attention wanders...

This attitude has never made any sense to me. It is, as Suroweicki writes, always more expensive to get a new customer than to keep an old one, so, in a tight-money environment, why wouldn't you spend less to keep rather than more to acquire?

My guess has been -- I don't have any research to prove it -- that it's the sex appeal. It's simply sexier, a bigger rush, to land a new customer than to keep an old one happy. (I wonder if this is why so many people seem to be better at courtships than at marriages?)

In response to the article, one reader responded as follows (I haven't found the "letters to the editor" section on the magazine's website, so I'm providing the text rather than a link):

Many years ago, I owned a small business. Two members of my staff handled customer-service calls. They were told that they didn't have to listen to customers screaming at them but that, instead of hanging up, I preferred they give the really tough calls to me. I would begin every conversation the same way: "Mr. Jones, I understand there's a problem, and I'm here to solve it. But, before we get to that, there are a few things I'd like you to know. On the way to work today, I got two flat tires. When I finally got to my desk, I found a letter from the I.R.S. telling me that I'm being audited for the past three years. And, as if that weren't enough, I just got a call from my son's school. I was told that he has been suspended indefinitely. But enough about me, Mr. Jones. How can I help you?" At that point, I could hear the wind go out of Mr. Jones's sails, and a calm discussion would ensue. If you can get people to take a deep breath, and put things in perspective, customer service can work more effectively for those on both sides of the divide."

The analysis is correct: If you can get people to put things in perspective, customer service can work more effectively.

But the method? Lying to your customers as a way to do customer service?!?!

I don't think so.

Most customers don't call customer service screaming for blood immediately. Something else has gone wrong along the way. Usually, it's a sequence of indifference that makes them madder and madder, so that by the time they have gotten to the business owner or the vice president or whomever, they're steaming. Or it's the call-center-from-hell automation system (press "1" for a different problem than yours, press "2" for something else entirely, press "Mom" on your speed dial if you want someone who cares).

The way to deal with infuriated customers isn't to lie to them at this point -- by the way: just imagine, Mr. Ex-Small Business Owner, how your former customers will feel when they read your letter -- but to deal with their problem immediately before they get so angry they can't "put things in perspective."

In other words, your customer-service representatives should have had not just the responsibility of dealing with customers' problem, but the authority to see to it that the customers were satisfied.

Whatever it took.

Oh, that open-ended offer is going to get me into trouble.

Not really.

Most customers aren't out for blood. They have a problem, and they want it fixed. And they want to be treated respectfully and honestly.

The first thing to do is to listen. Really listen. Let them tell the whole story without interruption, even if it's the 238th variation on the theme that you've heard. It's not the 238th for them (at least, we hope not! And if it's the 238th for you ... well, you have a set of problems all your own that need fixing, don't you?).

Acknowledge that the customers' issues are real problems, whether you think they are or not. It's real to them. (Note that your lawyers may not like this suggestion: "You're laying yourself open in the event of a lawsuit," they will warn. Ignore them. If you deal with the problem promptly, and fix it, there won't be a lawsuit. Suits come about because you've screwed up.)

Ask your customers what it would take to make it right. Unlikely as it may seem to you, most of them are quite reasonable: "The toaster broke the day after the warranty expired." Do they want your store, your savings, or your first-born child in recompense for this disaster? No. "Gee, all I really want is to get it fixed or replaced."

Then fix it, or replace it. Done.

And you, Mr. Ex-Small Business Owner, haven't had to get involved. You haven't had to waste your more-valuable (or at least more expensive) time. And best of all, you haven't had to lie to your customers.

A Fee That Developers Love and an Ethicist Hates

Here a fee, there a fee, everywhere you look a new fee.

We've gotten used to them -- the fee airlines charge to check your bag (or the fee that they charge for your carry-on), the fee for parking in a previously-free lot, the fee for ... you name it.

But yesterday's New York Times introduced me to a new fee: the "resale fee" (or "capital recovery fee" or "private transfer fee") that some real-estate developers are charging, permitting them to collect 1% of the sale price every time the property changes hands, for up to 99 years. [Full article, by Janet Morrissey, here]

A growing number of developers and builders have been quietly slipping "resale fee" covenants into sales agreements of newly built homes in some subdivisions. In ... [one particular] contract, the clause was in a separate 13-page document -- called the declaration of covenants, conditions and restrictions -- that wasn't even included in the closing papers and did not require a signature.

I find it hard to believe that I'd be legally liable for a fee that I haven't been told about and that I don't have to sign for, but let's ignore the legality for a moment and think about the ethics.

I'm not alone in having ethical qualms about this, fortunately. Morrisey quotes Justin Ailes, director of government affairs at the American Land Title Association: "The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn't pass the smell test."

The concept is also opposed by the National Association of Realtors and the Center for Responsible Lending, among others.

Developers, apparently, see this "as a creative way to get new financing."

In fact, according to the chief operating officer of Freehold Capital Partners, it's a "win-win deal" for developers and home owners, because "the fee is a fair and equitable way to spread development costs [including building roads and other infrastructure], and results in lower costs to the average homeowner."

The home page for the Freehold Capital Partners website has a link for a brochure with more information on "capital recovery fees" which are described as "a real estate financing solution designed to more efficiently structure the economics of real estate projects." Who could argue with so laudable a fiscal goal?..... Just give me a second.

Now, no one can deny that some developers, like some homeowners, are currently upside down on their loans and are in deep financial trouble.

But neither can anyone deny that this is a singularly shady way to try to get out of the situation.

There are plenty of homeowners who rode the surge in home prices upwards by flipping a series of houses, and are now holding the bag and crying for help. Since they're not as essential to the overall economy as the major banks who encouraged them in this risky behavior, the homeowners are not likely to get much of a government bail-out. Whether they should is a topic for another day.

Should the developers be eligible for government help? That too is another issue.

But, to use Ailes' "smell test", the developers' "resale fee" is the wrong way to go.

In one example the Times used, not only did the homeowners not learn of the resale fee until after the closing, but even the home builder was not aware of the fee.

Even if a prospective owner learns of the fee at the time of the closing -- does that strike you as fair? Given the number of houses a prospective buyer has probably visited, the negotiations that he or she has gone through to reach an agreed-upon price, the inspections and banking arrangements, and everything else that's involved in buying or selling a house, this fee seems like adding insult to injury. Moreover, given that a standard mortgage is 20% down (sometimes less), a 1% resale fee will amount to 5-10% of the buyer's downpayment -- which is significant, and not something to be thrown at you when you're signing the final papers on your dream house.

The Buck Stops Where?

According to a 193-page report released yesterday, British Petroleum (BP) has concluded that "multiple companies and work teams" were responsible for the devastating 20 April 2010 Deepwater Horizon disaster.

Per the executive summary (here; BP press release here),

The team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.

This sounds just like a mea culpa, doesn't it? Well, maybe not.

In fact, it sounds more like an effort to deflect as much culpa onto other parties as possible, especially Transocean (which owned the rig) and Halliburton (the rig's cement contractor).

Note that on the same day that BP's report was issued, news came from the Gulf that the well still has not been fully sealed (New York Times story here), "as engineers worked to better understand the well's condition."

The report laid out a number of significant errors, human and mechanical. Some are well-known, such as the failure of the "blow-out preventer" (which was raised from the ocean floor over the Labor Day weekend and will be analyzed by government investigators); others are less familiar, such as the particular cement slurry that was used at the bottom of the well.

Both Transocean and Halliburton have raised objections to BP's findings.

Tiernan Ray, on his Barron's blog, reported that Transocean said, "This is a self-serving report that attempts to conceal the critical factor that set the stage for the Macondo incident: BP’s fatally flawed well design. In both its design and construction, BP made a series of cost-saving decisions that increased risk – in some cases, severely." (Side notes: I like calling the biggest oil-spill disaster ever an "incident", don't you? "Macondo" refers to the Macondo Prospect, the part of the Gulf of Mexico in which the Deepwater Horizon well was located.)

Halliburton's response was a little more measured, and did not specifically deny some of the more serious allegations, saying only: "Halliburton remains confident that all the work it performed with respect to the Macondo well was completed in accordance with BP’s specifications for its well construction plan and instructions.... The well owner is responsible for designing the well program and any testing related to the well. Contractors do not specify well design or make decisions regarding testing procedures as that responsibility lies with the well owner." (Full response in Ray's blog, here)

In the end, we may learn that actions taken by Halliburton and Transocean did indeed have an impact on the scale and scope of the disaster. But being (partially) at fault is not the same thing as being responsible. It was BP's well; Halliburton and Transocean were contracted by BP; the buck should stop with BP.