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The Ethics of Pharma-Economics
An Examination of the Limit of Corporate Responsibility in the
Pharmaceutical Industry
I remember making my first presentation about AIDS back in 1983, at the beginning of my senioryear in high school. The disease was just beginning to cause public panic but was still considered a“gay problem.” My report was about the huge rush to start developing drugs and to discover thecure to the disease.
Flash forward 16 years: There is no AIDS cure and treatment has its limitations. A course of AIDStreatment costs between $25,000-37,000 per year [11] and while the therapy has been effective atslowing the death rate, there has been a recent upswing of treatment resistant mutations [13]. Thereis clearly no easy cure and the research continues slowly and with uncertain outcome.
“Millions of children and adults are becoming infected, falling ill and dying without the barest essentials in medical treatment, counseling or social support.” Kofi Annan, Secretary General of the United Nations addressing the 12th World AIDS conference I began to wonder about the larger question of whether there was any ethical obligation of thesepharmaceutical companies to develop, produce or supply medicinal products to markets that eithercannot afford them or that are too small to bring a return on the investment. After all, few wouldargue that a computer company has a moral obligation to develop a product for a small unprofitablemarket, or provide computers at discount or no cost to markets that cannot afford them. Arepharmaceutical companies to be treated differently because of the product that they produce? This is a timely question with eternal underpinnings. In this day and age, pharmaceuticalcompanies are under tremendous pressure to escalate the rate and number of successful productsthat they bring to market. Because of the huge development expense, there is no way that apharmaceutical company can be expected to spend precious research dollars on products that willnot have the necessary financial returns, nor to squander the opportunity to earn returns on theproduct in the limited time left before patent protection expires.
Given these pressures on the pharmaceutical industry; • Do they have any ethical obligation continue research into, for example, AIDS treatments if it • Do they have any ethical obligation to provide the drugs to the millions who cannot afford Companies have to make decisions daily that are based on the financial implications to thecompany. In the case of pharmaceutical companies, this field is called pharma-economics.
Underlying the corporate financial decisions for this industry is the eternal question: Ultimately,what is a life worth? And, do we have to pay for it? This is not a paper about AIDS. AIDS and almost everything that is associated with it comes withits own set of moral and ethical issues. However, using this disease as a backdrop, this paperexamines some of the ethical issues surrounding pharma-economics and the limit of corporatesocial behavior.
AIDS: The State of the Disease
It is estimated that by the year 2000, there will be 40 million cases of AIDS worldwide [10]. At aninfection rate of one every five seconds, or 16,000 new cases a day, the plague is far from havingrun its course [10]. In the United States, AIDS death rates fell 47% between 1996 and 1997 due todrug treatment [13]. In Europe, where there is universal health care, the figure was 80%. Medicaidis the largest payer of HIV-related medical services in the United States [14] and the domesticmarket is estimated at $5 billion [13].
Despite these magnificent results, however, over 90% of HIV-infected people are in the developingworld. HIV is most severely affecting Africa, the Caribbean, Latin America and Southeast Asia; allthe countries and continents not able to afford even the $0.50 blood test for AIDS, let alone fulldrug treatment [11]. The majority of the pharmaceuticals consumed in these areas are importedbecause they do not have the manufacturing or R&D money or infrastructure to supply their ownpopulations. Prices at world levels put even the most basic drugs out of reach of countries whoseper capita incomes are 5-10% that of the US [15]. For example, in Indonesia, where per capitaconsumption of pharmaceuticals is $2.50, or in Brazil where it is $13, obtaining yearly AIDSmedicines at $25,000 is beyond possibility.
Clearly there is a gap in who gets treatment and who does not. AIDS treatment has become an issueof rich versus poor, rather than gay versus straight, but the problem of treatment disparity andaccess is broader than this particular disease. Additionally, the enormous cost of research, the slowand disappointing research progress, and the lack of return on investment has led to predictions thatsome companies will be forced into reducing or eliminating altogether AIDS related research[12,9].
Does the pharmaceutical industry have an obligation to continue developing drugs that may notrecoup the cost of investment? Does the industry have an obligation to provide poor markets withpharmaceuticals? The answer, simply, is no. Outright donation of pharmaceutical products or thecontinued investment in financially unprofitable research is not in the best interest of the company,its shareholders or, ultimately, society.
Corporate Responsibility Versus Charity
The corporation has as its primary responsibility, action that best increases its shareholders wealth[1]. Management is charged with the responsibility to oversee the operations of the business andinsure that actions taken benefit those who have vested financial interests in its performance. Fromthe most basic financial perspective, this means that the company engages in projects whose returnsexceed the amount invested to initiate the project. The more successful the company is in engagingin this behavior, the more financially successful the company is. Provided that the other operationsof the company support money-making and cost control, the shareholders are ultimately benefitedby the increased value of the company. The market responds to this increase in corporate value byincreasing the share price; and the shareholder wealth is increased.
Corporations are legally obligated to act in a socially responsible manner and there are lawsregulating every business practice from, for example, what can be produced and how it can beproduced to where and when it can be sold. The set of laws were originally enacted to protect theconsumer and society from the misdeeds of the corporation and some might argue that it is the onlything that keeps them from wantonly pursuing any mode of business to make a profit.
Not all business projects or behavior is strictly money making however. There are instances wherethe benefit of action is not readily measurable by strictly financial metrics. Take for instance theissue of corporate giving or charity. Over the past 20 years, corporate charitable contributions havebeen holding at approximately 1.9% of pre-tax income amounting to $6 billion [2]. Altruisticcorporate behavior, like charitable giving, sponsorship of community events, and donations ofgoods and services therefore must be driven by some powerful incentives. Why do corporationsdonate money, goods or service or support community activities? The answer is, simply, because itgood business [3]. If you donate to charities, your company can generate quite a bit of good presscoverage. Good media image has financial implications: it can increase goodwill and attract newinvestors or customers. It makes the company look friendly and more trustworthy. There are alsosignificant tax incentives aimed at increasing corporate charitable donations. Good corporatecitizenship is good for long term business.
Corporations are bound by law to act in a socially responsible manner [1], but there is no law thatmandates corporate charity. Is the corporation morally or ethically obligated to support charities orcommunity interests? Do corporations exhibit altruistic behavior? Without either the financial incentives or the good publicity, corporate charity would not be aparticularly good business practice since it would generate no financial returns that benefit thecompany. Continued engagement in this type of behavior, in fact, could be considered costly to thecompany and an abrogation of its primary responsibility to the shareholders. After all, no oneinvests in charities. Shareholders do invest in companies that maintain good community relations,but, not if it jeopardizes the value of the company or its ability to increase their wealth.
Merck: A Case of Corporate Altruism?
“We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they never failed to appear.” George W. Merck, Chairman and CEO of Merck (1925-1950). [16] Merck believes that there is an underlying corporate mandate to provide pharmaceutical products tosociety. They also are aware of the disparity between the access of the poor and rich to medicines.
In the late 1980' s, Merck had received approval for a medicine to treat river blindness, a terribleparasite transmitted disease that affects 100 million people in Africa and Latin America. Afterhaving spent 10 years and millions of dollars in developing this treatment, it was discovered thatdespite the real need for the drug, no one was willing to pay for it. Merck tried to get governmentsand other agencies to pay for the treatment but was ultimately faced with the fact that there was nomarket. In this case, the company donated the drug to all who needed it [16].
Merck also produces AIDS medicines and the company has priced their newest, Crixivan, at 30%lower than its competitors. Unfortunately, the drug has to be taken with other drugs which still putsthe total cost out of reach. Is Merck ethically obligated to donate Crixivan to AIDS patients? “Giving our medicines away in general is an unsustainable and unrealistic answer because, at the end of the day, we must earn adequate return on our investment in order to fund future Raymond v. Gilmartin, Chairman, President and CEO, Merck & Co. Inc.
Merck donated the river blindness treatment in part because of corporate goodwill, but also becausethe product had already been developed, produced and had to be unloaded before expiration. Thedonation was altruistic, but also was good business as the resulting positive press increased theprestige and notoriety of the company. Had there been a viable market for the product, nodonations would have taken place. Nor should they have. There is a responsibility of the companyto the shareholders to promote corporate action that increases their wealth. Corporate charity on thegrand scale would imperil the long-term ability to produce and sell other useful medicinal productsas potential profits that would be slated for R&D, would be severely decreased. The question arisesthen, which population of patients should be served, and, how best to sustain the ability of thecompany to produce pharmaceuticals in the future. This is the question addressed by pharma-economics.
Pharma-Economics and Drug Development
Pharmaceutical firms are facing greater challenges to increasing growth and shareholder valuebecause of several factors including increasing competition, expiring patents and, mostimportantly, skyrocketing drug development costs.
It is estimated that it costs between $350 to 500 million to take a chemical through screening andFDA approval to the market, and in 1999, drug companies will spend over $21 billion on researchand development [5,6]. “Over the past seven years, the R&D budgets of the 20 largestpharmaceutical companies have more than doubled in nominal terms. If this continues for the nextseven years, annual R&D costs per company will rise from an average of $1.2 billion to around$2.5 billion by 2005” [7].
In order to meet shareholders expectations of 10% growth, it is estimated that pharmaceuticalcompanies will have to bring 5 new products to market per year. Between 1990 and 1994, the top20 pharmaceutical producers each averaged 0.45 new products per year, and, of those, only 8%achieved sales of $350 million or more, the minimum considered to be successful [4].
Because of this enormous investment, drug companies are increasingly focussing on bigger market,developing only those chemicals that have the potential to become blockbuster products and devisebetter ways of increasing the return on investment. The enormous cost of research and developmentis forcing pharmaceutical companies to sharpen the initial screening process. “In the old days, a labworker could produce perhaps 50 chemical compounds a year at a cost of over $5000 each. Now, aworker using ‘combinatorial chemistry’ techniques can synthesize 1m molecules a year at athousandth of the price” [8]. The screening process has been made much more efficient in termsof its selectivity and the volume of chemicals that can be screened, however, it has also set up thesituation of how to choose the ones that go on to be developed.
One factor that weighs into this is an economic analysis of the market and a projection of thepotential return on investment. Like any other industry, net present value projects are generallyapproved and NPV negative projects rejected. In this day and age, where there are many promisingchemicals, but the pressure to recoup the enormous investment, many potentially promisingchemicals do not make it through the screen.
“Five years ago, a $100 million product would have been a good product. Now at a majorpharmaceutical company, that doesn't begin to make the screen” [6].
Therefore, some potential therapeutic products do not make it to market because the payback doesnot justify the investment. The obvious implication of this is that there are people who will nothave the opportunity to have a cure or relief because the drug was not expected to be profitableenough. When you are on the consumer/patient end of this information, pharma-economics is aheartless judge.
In spite of the human cost, however, pharmaceutical companies cannot afford to develop drugs thatare not going to provide the required returns on investment. This includes the drugs that lookpromising but may be directed toward too small a market--or would target an already saturated andtherefore unproductive market. It also includes the continuation of drug research that has beenongoing but for which the market is drying up, or the research is too expensive and involved, andthe potential for success very small. By devoting scarce resources to these sorts of projects, moneyis taken away from other drug products whose financial returns to the company can be invested innew research. In the end, society is best served by insuring that the pharmaceutical companiescontinue their research and development through the use of pharma-economics.
Who Is Responsible?
Social welfare and public health fall under the domain of government responsibility, not that ofprivate industry. Governments are accountable for the baseline well-being of its citizens and, inWestern countries at least, play an active role in health issues. The question is, if the government isresponsible for the basic health of its citizens, and the pharmaceutical industry has the keys to curesor treatments, how is the government going to get the pharmaceutical companies to participate.
Government already pays for many of the treatments but cooperation between these two sectorswould be the ideal arrangement.
Government could certainly enact laws that force pharmaceutical companies to, say, developtherapeutic products that would ordinarily have been shelved or provide drugs at artificially lowprices. This would be a highly dangerous proposition as interference with the ability to profit fromone's labor or inventions would stifle innovation and productivity.
A more productive approach is to create incentives for pharmaceutical companies to increasecharitable acts. Augmenting financial incentives or tax breaks for R&D might expand the numberof products that can be affordably developed. If a pharmaceutical company determines that aparticular chemical will not provide a reasonable financial return, perhaps the government couldmotivate them to donate the patent rights to the government for some tax break.
Pharma-economics underlies the decisions pharmaceutical companies make with regard to thedevelopment of their product lines. Because of the enormous financial resources that must bemobilized to take a product to market, pharmaceutical companies rely heavily on the analysis toinsure returns on the investment. Given that the customer for these products is often in life anddeath situations, pharma-economics may appear to be a cynical approach to research anddevelopment. Pharmaceutical companies are not obligated to participate in charitable behavior, but,most I believe want to be both good corporate citizens and good shareholder investments. Part ofthat responsibility, however, means insuring the long-term survival of the company, and this oftenmeans making decisions that have ethical implications.
[1] Business: Its Legal, Ethical and Global Environment (4th ed.). Marianne Moody Jennings (Ed)South-Western College Publishing, Cincinnati, Ohio, 1997.
[2] “Charity and the corporation,”http://www.cftech.comlBrainBank/ CORPORATEADMINISTRATION/CharityandCorp.html [3] Frooman, Jeff, “Socially irresponsible and illegal behavior and shareholder wealth: a meta-
analysis of event studies,” Business and Society 3 (36) p. 221.
[4] “Revamping Drug Development,” Chain Drug Review 19 (19).
[5] Scimone, Angelina, “Six degrees of separation in drug discovery,” Chemical Market Reporter
11 (252).
[6] Roller, Kim, “What will drive pharmacy sales into the next millennium?” Drug Store News 1
[7] “Spending on drug research project to reach $39 billion,” Chemical Market Reporter, p. 10.
[8] “Mercky waters,” The Economist, May 24, 1997, p. 59. [9] Kanegsberg, Barbara, “Shortening biopharmaceutical approval times,” Chemical Market
15 (251).
[10] Reaney, Patricia, “Call to arms against inequality ends AIDS meet,” Reuters NewMedia, July3, 1998.
[11] Krieger, Lisa M., “Money needed to fight AIDS in developing world,” San FranciscoExaminer, April 21, 1998.
[12] Olmos, David R., “The cost of a cure,” Los Angeles Times, February 3, 1994.
[13] Garrett, Laurie, “The virus at the end of the world,” Esquire 3 (3) pp. 102.
[14] “Early access to HIV treatments for under-served populations found to be cost effective,” PRNewswire, July 2,1998.
[15] Schweitzer, Stuart 0., Pharmaceutical Economics and Policy. Oxford University Press, 1997.
[16] “Innovation, ethics and core values: keys to global success,” address by Raymond V.
Gilmartin, Vital Speeches, January 15, 1999.


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