The Costs and Benefits of Off-Label Marketing of Pharmaceuticals

Pharmaceutical companies are prohibited from marketing products for uses other than those approved by the FDA. Despite this prohibition, the practice seems to remain fairly widespread according to this Bloomberg article. As just one example, Pfizer recently paid the largest criminal fine in history, $2.2 billion, for off-label promotion of Bextra. Bextra was approved only for the relief of pain associated with arthritis and menstrual discomfort; however, the company had been promoting it for all types of pain relief.

With such huge potential fines, why would pharmaceutical companies engage in this type of behavior? Perhaps it’s a rational calculation of the costs and benefits. Another example discussed in the article is the epilepsy drug Neurontin. Pfizer paid a $430 million penalty in 2004 for promoting off-label use. But, the drug has brought in over $12 billion in revenue, a large portion of which came from off-label use.

Let’s see if we can calculate the expected costs and benefits. The article notes that the prosecutor’s sentencing memo claimed the 94% of Neurontin’s 2004 revenue came from off-label use. Assuming off-label uses might have grown over the years (and just to be conservative), let’s assume that 50% of the $12 billion in Neurontin revenue came from off-label uses. In the early 2000’s, Pfizer’s net margins were running around 20%, meaning that off-label Neurontin sales generated around $1.2 billion in profit. Not too hard to see why companies might be engaging in this behavior (and it’s even more obvious if you think in terms of expected costs – if you figure there’s only a 50% chance of getting caught and paying a $400 million fine, the expected cost drops to $200 million).