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Pharma Governance Maladies and Corporate Leadership

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On September 26, 2017, two media headlines related to the Indian pharma industry, possibly made many wonder – Are these some of the key reasons prompting the Government to enforce stringent and costly regulations in this sector?

Above revelations came close on the heel of a series of alleged fraudulent, collusive and even criminal behavior of many domestic pharma players, by several overseas regulators, including the US-FDA. Besides international media, similar reports often featured in the national business dailies too. Most of these allegations are related to pharma marketing practices, and drug quality related concerns. In that sense, the core issues of following two news items are no different, and were reported as follows:

  • “The income tax (IT) investigation wing claims to have unearthed a nexus between a leading pharmaceutical company and doctors, and evidence showing payments running into Crores to the latter for prescribing the company’s medicines.”
  • Reaching out to Niti Aayog, Indian drug industry lobby groups, “mainly objected to three proposals in the draft policy floated last month: one drug one brand, curbing retailer margins, and mandatory bioavailability and bioequivalence (BA/BE) test for all drugs approved by state regulators and also future renewals.”

Out of these, the objection to mandatory BA/BE tests appears more intriguing to me – for two reasons. First, the news report doesn’t mention the participation of any global pharma company or their lobby groups in this meeting. If true, it would possibly mean, the pharma MNC players operating in India aren’t unduly worried about BA/BE requirements, which are mandatory in other countries of the world, primarily to ensure high generic drug quality standards.

The second one being, when the Indian pharma industry is so vocal on ‘poor quality’ of generic drugs sans brand names, apparently to protect branded generics, why is its lobby groups opposing mandatory BA/BE tests – so critical to address the quality issue. Opposing these tests, citing some ‘reason’, appears absurd. Resolving safety concerns on ‘Unbranded’ generics is nonnegotiable – for patients’ health and safety.

The major incident that snowballed:

It reminds me of the major US-FDA related quality issue involving Ranbaxy of India that eventually snowballed, attracting global media attention. This incident was well covered by Indian Press and Television, as well. As one such business daily reported, the much talked about whistleblower Dinesh Thakur, reportedly claimed that his boss in Ranbaxy made a detailed presentation of the alleged widespread manufacturing lapses and fudging of data in the company first to “a closed-door board of directors meeting in Thailand” in September 2004, and then to its science committee on December 21, 2004. Be that as it may, Ranbaxy subsequently pleaded guilty to several charges by the US-FDA, based on Dinesh Thakur’s testimony, and paid a hefty fine of US$ 550 million. It is worth noting, although Ranbaxy had an immaculate Board of Directors at that time, including distinguished and eminent personalities as the Independent Directors, the company used to be run by the promoters, or in other words, the key shareholders of the company. It may be coincidental that the majority of such incidences reported from India, either related to dubious pharma marketing practices or drug quality standard, may find a curious link with the promoter or the key shareholder driven domestic pharma companies.

The purpose of this article is not to assign blame to anyone, or any organization, but to have an intimate look at the governance process of most of such companies, which is systemic in nature. It may be worth pondering thereafter, whether one can learn the way forward from the credible research reports, available on this important subject.

The doctrine of ‘Maximizing Shareholder Value’:

In many corporate training sessions, especially for the senior management, including pharma industry in India, the above well-known doctrine is emphasized and reemphasized – again and again. It postulates, the ‘corporate managers should make maximizing shareholder value their goal – and that boards should ensure that they do.’

Indian pharma companies predominately being the promoter or the key shareholder driven corporations, choosing ‘maximizing shareholder value’ as the primary corporate mission, I reckon, is not too uncommon, either.

The basic premises of the theory:

The details of this theory were articulated in the 1976 Journal of Financial Economics article “Theory of the Firm,” by Michael Jensen and William Meckling. The concept was further deliberated in the article titled “The Error at the Heart of Corporate Leadership” by Joseph L. Bower and Lynn S. Paine, published in the May-June 2017 issue of Harvard Business Review, and its basic premises were summarized as follows:

  • Shareholders own the corporation and are “principals” with the original authority to manage the corporation’s business and affairs.
  • The corporation’s shareholders delegate decision-making authority to the managers and are thus “agents” of the shareholders.
  • As agents of the shareholders, managers are obliged to conduct the corporation’s business in accordance with shareholders’ desires.
  • Shareholders want the business to be conducted in a way that maximizes their own economic returns. (The assumption that shareholders are unanimous in this objective is implicit throughout the article.)

A flawed corporate governance model?

Bower and Paine in their above paper lucidly analyze a number of serious flaws in the basic premises of ‘maximizing shareholder value’ model. For example, they indicate that the ultimate responsibility and accountability for good corporate governance, or lack of it, lies squarely with the concerned senior management and the Board of Directors of the company and none else – not even with its large shareholders.

Moreover, the authors caution that this theory’s doctrine of alignment spreads moral hazard throughout a company and narrows management’s field of vision.

Putting it in the context of Indian pharma industry, I reckon, such risks increase alarmingly, when promoters take all management and Governance decisions, with the senior management, including the Board of Directors doing no more than endorsing those, knowingly or unknowingly, just as what happened in case of Ranbaxy, mentioned above.

Providing a more realistic foundation for corporate governance:

Against this backdrop, and accepting the following ground realities, there evolves a critical need to have a more realistic foundation for corporate governance and shareholder engagement, as the above HBR article deliberates:

  • Corporations are complex organizations whose effective functioning depend on talented leaders and managers.
  • Corporations can prosper over the long term only if they’re able to learn, adapt, and regularly transform themselves.
  • Corporations perform many functions in society – such as providing investment opportunities and generating wealth, producing goods and services, creating employment, developing technologies, paying taxes, and making several other significant contributions to the communities in which they operate.
  • Corporations may have differing objectives and strategies in this regard – such as, what the purpose of a corporation ought to be from a societal perspective may not be quite the same as what its promoters or key shareholders believe those to be.
  • Corporations must create value for multiple constituencies – such as, companies succeed only if customers want their products, employees want to work for them, suppliers want them as partners, shareholders want to buy their stock, and communities want their presence. In contrast, the ‘creating more shareholder value’ theory’s implied decision prompts that managers should always maximize value for shareholders – oversimplifies this challenge and leads eventually to systematic underinvestment in other important relationships.
  • Corporations must have ethical standards to guide interactions with all their constituencies, including shareholders and society at large – going beyond forbearance from fraud and collusion, is essential for earning the trust companies need to function effectively over time. ‘Creating more shareholder value’ theory’s ambivalence regarding corporate ethics can set companies up for destructive and even criminal behavior -which generates a need for the costly regulations that agency theory proponents are quick to decry.

All the above eight points, especially the last one, as many consider, are so relevant for the Indian pharma industry, probably more in the promoter-driven ones, as these constitute the bulk of it. It is equally important to understand that corporations are embedded not just in a network of financial systems, but also in a political and socioeconomic matrix, whose health is vital to their sustainability. Thus, changing from ‘‘creation of more shareholder value-centered governance’ to a ‘company-centered governance’ would be more meaningful in today’s paradigm.

The merits of ‘company-centered governance’:

As the Harvard article says, following are some of the merits of changing to a ‘company-centered governance’ from ‘creating more shareholder value-centered governance:’

  • More board-level attention to succession planning and leadership development
  • More board time devoted to strategies for the company’s continuing growth and renewal
  • More attention to risk analysis and political and environmental uncertainty
  • A strategic (rather than narrowly financial) approach to resource allocation
  • A stronger focus on investments in new capabilities and innovation
  • More-conservative use of leverage as a cushion against market volatility
  • Concern with corporate citizenship and ethical issues that goes beyond legal compliance

Conclusion:

Almost all domestic pharma companies in India are currently family run, mostly by the first or second-generation entrepreneurs, with well-defined and clearly established ownership pattern.

The glorious history of the family run Indian pharma business has started facing a more challenging future, especially in addressing the types of maladies, as epitomized in the above two recent media reports. With the ongoing process of ‘creating more shareholder value’ driven governance – almost totally scripted by the promoter or the key shareholders at the helm, the task ahead remains formidable. Additionally, the reports on Ranbaxy whistleblower’s narrative, prompted many to wonder the role of Independent Directors on the Board of strong promoter driven Indian pharma companies, besides others.

In this scenario, particularly to address the Governance related maladies effectively, a highly competent corporate leadership professionals should be empowered to steer the Indian pharma organizations, in general, from ‘creation of more shareholder value centric governance’ to a well-crafted ‘company centric governance’ process, in a well-calibrated manner and sooner.

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Draft Pharma Policy 2017 And Branded Generics

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In its first reading, the 18-page draft Pharma Policy, 2017 gives me a sense that the Government has followed the much-desired principle of ‘walk the talk’, especially in some key areas. One such space is what Prime Minister Modi distinctly hinted on April 17, 2017, during the inauguration function of a charitable hospital in Surat. He clearly signaled that prescriptions in generic names be made a must in India, and reiterated without any ambiguity whatsoever that, to facilitate this process, his government may bring in a legal framework under which doctors will have to prescribe generic medicines.

Immediately following its wide coverage by both the national and international media, many eyebrows were raised regarding the feasibility of the intent of the Indian Prime Minister, especially by the pharma industry and its business associates, for the reasons known to many. A somewhat muted echo of the same could be sensed from some business dailies too, a few expressed through editorials, and the rest quoting the views on the likely ‘health disaster’ that may follow, if ‘branded generics’ are not prescribed by the medical profession. Obviously, the main apprehension was centered around the ‘shoddy quality parameters’ of unbranded generic drugs in India. It’s a different matter though, that none can possibly either confirm or pooh-pooh it, backed by irrefutable data with statistical significance.

Be that as it may, making high quality generic drugs accessible to most patients at affordable prices, avoiding any possible nexus between the doctors and pharma companies, which could jeopardize the patients’ economic interest, deserves general appreciation, shrill voices of some vested interests notwithstanding.  Nonetheless, if the related proposals in the new pharma policy come to fruition as such, it would be a watershed decision of the government, leaving a long-lasting impact both on the patients, as well as the industry, though in different ways, altogether.

I raised this issue in my article titled, “Is Department of Pharmaceuticals On The same Page As The Prime Minister?”, published in this blog on May 15, 2017. However, in today’s discussion, I shall focus only on how has the draft pharma policy 2017 proposed to address this issue, taking well into consideration the quality concerns expressed on unbranded generics, deftly.

Before I do that, let me give a brief perspective on ‘brand name drugs’, ‘generic drugs’, ‘branded generics’ and ‘unbranded generic drugs’. This would basically serve as a preamble to arrive at the relevance of ‘branded generic’ prescriptions, along with the genesis of safety concern about the use of un-branded generic drugs.

No definition in Indian drug laws:

Although, Drugs and Cosmetics Act of India 1940 defines a drug under section 3 (b), it does not provide any legal definition of ‘brand name drugs’, ‘generic drugs’, ‘branded generic drugs’ or ‘un-branded generics’.  Hence, a quick landscaping of the same, as follows, I reckon, will be important to understand the pertinence of the ongoing debate on ‘branded generic’ prescriptions in India, from the patients’ health and safety perspectives:

‘Brand name’ drugs:

Globally, ‘brand name drugs’ are known as those, which are covered by a product patent, and are usually innovative New Chemical Entity (NCE) or a New Molecular Entity (NME). Respective innovator pharma companies hold exclusive legal rights to manufacture and market the ‘brand name drugs’, without any competition till the patents expire.

Generic drugs:

Post patent expiry of, any pharma player, located anywhere in the world, is legally permitted, as defined in the Intellectual Property Rights (IPR) regulations, to manufacture, market and sell the generic equivalents of ‘brand name drugs’. However, it’s a global norm that the concerned generic manufacturer will require proving to the competent drug regulatory authorities where these will be marketed, that the generic versions are stable in all parameters, and bioequivalent to the respective original molecules. According to US-FDA, a ‘generic drug’ will require to be the same as the original ‘brand-name drug’ in dosage, safety, strength, quality, purity, the way it works, the way it is taken and the way it should be used.

‘Branded generic’ drugs:

Branded generics are generic molecules marketed and prescribed by their respective brand names. Around 90 percent of generic formulations are branded generics in India, involving heavy sales and marketing expenditure in various forms, which has become a contentious issue today in India. The reason being, although branded generics cost significantly more than unbranded generics, the former variety of generic drugs are most preferred by the medical profession, as a group, in India. Interestingly, there is no difference whatsoever in the marketing approval process between the ‘branded generics’ and other generic varieties without any brand names.

Unbranded generic drugs:

Unbranded generic drugs are those, which are sold only in the generic names, sans any brand name. I reiterate, once again, that there is no difference in the marketing approval process between the ‘branded generics’ and ‘unbranded generic medicines’.

The core issue:

The whole debate or concern related to both efficacy and safety on the use of unbranded generic drugs in India stems from a single regulatory issue, which is widely construed as scientifically improper, and totally avoidable. If this subject is addressed in a holistic way and implemented satisfactorily in the country, by and large, there should not be any worthwhile concern in prescribing or consuming single ingredient unbranded generic drugs in India, which generally cost much less than their branded generic equivalents.

This core issue is primarily related to establishing bioequivalence (BE) with the original molecules for all generic formulations, regardless of whether these are branded or unbranded generic drugs. Thus, positive results in bioequivalence studies, should be a fundamental requirement for the grant of marketing approval of any generics in India, as is required by the regulators of most countries, across the world.

This has been lucidly articulated also in the publication of the National Institute of Health (NIH), USA, underscoring the critical importance of generic drugs in healthcare is unquestionable. The article says: “it is imperative that the pharmaceutical quality and ‘in vivo’ performance of generic drugs be reliably assessed. Because generic drugs would be interchanged with innovator products in the market place, it must be demonstrated that the safety and efficacy of generics are comparable to the safety and efficacy of the corresponding innovator drugs. Assessment of ‘interchangeability’ between the generic and the innovator product is carried out by a study of ‘in vivo’ equivalence or ‘bioequivalence’ (BE).”

The paper further highlights, “the concept of BE has, therefore, been accepted worldwide by the pharmaceutical industry and national regulatory authorities for over 20 years and is applied to new as well as generic products. As a result, thousands of high-quality generic drugs at reduced costs have become available in every corner of the globe.”

Why is BE not mandatory for marketing approval of all generic drugs in India?

It is intriguing, why is this basic scientific and medical requirement of proving BE is not mandatory for granting marketing approval of all generic drugs at all time, without any exception – covering both branded generics and their unbranded equivalents, in India.

As I have already deliberated on this subject in my article titled “Generic Drug Quality: Cacophony Masks An Important Note, Creates A Pariah ”, published in this blog on May 08, 2017, I shall now proceed further to relate this critical issue with the Draft Pharma Policy 2017.

Brand, branding and branded generics:

Nevertheless, before I focus on the draft pharma policy 2017, let me skim through the definitions of a ‘brand’ and the ‘branding process’, in general, for better understanding of the subject.

American Marketing Association defines a brand as: ‘A name, term, design, symbol, or any other feature that identifies one seller’s goods or services as distinct from other sellers.’ Whereas, ‘The Branding Journal’ articulates: ‘A brand provides consumers with a decision-making-shortcut when feeling indecisive about the same product from different companies.’

Business Dictionary describes the ‘branding process’ as: ‘Creating a unique name and image for a product in the consumers’ mind, mainly through advertising campaigns with a consistent theme. Branding aims to establish a significant and differentiated presence in the market that attracts and retains loyal customers.’

How does it benefit the branded generic consumers?

One thing that comes out clearly from the above definitions that brands, and for that matter the branding process is directed to the consumers. Applying the branding process for generic drugs, the moot question that surfaces is, how does it benefit the pharma consumers, significantly?

Besides, the branding process being so very expensive, adds significant cost to a generic drug, making its price exorbitant to most patients, quite disproportionate to incremental value, if any, that a branded generic offers over its unbranded equivalents. Thus, the relevance of the branding process for a generic drug, continues to remain a contentious issue for many, especially where the out of pocket expenditure for medicines is so high, as in India.

Marketing experts’ view on the branding process for drugs:

An interesting article titled ‘From Managing Pills to Managing Brands’, authored by the Unilever Chaired Professor of Marketing and a research fellow at INSEAD, published in the Harvard Business Review made the following observations on brands and the branding process for drugs:

“…It takes a huge investment to build a successful brand, consumer goods manufacturers try to make their brands last as long as possible. Some consumer products—notably, Coca-Cola, Nescafé, and Persil (a European laundry detergent) -  have stayed at the top for decades. That’s not to say the products don’t evolve, but the changes are presented as improvements and refinements rather than as breakthroughs.”

“In the pharmaceutical business, by contrast, a new product is always given a new name. Drug companies believe that only by introducing a new name can you signal to the market that the product itself is new. Unfortunately, this approach throws out the company’s previous marketing investment entirely; it has to build a new brand with each new product. That may not have mattered when pharmaceutical companies could rely on a large, high-margin market for each drug they wheeled out. But in a crowded market with tightening margins, the new-product, new-brand strategy is becoming less and less feasible.”

The above observations when applied to expensive ‘branded generics’, which are nothing but exact ‘me too’ varieties among tens other similar formulations of the same generic molecule, do not add any additional value to the patients, in a well-functioning drug regulatory environment.

Hence, to reduce the out of pocket drug cost significantly, Prime Minister Modi hinted at bringing an appropriate legal framework to address this critical issue, which gets well-reflected in the draft pharma policy 2017, as I read it.

Six key features of the draft pharma policy related to ‘branded generics’:

Following are the six key features enshrined in the draft pharma policy 2017 to translate into reality what the Prime Minister spoke about on this subject in Surat on April 17, 2017.

1. Bio-availability and Bio-equivalence tests mandatory for all drug manufacturing permissions:

For quality control of generic drugs, Bio-availability and Bio-equivalence tests (BA/BE Tests) will be made mandatory for all drug manufacturing permissions accorded by the State Drug Regulator or by the Central Drug Regulator. This will be made compulsory even for the future renewals of manufacturing licenses for all.

2. WHO GMP/GLP mandatory for all drug units:

The government shall ensure to get the World Health Organization’s Good Manufacturing Practices (GMP) and Good Laboratory Practices (GLP) adopted by all manufacturing units.

3. No branded generics for single ingredient off-patent molecules:

The government will pursue the policy of sale of single ingredient drugs by their pharmacopeial name/salt name. To keep the identity of the manufacturer, the manufacturer would be allowed to stamp its name on the drug package. For patented drugs and Fixed Dose Combination (FDCs) drugs the brand names may be used.

4. ‘One company – one drug – one brand name – one price’:

The principle of ‘one company – one drug – one brand name – one price’ would be implemented for all drugs.

5. Aid and assistance to prescribe in generic names:

To aid and assist the registered medical practitioners in prescribing medicines in the generic names, e-prescription will be put into operation whereby the prescriptions will be computerized and the medicine name will be picked up from a drop-down menu of salt names.

6. UCPMP to be made mandatory:

The marketing practices of several pharmaceutical companies create an unfair advantage. To provide a level playing field, the regulation for marketing practices which is at present voluntary will be made mandatory. Penalty will be levied for violations and an agency for implementation would also be assigned.

Conclusion:

I have focused in this article only on those specific intents of the government, as captured in the draft pharma policy 2017, to reduce the out of pocket expenses on drugs for the Indian patients, which is currently one of the highest in the world. This area assumes greater importance to many, keeping in mind what Prime Minister Modi hinted at in this regard on April 17, 2017. If implemented exactly as detailed in the policy draft, this specific area would have a watershed impact both on the patients, as well as, the pharma companies, including their related business associates, lasting over a long period time.

Far reaching consequential fall outs are expected to loom large on the way pharma players’ strategic business processes generally revolve round ‘branded generics’ in India. I hope, the Plan B of many predominantly branded generic players is also receiving final touches on the drawing board by now, as this aspect of the draft policy proposal can in no way be construed as a bolt from the blue, catching the industry totally off-guard. That said, would the same changes as proposed in the draft pharma policy 2017, if and when implemented, be a ‘wow’ moment for patients?

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.