The Rise and Fall of Pharma Reputations

February 1, 2005
Doretta W. Gasorek

Jeffrey T. Resnick

Jeffrey T. Resnick is a principal and chief research officer for Rating Research LLC, based in Bedminster, New Jersey.

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-02-01-2005,

As a reputation driver, ethical behavior has increased steadily in importance over the last three years.

It is already passé to say that 2004 was a year of disappointments for the pharmaceutical industry. The recall of Merck's Vioxx (rofecoxib), the concern over other COX-2 inhibitors, new drugs that did not live up to expectations, and Chiron's failure to ship flu vaccine from its UK supplier—all bricks in the wall of worry. As industry observers can attest, the escalating anxiety took large unexpected bites out of the market value and reputations of many companies.

Reputation trends

But amid the damaging press reports, pharma executives and industry analysts—in response to Rating Research LLC's (RRC) third annual insider survey—say they still view pharma companies as "excellent" and are, for the most part, still willing to personally invest in them. (See "About the Survey")

In an industry dependent on partnerships and licensing agreements, internal reputation is critical to success. In 2004, some of the brightest stars in past reputation surveys—most notably Merck and Pfizer—lost some of their luster. But others—Eli Lilly, Genentech, and Amgen— rose with equal and opposite flair to take their place and to keep industry averages at or above previous levels.

Overall reputation ranking

Executives' Long View

In the 2004 survey, executives responded to more than 50 general industry questions and assessed 19 leading pharma companies individually. An average of 62 percent of the executives polled said they agreed or strongly agreed that each of the 19 pharmas is an "excellent company." That percentage was about even with the results of two previous studies. (See "Reputation Trends.")

The vioxx factor

And despite the uncertainties of 2004, a slightly greater percentage of executives this time (49 percent) said they would be willing to invest in pharma compared with past years (46 percent in 2002 and 2003). And their willingness personally to support those companies in times of controversy remained stable on average (32-34 percent). At the same time, the scores on "willing to invest in" and "willing to support" were substantially lower than the scores on "excellence." That represents a vulnerability for some pharma companies. The latter measure indicates whether industry constituencies are willing to give a company the benefit of the doubt, an issue that may be critical for companies suffering from continued negative press.

That said, there was one important sign that executives were willing to be circumspect about the events of 2004. An analysis of the executives' responses shows the Vioxx recall did not have a statistically significant impact on their opinions of pharmas in general. Regardless of whether executives were interviewed before or after the October recall, the overall pattern of opinions was essentially the same. As insiders committed to partnering with others in the pharma industry, it appears that executives who have a long-term view give less weight to current events and surprises. Not financial analysts.

Reputation drivers

Short-Term View

Analysts view the industry from outside and are able to shift their investments rapidly to capitalize on perceived short-term opportunities. So it is not surprising that their opinions of pharma companies deteriorated rather sharply following the Vioxx withdrawal. Before the news, 64 percent of analysts agreed that Merck "is an excellent company." After the announcement, only 13 percent still felt that way. The number of analysts willing "to invest in Merck" showed a similar pattern. (See "The Vioxx Factor.")

Given the publicity surrounding the recall and the questions raised about other anti-inflammatory drugs, it is not surprising that the event also had a strong effect on analysts' opinions of other companies in the industry. Among analysts interviewed before the announcement, an average of 64 percent said they agreed (or strongly agreed) that the 18 pharmas (excluding Merck) were excellent companies. After the announcement, the average dropped to 53 percent.

Ethical behavior ranking

It is important to note, however, that analysts' opinions of both company excellence and investment willingness were more sanguine in 2004 before Vioxx than they were in the 2003 study. At that time, only 45 percent of analysts said they would be willing to invest in pharma companies. In 2004, 50 percent of analysts interviewed before the Vioxx event were willing to invest in pharmas. Analysts interviewed after the announcement were significantly less willing to invest (39 percent), but that only brought the 2004 average down to equal that of 2003. Researchers speculate that before Vioxx, analysts tended to feel that the industry had passed through the challenges of 2003 and were ready to reconsider investment in this traditionally strong industry.

New Leaders

Although the industry averages didn't change much, the reputations of individual companies fluctuated greatly between 2003 and 2004. (See "Overall Reputation Ranking.") To generate the Reputation Strength Scores (RSSs) for each company, researchers analyzed executive responses (no analysts) using a proprietary reputation strength model that incorporates factors such as behavioral measures and the current drivers of reputation strength. In 2004, the metrics, listed in order of relative importance, were:

1. ethical behavior

2. workforce

3. financial stability

4. leadership

5. third-party relations

6. marketing effectiveness

7. community outreach

8. strategy

9. global capabilities

10. charitable support

Eli Lilly was the biggest winner in the overall reputation rankings for 2004. The company took the top slot, and its score jumped nine points from 63 in 2003 to 72 in the current survey. That made Eli Lilly one of the highest ranked firms during the 2002-2004 period, nearly reaching the record score of 74 set by Johnson & Johnson in the 2002 study.

RRC researchers believe Lilly's strong revenue growth from new product sales may have helped to lift its 2004 score. But equally important, survey respondents pointed to significant improvements in the company's commitment to R&D, the quality of its employees, and its financial transparency as key elements of reputation strength. Said one executive: "Eli Lilly is a world class pharmaceutical company focused on many key treatments."

Genentech also rose sharply in the RSS rankings to claim the second place position for 2004, up from seventh a year earlier. The company registered an eleven-point increase—from 60 in 2003 to 71 in 2004. RCC believes the successful launch of Genentech's Avastin (bevacizumab) colon cancer drug and its strong growth prospects in pharmacogenomics (personalized medicines) helped to boost its reputation last year. This premise is based on respondents' references to the innovativeness of Genentech's products, the quality of the company's employees and regulatory relationships, and its strong corporate governance. As one executive commented, "Genentech is a highly innovative and creative organization and is well positioned for the future."

Amgen also made a strong showing in 2004, moving up to third place in the overall ranking with an RSS of 70, up five points from 2003. Respondents pointed to improvements in Amgen's employee retention and work processes, along with its ability to execute strategic alliances and successful acquisitions. One executive's comment that Amgen is "a technical leader and very creative" is typical of respondents' views of the company.

Downward Movers

Troubling events of 2004 led several of pharma's biggest and best-known companies to lose status among industry insiders.

Merck, to no one's surprise, moved from its top-ranked position in 2003 down to eighth place in the current study. Respondents in 2004 were significantly less enthusiastic about Merck's strategic direction, its financial security, and its management team. It is important to note, however, that even though the recall occurred in the middle of the 2004 survey, Merck's RSS remains at a respectable 60. Without the strong corporate reputation Merck had built up in recent years, its slide down the RSS scale could have been far more severe. Reflecting the immediate uncertainty, comments from respondents varied widely. Some asserted that Merck continues to be "a diverse, quality company," while others pointed to "a questionable future given Merck's weak pipeline and the Vioxx recall."

Bayer AG's score made the most precipitous decline of any company in the study, dropping 14 points to 45. Ranked 17th in the 2004 poll, Bayer's overall reputation was hurt by a sharp drop in insider perceptions of its ethics. The company's ranking in what is currently the most important reputation metric, ethical behavior, dropped to last place in 2004, down from fourth place in both 2002 and 2003. In particular, respondents cited issues with company leadership, trustworthiness, treatment of employees, and relations with vendors and suppliers. One said, "Bayer is overextended and too diversified to know what it is doing."

Pfizer also had difficulties in 2004. After sharing a first-place ranking with Merck in 2003, the company slid to sixth place in the overall reputation rankings. Pfizer maintained a still relatively high RSS of 66 in 2004, thanks in large part, RCC believes, to the reputation capital it had built in earlier years. Nevertheless, the firm was affected by the same issues that are troubling Merck.

Pfizer's Celebrex (celecoxib) arthritis drug competes with Vioxx and may have similar negative side effects. Given its size, analysts believe Pfizer faces difficulties in developing enough new drugs to fuel future revenue growth. Industry executives gave the company lower marks this year in financial transparency, work process innovation, and treatment of employees. At the same time, Pfizer achieved higher marks for its competitive differentiation, earning the top rank in that metric. "Pfizer is a strong company," said one respondent, "but there are questions about its pipeline longer term."

New Drivers

RRC's reputation questions are designed to get at the drivers (or metrics) that respondents believe will add to or detract from a company's reputation strength. The answers, combined with researchers' assessment of behavioral measures, help provide a more accurate overall picture of each company's reputation strength. They also provide critical information that companies can use to assess their current status and to identify areas for improvement through operational changes, communications programs, or both.

Most questions were consistently worded in all three studies to allow direct comparisons over time. But analysis of the importance of key groupings of questions changes over time along with industry environment and respondent opinions. Essentially, changes in the key drivers each year can be seen as a reflection of changes in how the industry sees itself.

Competitiveness. It is notable, for example, that the multivariate analysis in both 2002 and 2003 revealed that competitiveness was the most critical driver of reputation strength for pharma companies. Amid the negative events and public relations pressures of 2004, things changed dramatically. Companies' ability to compete continued to be important, but respondents' opinions tended to focus more on factors relevant to long-term survival in a turbulent industry. In 2004, ethical behavior ranked as the most important driver, followed by workforce, financial stability, and leadership characteristics. (See "Reputation Drivers.")

Ethical behavior, driven in large part by the negative publicity over drugs' side effects and high costs, has consistently increased in importance over the past three years, rising from third place to first. Falling within this category are questions relating to a company's adherence to ethical business practices, its openness and honesty with the public, the transparency of its financial disclosures, and its ability to be environmentally conscious, among others.

These elements of reputation can serve a company well during times of controversy and differentiate it from its competitors in the minds of its peers and the financial community. It is not surprising, therefore, that the same three companies that earned the top three positions in ethical behavior—Genentech, Lilly, and Amgen—also constitute the top three in the overall reputation ranking. (See "Ethical Behavior Ranking.") Respondents put Bayer in last place on this metric, a position that contributed to the company's low overall ranking for 2004.

Workforce was the second most important driver of reputation in 2004, rising from fourth in 2002. (It was not specifically listed in 2003.) This metric encompasses elements such as attracting and retaining high performing and diverse employees and treating them well, paying competitively, and training. Again, Amgen and Genentech rank highly here—numbers one and two, respectively. Roche's third-place workforce ranking in 2004 helped give the company enough points to bring it to seventh overall in 2004, up from eleventh in 2003.

Financial stability has been a key metric for pharma companies in each of the last three years. Amid the growing financial uncertainties surrounding many drug companies last year, this metric rose to third most important in 2004, up from fifth in 2002. Key facets of financial stability, according to survey respondents, are a company's ability to be well positioned for the future, to survive downturns, and to generate innovative products. Respondents ranked Novartis in first place for this metric, followed by Pfizer and Amgen, respectively.

Leadership, in fourth place in 2004, dropped in importance from third in 2003. Among the key elements for this metric, respondents gave most credit to companies with effective CEOs, a talented management team, clear strategic direction, and strong corporate governance. Genentech, Eli Lilly, and Amgen ranked first, second, and third respectively on this metric—the same rankings that they held for ethical behavior. (See "Leadership Ranking.")

In times of turbulence, the industry can expect this metric to continue to be a key driver of reputation strength. For the same reason, it is likely that industry insiders and observers alike will continue to place the greatest emphasis on difficult-to-define but increasingly critical reputation factors such as ethics, trustworthiness, and workforce quality.


For the third year, Ratings Research LLC (RCC) polled leading industry executives and analysts using a consistent survey methodology tailored to the pharma industry. This year, researchers conducted 30-minute interviews with 214 executives during the period of September 9 to December 9, 2004. They used a questionnaire with more than 50 questions designed to test the reputation strength (on a five-point scale) of 19 leading pharma companies . More than three quarters of the executives polled were CEOs, CFOs, or other C-suite-level executives from a broad sampling of companies across the pharma industry, including many firms not analyzed in the study.

RCC also polled a representative sample of 60 financial analysts who specialize in the pharma industry. Each analyst interview lasted one hour, including questions similar to those posed to executives but tailored to the analytical audience. Because of the more volatile nature of analysts' responses, they were not included in the Reputation Strength Scores (RSSs). Using a proprietary model that incorporates respondents' answers, RRC generated a strength score for each company that reflects both behavioral measures of reputation and relative weighting of key drivers of reputation strength.

Doretta W. Gasorek is principal and rating committee chair, and Jeffrey T. Resnick is chief research officer, for Rating Research LLC. They can be reached at and, respectively.

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