Heart Valve Case Leaves Pfizer Under a Cloud : Law: Failures of a device produced by an Irvine subsidiary continue to haunt the health-care giant. Concern over the cost of settling legal claims has investors nervous.
Pfizer Inc. was supposed to be on a roll in 1990. After years of lackluster results, the diversified health-care giant was set to reap the rewards from a bevy of blockbuster new drugs. Wall Street critics, impatient for better earnings, would finally be silenced.
But instead of a celebration, the beginning of the new decade has been a public relations disaster for Pfizer. And the culprit is a product that the company hasn’t sold since 1986, whose problems were well publicized long ago: the Convexo/Concave heart valve, once the key product of Pfizer’s Shiley Inc. subsidiary in Irvine.
Of the 86,000 valves implanted in heart patients worldwide between 1979 and 1986, 391 are known to have failed, with two-thirds of those failures causing death. Pfizer stoutly maintains that liability arising from the defective valves will have no material impact on earnings now or in the future. Still, when public attention was focused on the problem in the wake of a California appellate court decision in January, a congressional hearing in February and a new lawsuit earlier this month, Pfizer stock plummeted. The stock now trades at $61 a share after reaching $75 last year.
And the company is in the unenviable position of losing even if it ultimately wins the tangled legal battle over the Shiley valve. Most analysts believe that Pfizer and Shiley will be able to refute allegations that they fraudulently concealed information about design and manufacturing flaws in the valves and will be able to avoid massive liability of the type that destroyed A. H. Robins Co., manufacturer of the notorious Dalkon Shield intrauterine device.
But even the rosiest scenario for Pfizer includes years of adverse publicity, expensive litigation and costs running into the hundreds of millions of dollars to settle claims. And the worst-case scenario is very bad indeed. “It’s an open-ended problem that will pop up like a jack-in-the-box for years,” said Christina Heuer, a drug analyst with Smith Barney, Harris Upham & Co. in New York. “There’s a risk investors don’t take with other drug companies.”
To be sure, product liability lawsuits are anything but a rarity in the drug and medical products industries. While the Dalkon Shield case remains unique--the victims will ultimately receive $2.4 billion--the list of companies that have been hit with massive liability lawsuits includes Eli Lilly and Co. (for the arthritis drug Oraflex), G. D. Searle (for the intrauterine device Copper-7), Merrell Dow Pharmaceuticals (for the morning sickness drug Bendectin) and a veritable laundry list of big drug companies for the pregnancy treatment diethylstilbestrol (DES).
Only A. H. Robins, which went into Chapter 11 bankruptcy and was later acquired by American Home Products, was badly hurt by the litigation. And some cite that fact as evidence that Pfizer’s risk is limited. “Nothing is going to happen,” said Joseph Riccardo, a drug analyst at Bear, Stearns & Co. in New York. “That’s the history of this business. They got one company.” Pfizer, he speculated, might pay out “a couple of hundred million over 10 years,” a sum that would easily be covered by insurance and reserves.
Pfizer, which earned $681 million on revenue of $5.7 billion last year, can clearly weather claims of that magnitude. The company has for years downplayed any potential impact from the Shiley litigation and still says the Shiley valves have saved the lives of far more patients than they have harmed.
Moreover, Pfizer should get a big financial boost over the next few years from several long-awaited products. Smith Barney’s Heuer estimates that Procardia XL, a new one-a-day treatment for angina and hypertension, will produce $800 million in new revenue, while the new anti-fungal agent Diflucan will bring in $600 million. “They’re blockbuster drugs, major winners,” Heuer said.
Jean-Paul Valles, Pfizer senior vice president, said the company’s “financial strength is second to none,” pointing to a triple-A bond rating from Moody’s Investors Service. “We have an excellent new product pipeline and the marketing expertise to launch that pipeline.” Valles called the valve problem “an old story” that resulted in “an unjustified level of bad publicity” and said Pfizer earnings would grow at a compound annual rate of 10% to 15% in the 1990s.
Executives at Shiley, which produces a range of cardiopulmonary products such as heart-lung machines but no longer sells heart valves in the United States, said the subsidiary hasn’t been damaged by the problems. “It’s not having an impact on the sales of other products,” said company President Patrice Froidure, though he confirmed that the issue takes up a great deal of his time.
A 10-person task force headed by medical director Roger Sachs has been assigned to handle the heart valve issue at Shiley, respond to inquiries from doctors, patients and news reporters and try to develop a way to diagnose valves in danger of failure. Physicians, key players in the sale of all Shiley products, “are not at all hostile to us; they understand there is no product that is risk free,” Sachs maintained.
But the heart valve jack-in-the-box has been growing steadily more ominous since it first reared its head shortly after Pfizer’s 1979 acquisition of Shiley. The Irvine firm, which pioneered artificial heart valves in the late 1960s, was at the time rolling out a new product developed with the help of the reknowned Swedish heart specialist, Viking Bjork.
Known as the “Bjork-Shiley 60-degree Convexo/Concave heart valve,” the device consists of a flexible disk attached to metal rings that are sewn into the heart. The disk opens and closes to allow blood to flow through the heart, and it is held in place by two struts that are welded to the ring. The 60-degree valve, and a similar model known as the 70-degree valve, were supposed to be an improvement over older products because they produced a lower incidence of blood clotting.
But evidence began to emerge in the early 1980s that the welds holding the struts to the ring were prone to failure. The 70-degree valve, which had the worst incidence of failure, was never approved for sale in the United States--though it was sold overseas--and Shiley pulled the 60-degree valve off the market in 1986 without conceding that there were design problems. Lawsuits arising from the strut failures became more and more frequent through the 1980s.
Modest estimates by Bear Stearns’ Riccardo and others of the heart valve’s potential impact on Pfizer are based on the assumption that Pfizer will have to pay claims only in cases in which the heart valves have actually fractured. The company has settled about 200 such lawsuits, and although Pfizer has taken pains to keep the numbers secret, attorneys familiar with the cases say the settlements have ranged from $250,000 to more than $1 million.
The big danger for Pfizer lies in the possibility that people whose valves have not malfunctioned will be able to sue successfully for emotional distress or anxiety caused by living with a valve that they know might fail at any moment. That specter looms much larger after a California appellate court ruling in January that permitted 39-year-old Judy Kahn to claim damages if she can show that Pfizer had fraudulently concealed information about problems with the valves.
Uncovering such instances of fraud was the object of an investigation and subsequent hearings by the House Energy and Commerce Committee investigations subcommittee. The committee, headed by Rep. John D. Dingell (D-Mich.), targeted allegedly lax Food and Drug Administration approval procedures for medical devices, and the Shiley case was the prime example.
The subcommittee staff report is sharply critical of Shiley’s conduct in the affair, stating that the company aggressively marketed the valve “despite internal knowledge of serious problems in the manufacturing and quality assurance procedures.” The report also charges that Shiley failed to disclose some early failures of the device to the FDA and didn’t share key information with the regulatory agency in a timely manner.
The evidence against Shiley includes allegations by Gerry Sherry, a former employee, that the company concealed severe quality-control problems in its valve production process, and a telex sent by Shiley to Bjork asking him to hold off on publishing some data.
Pfizer and Shiley maintain that they acted properly throughout and that the report failed to produce the devastating indictment of the company that many had expected. But Bruce Finzen, an attorney representing Kahn and more than 180 other Shiley valve recipients, said he is confident that he can show fraud.
“I’m fully comfortable going ahead with fraud and failure to warn as a cause of action,” he said. California, he added, “has recognized the fiction of requiring physical injury to recover for emotional distress.”
How grave a threat to Pfizer could such lawsuits become? Mary Ellen McCarthy, an analyst with Shearson Lehman Hutton in New York, has developed three possible outcomes. Her best-case scenario for Pfizer, in which fracture cases are settled for $250,000 each and a very small number of anxiety cases are settled, estimates total costs at about $80 million. The worst-case scenario, in which settlement costs are $1 million each and the company settles 10% of the anxiety cases for the 70-degree model of the valve, points to a bill of $800 million.
McCarthy, after reviewing the Dingell committee report and other documents, concluded that Shiley did not commit fraud on the 60-degree valve, although it “didn’t behave terribly responsibly” in certain instances on the 70-degree valve. Her study concludes that “earnings momentum from new product launches over the next three years will far outstrip any incremental costs due to Shiley valve litigation,” and she continues to recommend the stock as a buy.
Even in her worst-case scenario, however, McCarthy doesn’t admit the possibility of fraud involving 60-degree valves--the true worst-case for Pfizer. Such a finding would open the door to tens of thousands of lawsuits, compared to hundreds involving actual fractures. And that issue probably will not be put to rest until late 1991 at the earliest, when the first anxiety case is expected to come to trial.
Sidney M. Wolfe, director of health research at the Washington-based watchdog group Public Citizen and a longtime critic of Shiley, said, “If the pre-fracture cases start getting settled or adjudicated, (Pfizer) could get cleaned out.” He noted that if 50,000 people sue and get $100,000 each, Pfizer would be out $5 billion. And if the company is shown to have committed fraud, its insurance carriers might not share the burden.
Public Citizen earlier this month also filed a lawsuit in Los Angeles asking that Pfizer be required not only to notify all valve recipients of the possible problems but also to provide free medical checkups and psychological counseling on request. Shiley says it is more appropriate to notify the patients’ doctors.
Some shareholders are also disgruntled about the way Pfizer has handled the Shiley problems. Several have filed class-action lawsuits in New York alleging that Pfizer illegally withheld information about the potential financial impact of the Shiley litigation.
Some of the possible effects of the litigation on Pfizer and its subsidiaries are almost impossible to measure. Ongoing negative publicity could damage the firm’s reputation with doctors, consumers and regulatory authorities, although Pfizer’s Valles denies that has been a problem.
Froidure, who has held his post as president of Shiley for less than a year, said the impact on morale and recruiting has been less than he anticipated: “I’m surprised, but I’ve been able to hire very, very good people.” Shiley, which has about $200 million in annual revenue, employs 1,100 people in Irvine and another 700 overseas.
Pfizer’s reputation with investors, however, has been hurt just as the company was poised to get back into their good graces with its new products. And it may not have the chance to impress Wall Street again soon, since some of the firm’s major money-making drugs will lose their patent protection in the early 1990s.
In another respect, though, Pfizer’s timing isn’t so unlucky. The company’s traditionally modest earnings growth, combined with the fact that it has major non-drug operations in areas such as consumer products and specialty chemicals, once made the company an object of frequent takeover speculation.
But even with the recent fall in its stock price, which had lost about $2 billion in market value at one point, analysts say Pfizer is too big to be swallowed in the current merger-shy climate. If the Shiley problem had come to a head in the go-go 1980s rather than in cautious 1990, Pfizer Inc. as an independent company might have been history.