The FDA Commissioner Divests

Dr Margaret Hamburg, having been confirmed by the US Senate, is the new commissioner of the US Food and Drug Administration (FDA). We posted twice about whether her and her family's financial relationships might be relevant to her nomination.

Here we discussed her position on the board of directors of Henry Schein, Inc a medical supply company. My concern was whether someone who had spent years being ultimately responsible for maximizing the profits of a medical supply company would be able to be a fair, and when necessary, tough regulator of the companies that supply Henry Schein with products to sell.

Here we discussed Dr Hamburg's husband's leadership of the hedge fund management company, Renaissance Technologies. My concern was whether someone who is part of a family that had gotten rich from buying and selling stocks and financial instruments, of which a likely substantial but unknown fraction were of health care corporations, would again be able to be a fair, and when necessary tough regulator of some of these same companies.

At the time, it did not seem that anyone else shared these concerns. As far as I could tell, there was no discussion of them in the press, or at Dr Hamburg's confirmation hearings.

However, today the Wall Street Journal reported:

The new commissioner of the Food and Drug Administration is among the wealthiest Obama administration appointees, with income of at least $10 million in 2008 thanks mostly to her husband, a hedge-fund executive, according to financial disclosure forms.

Margaret Hamburg and her husband, Peter Fitzhugh Brown, must divest themselves of several hedge-fund holdings as well as some of Mr. Brown's inherited drug-company stocks so Dr. Hamburg can take the post as the nation's top food and drug regulator. Mr. Brown is a lieutenant to hedge-fund magnate James Simons

The couple's income in 2008 came from stocks, money-market accounts, trusts and funds including several affiliated with hedge-fund sponsor Renaissance Technologies, where Mr. Brown works.

The couple controls assets worth between $21 million and $40 million, according to disclosure forms Dr. Hamburg gave the White House. The forms don't reveal exact figures, just ranges.

Before her FDA nomination, Dr. Hamburg also served for five years on the board of Henry Schein Inc., a $4 billion firm that distributes medical and dental supplies including vaccines. Her remuneration has been in the form of Schein shares.

She will forfeit $100,000 to $250,000 in restricted stock and more than 11,000 unvested stock options, all of which have a strike price above market value. She will also have to sell vested stock, valued between $250,000 and $500,000.

Mr. Brown, an expert in artificial intelligence, is vice president and director at Renaissance Technologies. The fund company said recently its total assets were about $18 billion. Mr. Simons was the top-paid hedge-fund manager in 2008, receiving $2.5 billion, according to Alpha magazine.

A lengthy review by the Government Ethics Office, which included direct discussions with Renaissance managers, determined that both Dr. Hamburg and her husband will have to get rid of their interest in four Renaissance funds—the Renaissance Institutional Equities Fund, the Renaissance Institutional Futures Fund, Meritage Investors and Topspin Partners.

However, the couple will be allowed to retain their interest in Renaissance's Medallion fund. An administration official said Medallion was exempted because its computerized quantitative model trades rapidly and holds shares only briefly, creating the equivalent of 'a very blind trust.'

Mr. Brown has already sold his stock in Abbott Laboratories and shares in Johnson & Johnson, Merck & Co. and Medco Health Solutions Inc., which he inherited from his father.

So it appears, in retrospect, that the Government Ethics Office also felt that Dr Hamburg's position on the Henry Schein Inc board constituted a conflict of interest. Furthermore, the Office felt that Dr Hamburg's and Mr Brown's holdings in several hedge funds constituted conflicts of interest. So, in retrospect, it is odd that these financial relationships attracted no attention other than that of Health Care Renewal prior to Dr Hamburg's confirmation by the Senate. I do hope that now, having severed significant relationships and sold financial holdings, Dr Hamburg will prove to be a fair, and tough when necessary regulator of companies that have too often misbehaved.

Putting a New Schein to the FDA?

When the national discussion seems preoccupied with the bonuses at AIG, the nomination of a new leader of the US Food and Drug Administration did not seem to get the attention it may have deserved. Last week, the president nominated Dr Margaret Hamburg to this position. As reported by the Los Angeles Times,

President Obama has decided to nominate former New York City Health Commissioner Margaret Hamburg to head the Food and Drug Administration, turning to a onetime Clinton administration official to help right the beleaguered regulatory agency, a source briefed on the choice said Wednesday.

Hamburg, 53, a physician who has worked extensively on bioterrorism issues, is a senior scientist at the Nuclear Threat Initiative, a Washington-based foundation focused on threats from nuclear, biological and chemical weapons.

Though less experienced as a regulator, Hamburg has extensive government experience. She served as health commissioner in New York for six years in the 1990s before becoming assistant secretary for planning and evaluation at the Department of Health and Human Services in 1997.

Tucked away at the end of the LA Times story, and not emphasized in other news articles, was a salient fact:

She sits on the board of medical supply distributor Henry Schein Inc., but would have to surrender the position if confirmed by the Senate.

Many now believe the FDA is in crisis, having failed to protect the people from unduly hazardous drugs and devices, and becoming too cozy with drug and device companies, which it may not regard, instead of the population as a whole, as the agencie's clients. Would Dr Hamburg's current position with Henry Schein Inc, however, jeopardize her ability to restore peoples' trust that the agency will put their interests, rather than those of health care corporations first?

Henry Schein Inc is a large distributor of health care supplies, including drugs and devices. For an example of its very extensive catalog, look here. Henry Schein makes its profits by selling the products that the FDA regulates, particularly drugs and devices. In her role as director of Henry Schein, Dr Hamburg had a legal responsibility to enhance the finances and profits of the company and its stockholders. As we have discussed many times previously, a corporate director has a legal obligation to advance the profits and financial fortunes of the corporation he or she serves. As Robert AG Monks put it, corporate directors are supposed to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.]

As compensation for that loyalty, corporate directors are usually exceedingly well-paid for the nominal hours they spend in their meetings.So, according to the company's 2008 proxy statement, Dr Hamburg owned the equivalent of 63,472 shares of stock (current value, at the price of $37.32, via Google Finance, $ 2,368,775.04). Her total compensation in 2007 for her position as director was $249,151.)

Given that Dr Hamburg has spent over five years living with the obligation for unyielding loyalty to the interests of Henry Schein, and has become what many people would consider rich in the process, how easy will it be for her to turn to becoming a strict regulator of the products her former company used to sell? Time will tell. But this is the second nomination to a major health care post charged with improving the health of all citizens that has gone to someone currently obligated to protect the interests of corporations that now profiting from today's health care milieu. Let us see if this will lead to the change we need in health care.