Medicine and Business Ethics


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Through a parable of two drug companies this presentation builds up the case for business ethics and corporate responsibility.


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Presentation Transcript

Medicine and Business Ethics : 

Medicine and Business Ethics The tale of two Companies Kamala Nehru College 22 August 2008

Life threatening diseases or laws and drug companies : 

Life threatening diseases or laws and drug companies We are all aware of life threatening diseases like AIDS. But what we do not know is that the threat to human lives is more due to the patent laws and the ethics of big drug companies. The whole issue revolves around two types of medicines known as “generic” and “patented” remedies.

Generic drugs : 

Generic drugs The controversy over manufacture of medicines has been over the formulation of a drug. The basic salt in a medicine can be used to manufacture a medicine that would hardly cost anything. Such medicines are known as generic drugs (paracetamol).

Patented medicines : 

Patented medicines Big pharmacy companies, on the other hand produce complicated preparations and get a patent for such drugs. Other companies are not allowed to produce the drug. The society does not get the benefit of such drugs for a long time till the patent has expired. It may be 15 years before this can happen. Since they invest in research they argue that they can charge many times the price of a generic medicine.

Process and Product Patents : 

Process and Product Patents There are two types of patents – Product and Process patents. The US patent laws have product patents which give monopoly rights to companies that develop the medicine. Till recently Indian laws did not give any product patent. Any manufacturer could modify the process and produce any drug for which a US company had a product patent.

Global health care and patent laws : 

Global health care and patent laws There are serious health problems in poor countries because they cannot manufacture their own medicines and cannot afford to buy expensive patented medicines. The only organization that has world wide reach and respect is the World Health Organization (WHO). Moreover, its charter is to ensure global health care. Even WHO defers to the US laws. It relies upon certification by the US Food and Drug Administration.

One company : 

One company The first story is about one US based Company – Merck and its attitude and ethics with respect to a dreadful disease called River Blindness.

River blindness : 

River blindness River blindness is a disease caused by black fly, which is the carrier of the disease. It afflicts more than 20 million poor people living near the river banks of Africa and Latin America. A tiny worm injected by the fly, passes through the skin and causes microfilaria which eventually blinds the victims. Spraying pesticides only leads to immunity in the carrier – the black fly. This has severely affected the livelihood and earnings of these communities who have had to migrate.

Response of Merck company : 

Response of Merck company Ivermectin, a low cost, safe and simple cure initially developed for animals. It was found that the same drug may prove to be efficacious for treating river blindness amongst humans. In 1979, Dr. P. Roy Vagelos, Chairman, Merck, encouraged the development of a human version of this drug. The cost of developing this drug was more than $ 100 million.

Likely Problems : 

Likely Problems The company would not be able to recover the development cost. If there were side effects, the animal version having a market of $ 300 million, would be at stake. The idea was to sell the drug at a very cheap price because the poor could not afford it otherwise. But then the cheap drug may be smuggled into the black market and sold to veterinary hospitals.

Merck’s Dilemma : 

Merck’s Dilemma On account of the development of the new drug, general sales would be adversely affected. There was a possibility of competitors entering the market if the drug was sold a generic drug and not as a patented drug. A government order had put a cap on medical reimbursement which implied that generic drugs would replace patented drugs which were Merck’s main source of income. Under such adverse circumstances, Merck faced the dilemma of whether to take the risk of releasing the drug or not.

Problems of Distribution : 

Problems of Distribution After 7 years of research, at enormous cost, the human version was developed. A single pill, taken once a year, would permanently cure the disease. However, there were no distributors willing to distribute the medicine, meant to protect 85 million people because they gain only if the medicine is expensive. They get a percentage cut.

Miracle cure and miracle solution : 

Miracle cure and miracle solution With the help of WHO and certain governments and voluntary organizations, in 1996, a committee was formed, which undertook the task of distribution. Merck decided to give the drug to potential victims “free of cost!!!” Dr. Roy, when questioned about this decision, simply said, “People in the third world will remember Merck”. He also expected that in the long-run the company would gain in reputation. This was expected because they were doing things that society expected of them.

The main conflict : 

The main conflict The main conflict is whether a company should develop a medicine at a high cost and patent it or whether it should stick to the basic medicine and sell it cheap. The former strategy would help it to earn huge profits while the later would help it achieve its basic objective of providing cheap health care which is the expectation of society.

The second Company : 

The second Company The tale of the second company is actually that of two similar companies. One is Abbott Laboratories (USA); and The other is of Roche the Swiss drug giant.

Price of medicines and market value of the company : 

Price of medicines and market value of the company Abbott Laboratories (USA) manufactures an AIDS medicine called Norvir. In December 2003 the company boosted its price by 400 percent from $1.71 per day to $8.57 per day . Shares of Illinois-based Abbott rose $1.07 to $40.62 on the New York Stock Exchange Tuesday.

Fuzeon – The killer medicine : 

Fuzeon – The killer medicine In 2003 a new drug for AIDS was introduced with a price tag for the drug which was about $20,000 a year. That is almost triple the cost of the most expensive treatment that was then available. The manufacturer was the Swiss drug giant Roche. So a medicine which is supposed to save lives would actually kill by its price.

Development cost or monopoly profits? : 

Development cost or monopoly profits? Roche's chairman and chief executive, Franz Humer, said it is natural for the company to make money on a drug it took time and expertise to develop. Humer said Fuzeon's price simply reflects the $600 million cost of development, as well as the cost of manufacturing and research for other AIDS medicines.

Complicated drugs : 

Complicated drugs The manufacturing process for Fuzeon is very complicated, requiring 44 ingredients, about three times the norm. There are 106 steps involved, more than four times the average. AIDS activists insist the elaborate process still doesn't justify the price. Roche can't release the U.S. price until Fuzeon is approved but said it will be close to the recently announced European annual cost of $20,409.

Want, need and demand. : 

Want, need and demand. Franz Humer, said “We need to make a decent rate of return on our innovations. This is a major breakthrough therapy,” he said in an interview. “I can't imagine a society that doesn't want that innovation to continue.” Surely patients not only “want” it, in fact, they need it. But the question is can they afford it? If patients cannot afford to buy it how can the innovation reach society.

“Decent rate of return” or Profiting on others misery : 

“Decent rate of return” or Profiting on others misery If 12,000 people were to take Fuzeon at $20,000, Roche would reap about $240 million in revenues. That would grow to about $480 million by 2005 if manufacturing capabilities expand as hoped. Analysts say Fuzeon's pricing suggests Roche could turn a profit in three years. The industry average for a new drug is 16 years, although some blockbusters make money in five to 10 years. This means that Roche is profiting on others misery. The supernormal profit is 3 to 5 times other companies.

Innovation and ethics : 

Innovation and ethics The ethical issue is as to how the gains from innovation should reach the society. If the innovator has an undue advantage then the society at large loses. If the society only gains then it deters innovation. The innovator does not have any incentive. This is an apparent conflict.

Is the conflict irresolvable? : 

Is the conflict irresolvable? The conflict is between the interest of the individual and society. There are clear moral standards laid down for such situations. Philosophers like J. Bentham and J.S. Mill have prescribed the tenet- “Greatest happiness for maximum number of people.” Therefore, corporate social responsibility, has a well established basis in ethics.

Two strategies : 

Two strategies The above two cases show how two different companies have adopted two different strategies to deal with the markets that they faced. These strategies arise out of their respective business philosophy.

Misnomer about Corporate Social Responsibility : 

Misnomer about Corporate Social Responsibility Certain misnomers that have crept into the domain of the study of Business Ethics and Social Responsibility. The first relates to the fundamental basis of social responsibility and the second is about the relationship between business ethics and Corporate Social Responsibility (CSR) or simply social responsibility.

CSR for profit? : 

CSR for profit? It has become almost passé to highlight a case for CSR by eulogizing the benefits of Social Responsibility programs for the bottom-line, that is, for profit. The justification for such an approach arises out of business strategy. In turn, Business Strategy relates to Business Philosophy.

Business Philosophy and Philosophy of Business : 

Business Philosophy and Philosophy of Business While having stated the premise of Business Philosophy it is important to distinguish between Business Philosophy and Philosophy of Business. Business Philosophy is a driving force of a particular business. For instance, the “Business Philosophy” of Tata’s might be to develop a business that is quality conscious and produces products that are within the reach of the common man.

Philosophy of Business : 

Philosophy of Business On the other hand, Philosophy of Business explains the moral principles that underlie business as a domain. It goes into the purpose of business and the ethical basis and consequences of business. Therefore, “Business Philosophy” relates to the vision of a company whereas “philosophy of business” is an area of study.

Do we need business ethics? : 

Do we need business ethics? Peter Drucker and some leading management thinkers believe that Business Philosophy need not include ethics. “There is neither a separate ethics of business nor is one needed” - Peter Drucker (1981) In his ‘What is “Business Ethics”?’ Peter Drucker accuses business ethics of singling out business unfairly for special ethical treatment.

Foundations of business ethics : 

Foundations of business ethics “Business Philosophy” may or may not include the ethical dimensions but “philosophy of business” necessarily does. But the “philosophy of business” necessarily and clearly is concerned with the ethical foundations of business as a discipline. It is a sub-discipline of philosophy and forms the basis of business ethics and Corporate Social Responsibility or simply Corporate Responsibility.

Corporate Responsibility : 

Corporate Responsibility Therefore, by our newfound understanding it is necessary to visualize the relationship between Philosophy of Business, Business Ethics and the three elements of social responsibility of business which could also be called Corporate Responsibility – CSR, Environmental Accountability and Corporate Governance. .

Slide 32: 

Responsible Company: A holistic approach Concern for People (Social responsibility) Concern for Planet (Environmental Accountability) Concern for Profits (Corporate Governance)

Slide 33: 

Philosophy of Business:The expectations of society from business Business Ethics:Ethical norms and standards and moral reasoning evolved by society in respect of the three pillars of corporate responsibility. Corporate Social Responsibility Corporate Governance Environmental accountability Corporate Responsibility Business Philosophy should be aligned with expectations of society and not merely aligned with long term goals of the particular business or business exigency. Code of Ethics of Business aligned with ethical norms evolved by society for corporate responsibility From Philosophy of Business to Company Code of Ethics

Which are the two Companies in our story? : 

Which are the two Companies in our story? The names do not matter. It may be Abbott or Merck. One is an ethical and responsible company and the other is unethical and irresponsible

What is the lesson from the parable – Tale of two companies? : 

What is the lesson from the parable – Tale of two companies? Corporate Responsibility and business ethics are integrally linked. Corporate Responsibility is something that the society dictates. It is not determined by Business Philosophy much less business strategy. If companies ignore business ethics and seek CSR as a means of raising profit they are doing wrong.

Thank you!Any [email protected]

Thank you!Any [email protected]

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