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Friends of MSF Essay Competition 2009-10 | Category 1: ‘Medical and Practical ---------------------------------------------------------------------------------------------------------------------------------------------------
CEO’s Dilemma Julia Fan Li Working late at 11pm, the CEO of Company X breathed a deep sigh. Here he was again, alone on a Friday night after a week of investor road shows, analyst calls, patient advocacy group briefings, supply chain updates and now sitting down to prepare for next week’s quarterly Board of Director’s meeting. The CEO leaned back in his chair and was reminded a phrase heard often from his grandfather, “sometimes, it’s lonely at the top”. Today was one of those days. Friday afternoon had seen an intense 3-hour executive management meeting on deciding the future pricing strategy of Company X’s vaccine portfolio including its new pentavalent (DTwP-Hep B-HiB) childhood vaccine. Now long after his assistant and the rest of the executive management team had gone home, it was down to him, the CEO, to make the final call. How was he going to inform the Board that Company X is in negotiations with UNICEF to sell the vaccine at not-for-profit prices to the world’s poorest countries? On the one hand, the low price points will guarantee to increase access and availability of the vaccine to people who are in need. But alternatively, the shareholders were expecting a high stream of future cash flows from the commercialization of this technology and a healthy payback for the years of research and development dollars invested. The CEO furrowed his brow. Company X is one of the world’s top 20 pharmaceutical companies, responsible for a global vaccines distribution of 1.5 billion doses affecting 500 million lives annually. It is also a wellregarded Fortune 100 publicly listed company. To maintain future performance, cashflow is still required to fund the R&D innovation pipeline for future vaccines. The CEO looked up from his computer to relax his eyes and noticed a clipping from last year’s Access to Medicines Index report. The Access to Medicines Index was launched in 2008 to rank the world’s top drug companies on their commitment levels to increasing access to life-saving drugs and medications for patients. Access is defined as having medicines continuously available and affordable at public or private health facilities or medicine outlets that are
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within one hour’s walk from the homes of the population1. The Index is a multi-stakeholder input tool and has many users. Company X was rated well by the independent report, however, it was not rated the top. The CEO started thinking about all the stakeholders in delivering global health…
Stakeholder Perspectives In the dynamic pharmaceutical industry business ecosystem, there are both push and pull drivers of business sustainability and the call for ethical action.
The pharmaceutical
business model operates in a unique paradigm of heavy upfront R&D investment, rigorous clinical testing, onerous regulatory requirements and a period of patent-protected revenue generation to compensate the firm’s efforts. The core competency of these firms is the discovery and commercialization process. However, healthcare straddles the public and private sectors and there exists a tension between how the private sector investment costs can be recouped through primary healthcare delivery and public procurement procuresses in developing countries. The Business Perspective It has been long argued in Friedman’s school of thought that the only legitimate purpose of business is to maximize profit and increase shareholder value (Friedman 1970). However, billions of dollars of shareholder value in pharmaceutical companies are at stake everyday as a result of social issues that ultimately funnel into core drivers of corporate performance. Social responsibility is ingrained in the fundamental pillar of the drug industry – to help patients. Pharmaceutical companies need to build social issues into overall strategy in a way that reflects their actual business importance (Davis 2005). The ATM Index ranks the ability of firms to incorporate social issues and increasing access into sustainable business operations. The social strategy needs to be actively managed and the tracking use of an index encourages development and deployment of voluntary standards of behavior at an industry-level (Kremer 2004). It is repeated that multinational pharmaceutical companies need to develop broad metrics or summaries (Davis 2005, Silverthorne 2007) that usefully describe the relevant social issues for analysis in the same way that most firms analyze financial trends today. Key metrics around the inflection points of value-added activities help drive appropriate behaviour which will positively impact both social and financial returns. 1
Operational
United Nations Development Group, Indicators for Monitoring the Millennium Development Goals (United Nations, New York, 2003). 2
measures can help track the convergence of interests between society and companies where philanthropy is truly strategic (Porter 2002). Philanthropy is no longer viewed in isolation as a separate firm activity unrelated to operations, but as a strategic social business investment area where firm resources are directed by senior leadership (Yunus 2007, Porter 2002).
Figure 2 – Convergence of Interests
(Source: Porter M The competitive advantage of strategic philanthropy)
The Access to Medicine Index encourages pharmaceutical companies to view the Base of the Pyramid (BoP) (Sachs 2005) as a dynamic market. Increasing access can also be combined to increase financial returns. The commercial opportunity is illustrated by the 4 billion people classified at the bottom of the pyramid having $5 trillion in purchasing power (Prahalad 2006).
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Figure 3 – Dynamic Markets at the Base of the Pyramid
(Source: Prahalad CK Serving the poor, profitably)
A reason why market forces have not yet significantly impacted developing countries is because the Western corporations have not spent enough time studying market needs (Gates 2008) and redefining who the “customers” are in these markets (Rangan 2007). For example, aggregated purchasing power of Ministries of Health (“customers”) for vaccines have seen huge jumps in demand. Financial incentives facilitate creative capitalism and can often be provided by governments, NGOs and collaborative partners.
The ATM Index
creates traction by generating publicity so companies receive credit for innovative access solutions and partnerships. Global Governance Perspective The financial opportunity for access to medicines is pull-side pressure complementing longterm push-side pressure from global governing bodies such as the World Health Organization (WHO) and country-development agencies (i.e. USAID, Department for 4
International Development, Canadian International Development Agency) to reduce the poverty gap.
A healthy population increases a country’s political, economic and social
stability and exponentially aids development efforts for alleviation of poverty and encourages sustained growth. Development agencies and non-governmental organizations (NGOs) have recognized the special role of pharmaceutical companies and have lobbied for the ethical case for action (DfID Report 2005, WHO MDG8 Report 2008). The concept of supplying medicines at low cost in the public sector is a worthy aim, but the drugs and therapies need to be available (HAI Cairo 2006 Report). Availability and access are deeply intertwined with governmental procurement policies and general level of healthcare infrastructure, therefore close co-operation is vital between pharmaceutical companies and governments. Furthermore, the importance of such relationships warrants monitoring and objective measurement. Mandal (2008) argues now is the time to integrate the field of management and social entrepreneurship to improve lives. We Can’t Improve What We Can’t Measure The combined business case with the moral ethical case illustrates a need for sustainability in the drug industry. One of the crucial barriers that firms need to consider is how to plan for their short and long-term future (Szekely 2005). For these visibly ranked public companies, the market’s short-term evaluation is a major impediment to businesses that are trying to align performance with sustainable development (Mintzberg 1983).
Whereas financial
performance can be easily measured by international standards, it is difficult to measure social performance and impact of quality of life in global health. Healthcare access is multifaceted requiring alignment between science, technology, business, political will, infrastructure and human expertise. The current industry standards are voluntary and firms may subscribe to the Global Reporting Initiative (GRI) and UN Global Compact on an ad-hoc basis. However, these sustainability trackers fail to serve pharmaceutical industry-specific measures.
Standard measuring procedures are required to facilitate comparability of
policies and enable companies to adapt targets and develop standards for internal benchmarking of year-on-year progress (Szekley 2005).
Industry consensus calls for
evidence on how sustainability parameters can be converted into quantifiable indicators that both operational managers and financial analysts can use (Singh et al 2007, Adam 2008, Trouiller 2001). The Access to Medicine Index (ATM) is the first step towards developing a trusted and recognized tool for the market to give credit for industry initiatives. A problem with traditional indicators in the private sector is that financially driven measures often lead to a narrow, or one-dimensional focus. Kaplan and Norton (1992) believe that this can be overcome if the firm adopts a balanced set of measures for decision-making.
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Traditional financial measures are used by firms to quantify the efficiency and effectiveness of action (Flapper 1996, Neely 1997) and social metrics need to achieve the same. Pharmaceutical companies need to embrace thinking on benefits realization (Ellis 2008) and engage in the process of tracking deployment of company’s resources and expenditure to assure compatibility between outcomes and strategic business objectives.
Neely et al
(1997) argues that it is assumed that measurement provides a means of capturing performance data, which can be used for decision-making. The social framework needs to be integrated with existing reporting procedures, promoting systematic and “high priority� reporting that is cost-effective (Ellis 2008). Business Ecosystem Stakeholders
Developing operational performance metrics enables the Industry to use evidence in their presentation of realization benefits to shareholders.
Furthermore, on-the-ground social
impact should be tracked and measured to act as a feedback loop to drug companies on successful access strategies that can be integrated into sustainable business models. Drug companies should be recognized for their initiatives and programs, which improve lives across the world and on the same token, be motivated and given incentive to continue to innovate and do more.
Company X has heard the ethical, business and governance calls to action and is doing more. The CEO started typing his final Board slides with added vigour because he was reminded of the sense that with great power and success comes great responsibility. Corporations in the business of health cannot ignore fundamental responsibilities and he 6
knew he could convince the Board of Directors to agree. He looked down at his final slide and wrote the following title: Helping Patients, why we must do More.
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