Fen-phen Lessons

The history of fen-phen looms over the legal climate for Big Pharma. Wyeth has now reserved over $21 billion and paid out $14 billion of the reserve and it's not over yet. This is much higher than the worst case estimate made in 1999: $4.75 billion. What happened?

Fen-phen was a "cocktail" of three drugs. Each drug had been separately approved by the FDA years before, one as early as 1959. Combining them was thought to create the ideal weight-loss program, as the first drug suppressed appetite while the second drug reduced drowsiness. The appeal of "feel good while losing weight" was powerful. However, the combination was "off-label," meaning that it had not been studied or approved by the FDA.

In 1996, Wyeth sold $300 million of these drugs - not exactly a huge number for a company with $14 billion in revenues. But the revenues were growing quickly until doctors at Mayo Clinic published results in July 1997 that connected fen-phen with unusually high levels of heart ailments. After reviews of the FDA, Wyeth withdrew fen-phen from the market on September 15, 1997. Lesson One: use the FDA process.

Within months, Wyeth lost two dramatic cases. Alarmed, Wyeth set up a class action mechanism to address the thousands of fen-phen cases being filed. To attract participation in the class action, Wyeth defined generous benefits according to a payout matrix and, importantly, exempted participants from proving causation - expected to be a major difficulty for plaintiffs in this case.

Significant problems for Wyeth emerged both in and outside of the class action mechanism. When Wyeth lost two additional cases, the "headlines" caused more than 50,000 to opt out of the class action. Responding to widespread advertising, 80,000 others who were less sure of their cases chose to the class action mechanism. This number far overshot initial estimates of 35,000. Even worse for Wyeth, the severity was much worse than predicted. Lesson Two: generous class action terms simply create more claims.

With early estimates so incorrect, Wyeth undertook a study in 2002 and discovered widespread fraud. An audit of a claim group of $50 million revealed that doctors had exaggerated the heart ailments. The result was a reduced offer by Wyeth of $3.2 million. Angry plaintiffs fought back.

In subsequent hearings, the judge found a pattern of abusive practices, resulting in his ruling that payments should be withheld until claims were audited. After audit, over half of the claims were rejected. As the claims-paying of the class action ground to a halt, claimants opted out and pursued legal action individually. The docket of cases grew to over 50,000. Lesson Three: careful and efficient claims processing is critical.

To resolve the impasse, attorneys identified that the lowest level claims were the real issue, as they were subject to exaggeration. Without these claims, the original trust ($2.55 billion) would have enough to pay everyone. The result was an amendment to the original agreement so that $1.275 billion was taken out of the trust to be paid to the low level claimants on a pro rata basis. Lesson Four: moral hazards (no risk propositions) have to be addressed.

Audits of claims show that 70% of the claims should not have been paid. Nine years into the process, Wyeth is finally applying these fen-phen lessons. More importantly, so are the other companies.