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Volume 38, Issue 2
Whether the pharma industry is navigating calm or choppy waters, it should be smarter and more assertive in telling its story to its stakeholders-most importantly, patients and the wider public.
Whether the pharma industry is navigating calm or choppy waters, it should be smarter and more assertive in telling its story to stakeholders
“Merck’s Head Defends Drug Prices,” ran The New York Times headline. The Times was reporting on the Merck & Co. president’s testimony at the previous day’s Senate hearing, part of a high-profile investigation into the price-setting activities of the US pharmaceutical industry. Merck’s leader offered a robust defense, stressing that the industry was highly competitive and that it was actually giving the American public “a reasonable bargain.” But The Times reporter noted that the testimony was an indication “of the drug industry’s realization that its reputation was on trial.”
The date of this news item? December 9, 1959.
Merck’s head at the time, John T. Connor, was one of a number of leaders summoned by the Antitrust and Monopoly subcommittee, zealously headed by Democrat Senator Eftes Kefauver, which brought to the public’s attention allegations of drug manufacturers “exploiting the aged, infirm, and sick in the United States by charging more for their products in this country than abroad” (New York Times, December 5, 1959). The subcommittee presented evidence that the price of one drug had been increased by its manufacturer by over 1,000%, while the price of another represented a markup of 7,079%. In refuting these explosive claims, Connor and his contemporaries, such as Schering’s then-president, Francis C. Brown, attempted to educate the Senate on the realities of the pharmaceutical business-pointing out, for example, that 8% of its sales dollars went into research, compared to 2% for the industry generally-but this did not stop the investigation rolling on for the next two-and-a-half years.
The industry would finally emerge from the official probing “with more damage to its prestige than its purse,” wrote John M. Lee in 1962 (although the out-of-pocket cost of defending its reputation was estimated at $5 million, around $40 million today). Lee added that the principal effect of the Senate hearings was “to arouse the industry to a realization that it has to do a better job in telling its story to the public” (New York Times, April 22, 1962).
It is somewhat unnerving, although perhaps not surprising, given the industry’s inherent conservatism, that Lee’s remark from 1962 still applies nearly 60 years later. But the public-relations crises that have dogged pharma in the last decade particularly, whether seized upon by Democrat or Republican politicians, have seen the bouts of official and public anger with the industry-largely contained in 1959 by a more sober and deferential media climate-propelled into a more hostile, 24/7 social media world, where damaging news (real or “fake”) circles the globe in seconds, and can destroy careers and derail companies in a matter of days. As Dr. Nir Kossovsky told Pharm Exec, the “weaponization of social media” has meant that “the ability of stakeholders to be aware of failures, or even allegations of failures, has increased rapidly, and in this climate, the industry has become a punching bag.”
The result is that now, more than ever, pharma has to do a better job in telling its story to the public.
Kossovsky’s firm, Steel City Re (Pittsburgh, PA), evaluates, mitigates, and insures corporate and executive reputation risk. For Kossovsky, the issue of reputation is central to the industry’s dealings with all its stakeholders. “The notion of reputation can be defined as ‘an expectation by stakeholders,’” he explains. “Reputation risk is the risk of disappointing stakeholders by not meeting their expectations. When a company fails to meet expectations, those stakeholders behave in a way that tends to have adverse, objectively
measurable economic consequences for the company. Customers don’t buy products, don’t accept the price points, and they buy less volume; employees charge more to work and there’s more turnover; vendors offer less favorable terms, creditors and equity investors charge more for their capital; and regulators will apply a more severe burden, while NGOs (non-governmental organizations) apply more pressure.”
All of these factors create costs or reduce revenue, according to Kossovsky. “The relationship between reputation and meeting expectations and enterprise value are all tightly knit,” he says.
Kossovsky points to evidence that superior reputations create additional value. He cites the recent example of Merck CEO Ken Frazier’s reaction to the racist protests in Charlottesville, VA, over the weekend of August 12–13, 2017. Early in the morning that Monday, Frazier held a press conference and announced that he was resigning from President Trump’s Manufacturing Advisory Council. “That act raised Frazier’s profile very quickly,” says Kossovsky. “He was known within the industry before that, but not among the general public.” There was the expected surge of activity on Google, with people searching for more information on Frazier, but in terms of the market, “for about the next 10 weeks, Merck outperformed the SNP 500 pharmaceutical index, ultimately by about 3.5%, which for a company of its size translates to creating an excess of almost $6 billion in value.”
And Frazier’s move was no fluke, Kossovsky adds. “He showed that the company had a mechanism where they could take the event of that weekend, process it, and make a board-level decision by Monday morning. That’s a lot of activity for a company of that size, and a lot of risk for a company to take. It meant they had a risk management system in place that could handle it.” For Kossovsky, Frazier’s action was “an incredible example of how a CEO of a pharma company can create value by raising the expectations of stakeholders and signaling that the company is indeed an ethical one.”
But surely not all CEOs could hope to act as quickly and decisively as Frazier on a matter of principle? Kossovksy counters this notion: “The companies that really care about reputation and understand what it means will want to follow suit. It creates value; it’s not just a ‘nice thing to do.’ Merck has disclosed what its risk management systems are, and from that you can see that Frazier’s action was built into the company’s governance structure, into its philosophy.”
Still, the positive buzz surrounding Frazier’s move was a rare thing in modern pharma. For Pratap Khedkar, principal at ZS Associates, another firm active in the pharma reputation space, the last three years have amounted to “definitely one of the worst period I’ve seen” for the industry. While nothing has matched the Martin Shkreli–Turing pricing scandal in the last 12 months, the continued pressure from President Trump, the changing of the FDA commissioner and the HHS secretary, and the debate around opioid drugs means that the topic of pharma keeps cropping up in the Senate. And it’s not always about price. “There are many ways in which it is possible for the industry to be unfairly portrayed,” adds Khedkar.
Kossovsky’s organization looks at companies’ governance and enterprise risk management processes, rather than their products. “The governance of the company controls such things as ethical behavior and promotion, marketing, and pricing of products,” he says. “Because of FDA warranties, stakeholders may feel comfortable about the safety and effectiveness of products, but that is not how they feel about corporate governance.”
To this end, Steel City Re offers an insurance solution that “functions like a warranty in governance.” This involves, first and foremost, an inspection process that examines governance, enterprise, and operational risks from a reputational perspective. If the processes reflect a sound state of control over both stakeholder expectation management and operational conformance, and if crises management processes are well articulated, then the company is likely to qualify for insurance. According to Steel City Re’s website, Reputation Assurance is triggered, on average, by market cap losses of 24%, anticipated losses in sales of 13%, or anticipated losses in net income of 12%, but it can be triggered when anticipated losses are much lower.
“Reputation risk mitigation begins by pre-positioning an authentic story of managerial quality that will counteract the story that could be used against you, which will be some variation on ‘management is incompetent,’ ‘management is unethical,’ ‘management is stupid,’ etc.,” says Kossovsky. “If something bad happens and it’s not because the company’s governance is bad, or because the board is incompetent, it’s because there is a rogue, and rogues will happen. If a company has mechanisms to deal with them, it will recover.”
Kossovsky likens having a pre-positioned story in place to the effect Federal Deposit Insurance (FDI) had on banks when rumors triggered fears that they were about to run out of cash. “You can’t argue rationally once fear has taken hold, but if you already have FDI in place, you don’t get a run on the banks because FDI assuages stakeholders’ fear with a credible counter story: ‘There’s an authority saying the bank is being run well,’” he says. “Today, that’s the critical element of mitigating the anger that underpins reputational risk: the affirmative story that a company is being run well must be pre-positioned, simple to understand, and completely credible.”
ZS addresses the issue of reputation in a customer experience tracking study that the firm runs every year. As Khedkar told Pharm Exec, “if that does not come out so well, a company needs to ask, ‘How do we redesign our organization? How do we create new messaging, new services? What do we need to do to make the customer experience better?’”
Khedkar says that most companies think of reputation as “a PR thing only,” but it is something that cannot be managed just with press releases or by reacting to bad news. He explains: “If you have a portfolio of oncology products, you have to remember that there are only about 10,000 oncologists in the US. It is really important that your reputation as a company with those 10,000 people is sustained, is positive, and is based on the fact
that they understand your product and that you are helping their patients with good services.”
He reiterates, however, Kossovsky’s distinction between the product and the company. “For a long time, the product was king,” says Khedkar. “If you point to an individual product, people might say it’s fantastic, but if you point to the company that makes the product, there’s a disconnect. The company gets tarred with the industry view even if their product is associated with the patient benefit. Now we’re finding that there are so many products competing in the space, it is customer experience that really matters.”
Like Kossovsky, Khedkar recognizes the power of presenting and reinforcing a positive narrative in the public sphere. But in the social media space, for example, he believes pharma has so far been hampered by its extreme conservatism. “If there is the slightest doubt about what the industry might or might not be allowed to say, then it chooses not to say it,” he explains. “But this isn’t about selling or promotion, it’s about owning the narrative, it’s about being proactive, and it’s about doing it all the time, regardless of whether things are going well for the company or not. This is where pharma needs to be a little bit more aggressive.”
Khedkar concedes that, if a pharma company opens up its Facebook page to public comments, then someone, somewhere is going to post a comment about an adverse event. “But the big picture is that you have to open yourself up to some commentary,” he says. “People will say things that may be somewhat negative, but then you engage. Engagement doesn’t mean just one-way good news. Wouldn’t you rather deal with that burden and have good engagement, which prepares you for dealing with bigger issues when they come along?”
Khedkar offers a different perspective on Kossovsky’s banking industry comparison. “The banking industry’s reputation really just lies with one or two constituencies: the regulators and the general public. Pharma, however, has to worry about its reputation with its patients and the wider public,” he says. “It has to think about the government and the regulators. And it also has to worry about the institutional stakeholders: insurance companies, PBMs (pharmacy benefit managers), the large hospital systems. These are not patients or doctors, and yet some of these stakeholders have taken control of the narrative and pushed pharma into a corner.”
Where a bank “does not have to fight some other large sector occupied by large companies saying that banks are evil, pharma can get into rows with PBMs or insurance companies.” This has led to “a kind of schizophrenic divide,” says Khedkar, with some pharma companies believing they have to get along with these stakeholders at all costs, while others go on the offensive. Ultimately, a pharma company has to be able to say something to protect its reputation, he says. “That might involve challenging, in a measured and reasoned way, what another stakeholder is saying. It can also involve some measure of inviting debate, inviting criticism.”
Given that the issue of pricing goes back to those Senate hearings of 1959, it is impossible to ignore the subject in any discussion of pharma’s current reputation. But Khedkar believes that pricing has tended to overshadow the reputation question. “The reputation management that pharma needs to do is not to get into a debate about ‘Is the price right?,’” he says, “but to really focus on the value it is creating.” Again, this is about taking control of the narrative. Khedkar points out that in 2016 and early 2017, “about six companies made the pledge, starting with Allergan, that they won’t increase their prices more than 10%. But 95% of all price increases last year were actually less than 10%. A generic may go up 5,000%, but that will never happen with a brand. But the public can’t tell the difference.”
Pharma isn’t conveying this message effectively; the same goes for the cost-effectiveness narrative. “The value discussion is not happening enough,” says Khedkar. “How many years of life does your product provide? What kind of future cost avoidance does it create? It may be in the PBMs’ interest not to let the narrative go there, but pharma really has to take control of it.”
On the affordability issue, Khedkar believes pharma may become a victim of its own success. “With an effective, one-shot medicine that works straight away, it is more difficult to convince stakeholders of the long-term value,” he says. “Sometimes it may cost a half-a-million dollars over the course of 20 years for a chronic therapy. But if the price is one million dollars for a one-shot medicine that works and is worth 10 million dollars in impact, the customer will still say, ‘I don’t have one million dollars in my pocket today. Why does pharma want all that value back on day one?’”
These are the pricing stories that pharma needs to get into-and to tell more convincingly.
As Founding Father Benjamin Franklin once famously observed, “Glass, china, and reputation are all easily cracked, and never mended well.” With this sobering thought in mind, the industry needs to handle its reputation more carefully and cleverly, and in anticipation of any mishap, invest in some stronger glue. It is no longer possible to get by on the adage that served the industry leaders of the 1950s and 1960s: “The public doesn’t understand what we do.” Many people don’t understand a lot of things but can still influence others with their opinions.
There is a view from that early post-war era that should still resonate today, however, and still needs to be conveyed emphatically to stakeholders. Speaking to Tom Mahoney, the author of the 1959 book about the burgeoning drug industry, The Merchants of Life, Thomas G. Klumpp, a former FDA official and then president of Winthrop Laboratories, put it in a nutshell: “As mother nature fails to create and maintain perfectly functioning bodies, she will need the help of the pharmaceutical industry. The important thing is we have at long last learned how to go about unlocking her mysteries. Give us time and enough profits to do research, and some day we may at least understand them all.”1
Julian Utpon is Pharm Exec’s European and Online Editor. He can be reached at email@example.com
1. John Thomas Mahoney, The Merchants of Life, New York: Harper & Brothers, 1959, p. 29.