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Bristol-Myers Squibb:
Patents, Profits, and Public Scrutiny
TEACHING NOTE
Purpose of the Case Study
• To demonstrate how heavily a company relies on its corporate culture when facing core • To illustrate the growing power and effective influence of corporate governance • To highlight the effect of public perception on a company after the public revelation of • To stimulate discussion and critical analysis of communication strategy and business Identify the Business Problem
One month after Apotex’s introduction of a generic version of Plavix, Bristol-Myers Squibb hadlost 75 percent of the market for their blockbuster drug. As Plavix was single-handedlyresponsible for approximately 30 percent of BMS’ global revenues, this represented a financialcrisis for the leading pharmaceutical company and a strategic challenge for senior management. Compounding the problem was BMS’ recent history of negative press. Only five years ago, thecompany had recovered from an accounting scandal that had the potential to become a cripplingPR nightmare. The current Plavix patent expiration situation was worsened further by theAttorney General’s recent decision to reject a non-production agreement negotiated betweenApotex and Bristol-Myers Squibb. He censured the proposal as anti-free-market and questionedthe ethics of the tactics used to create it. This resulted in the dismissal of CEO Peter Dolan bythe BMS Board of Directors, leaving the company searching for a permanent replacement – aprocess that was estimated to take eight months – even as they faced patent expirations and apublic relations storm. BMS’ immediate concern was how to get the Plavix-Apotex story out thenews and settle any lawsuits with minimum damages. A secondary concern is the threat (orpotential opportunity) of a takeover. At $24.50 per share, BMS is highly undervalued. BMS also faces longer-term business problems: Apotex may have already set a precedentfor selling generic versions of drugs before the patent expires, tempting other genericmanufacturers to fellow suit in the future, threatening the market share and revenues of all BMSblockbusters approaching patent expiration. Identifying Critical Stakeholder Issues
In BMS’s 2003 annual report, management states: “Just as medical science and public policiesmust change to reflect transformations in society, business must continually adapt and change tomeet the expectation and needs of customers, stockholders, employees and other stakeholders.” BMS approaches the trade-off of interests between “key” and “other” stakeholders from a cost-benefit standpoint. Additionally, in the BMS hierarchy of beliefs thus lie two truths: Stockholders’ interests are prioritized above those of BMS employees The term “other stakeholders” seems to minimize or ignore the potentially vast influenceof various sub-groups.
Customers. BMS provides customers with excellent drugs on an immense scale, a
process through which millions of lives are saved or improved each year. Due to patentprotection, these unarguably beneficial drugs are, unfortunately, expensive to the consumer. Early adopters of the drug pay top dollar while it is under patent. In essence, these patients andtheir insurance companies pay the majority of society’s total cost. However, once the drug goesgeneric, the financial benefits begin to accrue to society at large. This is especially notable whenthe drug in question is a “blockbuster” (responsible for over $1bn in annual sales).
Stockholders. Pharmaceutical shareholders have a good understanding of how drug
companies create value, yet are pressed at the same time to generate investment returnscommensurate with the outstanding profits of past years. Drug companies enjoy relatively highreturns on capital simply because they have temporary monopoly power over high-demandgoods with prices far in excess of marginal cost. However, if pharmaceutical companies do notcontinue to fill their drug pipeline with new and viable products, as well as ensuring currentdrugs are kept protected long as possible, returns deteriorate sharply (or regress to the long-termindustry mean). In addition, demands and high expectations add constant pressure to succeed, asmarket analysts and stockholders know the equity value of each “blockbuster” diminishes overtime as its value is created and captured at a decreasing rate.
Employees. BMS prioritizes stockholders over employees, though it is the latter who
create value for the company. Though they are still highly valued and respected, their interestsand concerns are subordinated to overall financial affairs. Interestingly, the corporate tone hasnot changed in the 2005 annual report: As we move forward with a strategy to transform our company into a healthcareleader for the future, our guiding principles and values remain unchanged. Theyare outlined in the BMS mission – to extend and enhance human life and in ourPledge to our shareholders and indeed all of our stakeholders. “To act on our belief that the priceless ingredient of every product is in the honor and integrityof its maker.”1 Other Stakeholders
Generic Companies. Generic drug makers are prime stakeholders in many instances
(Apotex, for example), yet BMS makes little effort to identify the limits of their role or highlighttheir ethical value as potential partners in improving the quality of human life around the globe. It seems that primary drug makers are resistant to market forces. For example, if they createdstrong and transparent partnerships with generic drug companies, they would be able to stillmake high economic profits and simultaneously spend more time creating new blockbuster drugsfor the benefit of a greater society. U.S. Food and Drug Administration. The FDA is another important stakeholder. Their
critical drug-approval process is highly intertwined with the benefits that accrue to society, aswell as ensuring the protection of the public interest and well-being. Their mission statement isas follows: The FDA is responsible for protecting the public health by assuring the safety,efficacy, and security of human and veterinary drugs, biological products,medical devices, our nation’s food supply, cosmetics, and products that emitradiation. The FDA is also responsible for advancing the public health by helpingto speed innovations that make medicines and foods more effective, safer, andmore affordable; and helping the public get the accurate, science-basedinformation they need to use medicines and foods to improve their health.2 Taxpayers and Society. It is not widely understood in the public sphere how the
pharmaceutical industry in general and their various lobbying groups put federal funding tocredible use in repaying their astronomical initial R&D costs. Nevertheless, in essence,extending a patent means that society has to wait longer to receive the full widespread benefits ofthe drug. As long as the patent is in place, price remains well above marginal cost, which createswhat is known as “deadweight loss” in microeconomic terms. Instead of the economic benefitbeing enjoyed by society, it accrues to the patent holder. Only once generic copies are permittedto enter the market at lower prices do tax payers begin to receive both the medical and economicbenefits of the drug. As mentioned by the National Organization for Rare Disorders, “Institutions and drug companies receiving federal funding, or those receiving a license to market a governmentinvention, should be placed under the highest scrutiny when requesting a patent extensionbecause the taxpayer’s investment must be considered.”3 Insurance Companies. Insurance companies play a crucial role at the stakeholder table,
side-by-side with society at large. These companies pay a large portion of the cost of drugsunder patent protection, and would thus be better off if the drugs were sold for a lower, genericprice. Insurance companies suffer from the same upward spiral as consumers do because drugmakers can charge prices far in access of marginal cost. As a result, insurance premiumscontinue to rise, causing insurance companies to become more selective, which in turnexacerbates the “deadweight problem” suggested above. Forecast the Most Desirable Outcome
Succeed in remaining competitive, at least partially due to securing continued Plavixpatent protection for the next 3-8 years; Restore investor/public confidence in the company through strategic management of thecorporate public image; Manage image and media reporting on internal turmoil through application of the Pageprinciples and a genuine desire to instill and communicate ethics-based leadershipthroughout the company; Maintain and improve relationships with critical stakeholders, including customers,stockholders, society, and relevant regulatory agencies; Establish transparent and trustworthy reporting procedures for company businesswherever possible, and build a corporate culture that is intolerant to ethicallyquestionable conduct.
Applying the Page Principles
The vision articulated by Arthur W. Page (Vice President, Public Relations, AT&T, 1927to1946) offers a template for the practice of corporate communication in a crisis. Here arePage’s seven principles and a sampling of Bristol-Myers Squibb’s experiences with each.
Tell the Truth. Company officials lied to shareholders and the Securities and Exchange
Commission by filing incorrect financial statements that contained revenues that were inflatedthrough a channel surfing scheme. The company was forced to restate three years of sales andpay out hundreds of million of dollars to shareholders. In addition to the financial penalties,former Bristol-Myers CFO Frederick S. Schiff and former executive vice president Richard J.
Lane were indicted. Bristol-Myers also failed to tell the truth when they made incorrectstatements to the FTC about the patent protection agreement with Apotex. If Bristol-Myers hadcrafted an agreement that they could have truthfully represented to federal regulators, the company could have protected Plavix sales and CEO Peter Dolan would not have been fired. Theaccounting problems and failed patent protection agreement demonstrate the negative results oftruth-telling are generally less severe than the problems that arise when a company purposelymisleads the public and is caught.
Prove it with Action. The Bristol-Myers board fired CEO Peter Dolan and General
Counsel Richard Willard. By doing so, the Board showed that the unethical, deceitful behaviorof the past will not be tolerated in the future. Bristol-Myers must also take steps to ensure thatfuture accounting scandals are avoided by instituting internal compliance controls (such as thosemandated by the government in the agreement not to prosecute the company in the wake of theaccounting scandal).
Listen to the Customer. Bristol-Myers attempted to keep generic versions of Plavix off
the market and in doing so, acted solely in its own interest. Generic drugs reduce prescriptionscosts for consumers. In many cases, the prescription of generic drugs is required by healthinsurers. As increasing numbers of customers (including doctors, pharmacies and healthinsurers) and consumers demand generic versions of drugs, the only viable long-term businessstrategy for BMS is to release generic versions of its drugs before other companies capitalize onthe opportunity to do so. While Bristol-Myers must sell enough drugs and maintain contributionmargins (profits) high enough to cover its R&D expenditures and earn returns for itsshareholders, it must also find the balance between serving its own interests and responding tothe voice of its consumers.

Manage for the Future. Dolan clearly thought that the best way to secure Bristol-
Myers’ future interests was to protect the Plavix patent by any means necessary. In fact, thecompany’s long-term future and reputation would have been better protected through honest andfair negotiations with Apotex and interactions with federal regulators. Under these conditions,the company would not have been investigated and left in a tenuous position as a temptingtakeover candidate. Accounting irregularities consistently hurt companies’ long-term interests. Due to Bristol-Myers’ accounting scandal, the company lost two senior executives to indictment,as well as forfeiting the trust of multiple stakeholders. The company’s future interests clearlywould have been better served through honest accounting and transparent negotiations. Conduct Public Relations as if the Entire Company Depends on It. As CCO, Zito
must determine how to best utilize his corporate communications apparatus, to help Bristol-Myers regain the public trust. BMS’ lasting relationship with its stockholders, customers andconsumers is far more important than the Plavix patent. Legal protections on pharmaceuticalsmay expire, but relationships endure. Zito must figure out how to craft an effective response thathelps Bristol-Myers Squibb heal its wounded relationships. The future of the company dependson Bristol-Myers’ ability to retain shareholder trust and confidence in the wake of a patent trial,the outcome of which could reduce company revenues by billions of dollars.
Realize a company's true character is expressed by its people. Company managers
and executives represent the interests of shareholders but they also represent the company’svalues to the public. By deceiving stockholders and later publicly admitting to its accountingscandal, BMS damaged public perception of the company’s character. Even when executives arefired, as in the case of CEO Peter Dolan, the repercussions of their deceitful actions remain areflection on the company. Senior executives are often viewed as personifications of theircompanies (e.g. Bill Gates and Microsoft, Steve Jobs and Apple, Jack Welch and GE). Thisimplies that when an executive deceives the public, the company is seen to be deceitful as well. Companies, for good or bad, take on the traits of their executives; BMS must repair its image.
Remain Calm, Patient and Good-Humored. Zito must realize that regaining public
trust in the scandal-ridden company will not happen overnight. A long-term communicationsstrategy must be established that will comprehensively restore the company’s image. Althoughthe company risks the loss of billions of dollars in Plavix revenue, it must not panic or show anyindications of such to shareholders. Shareholders will respond to the first sign of disarray byselling Bristol-Myers shares and driving the stock even lower. The company’s strategy must betransparent, confident, and well-founded. Whatever BMS decides to do, it will take years ofhonest interaction for the company to re-establish relationships and regain the complete trust ofits stakeholders.
Discussion Questions
What are the critical issues facing Bristol-Myers Squibb in this case? Who are the key stakeholders in this case? How would a patent case verdict for oragainst Bristol-Myers Squibb affect the stakeholders? What messages does Zito need to communicate to the stakeholder groups? Howshould he deliver his message to them? What messages does new CEO James M. Cornelius need to communicate to thestakeholder groups? How should he deliver his message to them? Does Bristol-Myers Squibb need to retain an external firm to help it craft an effectivepublic response to Dolan’s firing or the patent dispute? How can the board restore public trust in BMS? What mistakes did Dolan make while negotiating with Apotex? What else could hehave done to protect the Plavix patent? What other actions (if any) should the board take in response to the accounting andpatent protection scandals? Can corporate communication play a role in helping Bristol-Myers Squibb win theupcoming patent protection trial? What can Zito and his team do? 1 2005 Annual Report . Bristol-Myers Squibb2 U.S. Food & Drug Administration, http://www.fda.gov/opacom/morechoices/mission.html

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