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Grace Under Fire


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-08-01-2001
Volume 0
Issue 0

While making small talk at a party, a new acquaintance asked a senior pharmaceutical executive what line of business he was in. "I work for a multinational pharmaceutical company," he replied.

While making small talk at a party, a new acquaintance asked a senior pharmaceutical executive what line of business he was in. "I work for a multinational pharmaceutical company," he replied.

"So you're about as popular as an international arms dealer right now," remarked his new friend.

That he could link pharmaceuticals and the illegal arms trade in the same breath is the result of the industry's biggest pricing and reimbursement challenge ever-access to medicines in developing countries brought on by the outcry over the price of HIV/AIDS therapies in sub-Saharan Africa. Hysterical headlines that followed the industry's retreat in its case against the South African government-"The Profits that Kill," "At the Mercy of Drug Giants," and "Victor's Mantle for South Africa as Drug Industry Dons Fig Leaf"-made it seem that pharma companies are to blame for the epidemic. In reality, the industry has been a powerless spectator to the human carnage wreaked upon the African continent by HIV/AIDS. The statistics are stupefying:

  • More than 5,000 people die of AIDS in sub-Saharan Africa every day.

  • The epidemic has created 12.1 million orphans on the continent.

  • More than one in three adults in Botswana are HIV positive. (See "Africa's Epidemic," page 46.)

Given the continuing humanitarian crisis involved, the public relations storm kicked up in South Africa will not easily blow over. Big Pharma's stock defense of its pricing policies relies on the need to recoup R&D costs as high as $500 million to bring a molecular entity to market.

Yet, try as it might, the industry has been unable to shake allegations that it puts patents and profits ahead of people and medical necessity. Its arguments--including that antiretroviral therapy is only the final piece in a complex treatment jigsaw that begins with dragging sub-Saharan Africa's 19th century healthcare infrastructure into the 21st century--have not passed muster with the public. As a result, the pharma industry has become an easy target for blame.

In response, the pharma sector must tread a fine line between the mandates of compassion and commerce, simultaneously addressing the humanitarian crisis while protecting its future commercial interests. The unprecedented round of price cuts offered to developing nations in 2001 is one sign that industry is already setting itself some dangerous precedents. Difficult questions lie ahead for senior management:

  • To what extent will developing nations use the South African case as a model to leverage deeper discounts and negotiate a more flexible interpretation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)?

  • Could today's demand for lower prices for HIV/AIDS therapies in developing countries be repeated tomorrow with cardiology or oncology treatments in the developed world?

  • Will it be possible to uphold a price point in affluent nations against wider use of international price referencing and lower-priced reference countries?

  • Are distribution systems secure enough to prevent charitably priced drugs intended for poor countries from being illegally diverted into richer ones?

  • Are national governments under pressure to legalize wider parallel trade in pharmaceuticals and to exploit differential pricing?

Such questions shift issues of pharmaceutical access beyond the remit of public policy and public relations departments all the way to the board of directors. Although it may be too late to repair the damage in South Africa, senior management must learn from its mistakes and respond more effectively to the next major crisis that comes along. Board members might start by considering the following ten recommendations.

Picture the scene: A heroic M��decins Sans Frontieres volunteer, sleeves rolled up, talks passionately to a TV news reporter about the lack of drugs to treat a dying AIDS patient in South Africa. Switch to a TV studio where a talking head in a suit is being quizzed on what the pharma industry can do for that patient and millions of others like him. In the battle for favorable public opinion, to play defense is to lose.

Take Crisis Management Lessons

As part of an industry that changes directions with the agility of a supertanker, pharma companies have struggled to deliver timely retorts to their more fleet-footed critics. They must now rethink practical problems of both style and substance. The industry must:

  • learn to respond more quickly to events as they unfold

  • develop more pre-emptive strategies to react to potential crises

  • present a more eloquent, compassionate, and inclusive public face.

There is also a problem of direction--the kind that comes not from public relations or public policy functions but from senior management at the board of directors level. Only by recognizing the strategic importance of pharmaceutical access and moving policy formulation to a higher corporate level will companies be prepared for the challenges ahead. Evidence of that lack of direction indicates that questions of access are not as prominent as they should be on CEOs' agendas.

Bad news sells, and, unfortunately, the pharmaceutical sector is easy to pick on. It's no surprise that the greater part of the industry's public relations efforts is invested in either defensive or negative campaigning, whether justifying its position on prices and patents or lobbying against politicians, as in last year's US elections.

Spread the Good News

Although it is important for the industry to make its case on those issues, it is dangerous to allow itself to become entrenched in negativity. If the best form of defense is attack, the industry should go on the occasional charm offensive. It has lots of positive stories to tell--including its many contributions in developing countries--about which the public rarely hears.

While on the public relations defensive, pharma companies missed an opportunity to highlight some uncomfortable truths for governments in sub-Saharan Africa. Although the industry is not blameless in the spread of AIDS across the continent, the media have reported little about the public health neglect that has fuelled the epidemic. South Africa spends 15 times more on defense--an estimated $4.2 billion a year--than it does on pharmaceuticals. Relatively few national governments have actually accepted offers of free and discounted drugs. And local generics companies have failed to take legal advantage of unpatented drugs in high-fatality therapeutic areas.

Tell it Like it Is

It is possible that some African governments use prices and patents as a smokescreen for their own negligence. In some cases, they may even use pharmaceutical access to further anticapitalist rhetoric. The industry has been too squeamish to make those points, presumably for fear of being seen as giving with one hand and taking with the other. As a result, even though they are central to the debate, such themes have not been part of the public dialogue. Perhaps it is time for the industry to start asking some awkward questions.

Some of the pharma industry's disputes have run for many years. The South African case dates to 1997, but only when it came to court did the case transcend the trade press and capture international headlines. It was the showcase nature of the hearing, portrayed in the media as pitting the strong against the weak, that dragged the industry's reputation through the mire.

Don't Rush to Court

There would have been much less damage if the case had been settled privately. Even though pharma companies would have been forced to make the same concessions, they could have escaped the ensuing public relations debacle. As a general rule, only when all else has failed and there is no prospect of a negotiated compromise--which, ironically, is what finally happened in South Africa--should the industry take such cases to court.

A tempting option is to do nothing. Although pharma companies are under some moral pressure to intervene in the AIDS pandemic, they are by no means obliged to get involved in charitable initiatives. Yet the recent round of price cutting in HIV/AIDS drugs for use in the developing world suggests that doing nothing is no longer an option, if it ever was. A combination of moral, political, and shareholder pressure has forced the industry to act. Companies operating freely on the world stage must take some responsibility for, and be responsive to, market failings.

Take the First Step

Another temptation to resist is pulling out of the HIV/AIDS treatment market. Some senior managers have privately questioned the wisdom of staying in a therapy area that has suddenly taken on all the commercial appeal of a treatment for leprosy. But HIV/AIDS is not a disease of poverty. For pharma companies that have already invested billions of R&D dollars, exiting the category would be walking away from the excellent returns still available from antiretroviral sales in developed countries.

Stay in the Therapy Area

It is also possible that what is happening to HIV/AIDS prices in the poor countries could happen in other therapeutic classes. The industry can't pull out of every area in which it is challenged. Instead, it must defend its markets by guarding the integrity of pricing structures that are designed to support research for the next generation of products.

Robert Goldberg, senior fellow at the US National Center for Policy Analysis, says, "The settlement [in the South African case] will help ensure that the current generation of AIDS drugs is the only one we have for a long time to come." Many hope that incentives for research will prove him wrong, especially in the face of the viral resistance already evident in approximately 10 percent of HIV/AIDS patients. It will require millions of dollars just to keep pace with the rapidly mutating virus.

The South African experience shows that pharma's public relations professionals have failed to connect with their audiences, and their impact on public policy--hitherto relatively effective for lobbying politicians--has also weakened. Both areas need a policy overhaul as well as the involvement of more senior management if the industry is to successfully face the twin threats of international reference pricing and parallel trade.

Review Internal Policies

At the strategic level, companies will have to prioritize their own policies. But the pharmaceutical giants that produce HIV/AIDS therapies are likely to settle on structures and policies in common. They need tighter management control toestablish corporate guidelines for issues such as differential pricing and product-specific targets for price floors, corridors, and concessions in charitable cases.

Companies also need to develop strategies to prevent low-priced products from leaking into developed countries' markets. Enough goodwill exists among stakeholders, including parallel traders in Europe, the United Nations, and national governments to prevent that practice, but the industry should still vary its presentation, packaging, and even dosages to erect as many hurdles as possible for black marketers. Only by physically differentiating their products can pharmaceutical companies track-and prevent-the illegal flow of discounted products from poor countries to developed ones.

There is less certainty at the political level about the possible expansion of parallel trade and international price referencing to include developing nations, but pressure is mounting against both. Because those contingencies could have catastrophic consequences for the industry, it must mobilize against them, beginning at the strategic corporate level and ending with the involvement of the national and international trade associations.

As prices tumble, sub-Saharan Africa will no longer be a viable commercial market for Big Pharma-if it ever was. All of Africa, including the wealthier north, accounts for just 1.3 percent of global pharmaceutical sales. (See "Small Sales.") But the combined market capitalization of the world's five largest pharma companies is approximately double sub-Saharan Africa's gross domestic product. So the research-based sector's involvement, at least in the major communicable diseases, is already largely a matter of corporate conscience.

Ring-Fence Charitable Causes

By grouping together the markets most affected by AIDS and establishing the kind of global fund proposed by UN Secretary General Kofi Annan, pharma companies would be able to collaborate with the authorities to distribute free or at-cost drugs without the usual competitive pressures. (See "Great Expectations," page 45.)That would allow the industry to meet its humanitarian commitments within the relatively secure framework of an internationally supported initiative.

GlaxoSmithKline made the significant point that its decision to supply medicines for communicable diseases to 63 developing nations at cost would have no effect on its bottom line. (See "First Response," page 50.) It moved the supply of those drugs from the company's normal commercial operations to a separate silo--a tactic that makes sense for accounting, humanitarian, and public relations purposes. Even the resulting challenge of policing the distribution of free drugs to ensure that they stay off the black market is a relatively small price to pay for dealing with the problem so decisively.

Initiatives of the type proposed by the United Nations will work only with the involvement and cooperation of all stakeholders, including pharma companies. Even if it were once tenable, the view that the industry should distance itself from broad healthcare policy now looks anachronistic. It has a key role to play in formulating policy solutions and in developing practical responses. But to do so, it must be at the center of the decision making process, working with the United Nations, the World Health Organization, national governments, nongovernmental organizations, donors, charities, doctors, pharmacists, and educators.

Partner, Partner, Partner

After many years of neglect, new models for handling such problems are finally emerging. Public-private partnerships such as the Medicines for Malaria Venture--founded in 1999 to stimulate research into malaria using a unique combination of public funds, industry input, and academic research--are here to stay. If companies are to take part in a meaningful way in the new generation of partnerships, they must sign up now.

South African president Thabo Mbeki's assessment of HIV/AIDS as a disease of poverty strikes at the truth: Long-term solutions lie not in the application of new pharmaceutical technologies but in an international effort to raise incomes in the developing world. The investment needed in healthcare infrastructure, however, is still beyond the ability of those nations.

Fight for Funding

Now that the pharma industry has extended the olive branch of lower prices, the pressure is on national governments, nongovernmental organizations, and international donors to match its offers. At a time of heightened corporate responsibility, it is not enough for the industry to rest on its laurels, nor can it hide behind what has-or hasn't-historically come within its purview. As part of a broader coalition, companies share the responsibility to help secure resources that will ensure the safe and effective use of their products.

The industry can hope to make its voice heard on the international stage only through the inclusive new partnerships now being built. Left on the outside, the pharma sector may find that the precedents it sets with HIV/AIDS prices in poor countries today could be used against its cash cows in developed nations tomorrow. The mere hint of that possibility should have CEOs scurrying to put the issue at the top of their agendas.

Abstinence is No Option

New and more vibrant policy leadership from senior management is needed for the industry to improve its public ratings, because pleading innocent to the charges leveled at it is no longer enough. In an era of sound-byte politics, media manipulation, and corporate responsibility, the one unforgivable policy is to have no policy at all. After all, whoever heard of an international arms dealer with a transparent trading policy?

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