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Managing Pharma Investors’ Expectations When The Chips Are Down

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Triggered by several critical factors, over a relatively short period of time, a downward spiral is visible with most Indian Pharma stocks, with a significant erosion in market capitalization of many large players in the country.

A set of important factors has been fueling this current downturn since around the last four years. These include, issues related to serious regulatory non-compliance with US-FDA and other foreign drug regulators, pricing pressure both in the domestic and the overseas markets, including the United States, delayed approval of several new generic drugs in the number-one pharma market of the world, for various reasons. Initial rollout period of GST expected to commence on July 1, 2017, may also prompt some major readjustments in the distribution setting of many pharma organizations. This has been further compounded with the wholesalers’ and retailers’ demand for compensation for any losses on input credit arising out of this critical reform.

As eroding market cap generally leads to commensurately lower market valuation of a company, it adversely impacts company’s many business growth related activities, which encompasses attracting low cost – high value investments, and M&A related activities, besides many others. Consequently, this negative swing has alarmed many investors, making them more demanding on company performance – uninterrupted, almost at any cost, as it were.

Not much headroom for necessary course correction:

Unrelenting expectations of this nature from the investors, inclusive of activist shareholders, to continue driving the business growth engine up the steep slope of ever increasing return on investment, is not expected to die down, anytime soon.

They may not be willing to leave enough headroom for the respective pharma management teams to realign their growth path with the changing and challenging needs of time, if it adversely impacts business even in the short-term. Nonetheless, if it is not allowed, the tailspin is likely to continue, as has been happening since, at least, the last couple of years, pushing the business at a dangerous level of sustainability.

Such demand of the investors and shareholders, irrespective of the gravity of the situation where their respective companies are in, may not be too uncommon, even in the global arena. However, many experts are now raising a key question in this area. In this article, I shall try to look at this issue, not just from the investors’ perspective, but also from what the concerned pharma players can and should do in this area, sooner the better.

A pertinent question needs to be addressed:

This important and relevant question is: what is the accountability of the investors, if their pressure for performance when the company is at a crossroad of this nature, causes a long-term irreparable damage to the business?

The very issue has been discussed immaculately in an article titled, “The Error at The Heart of Corporate Leadership”, published in the May-June 2017 issue of the Harvard Business Review.

The paper reiterates that attributing ownership of the corporation to its investors involves a challenging problem of accountability. This is because, ‘shareholders or private investors have no legal duty to protect or serve the companies whose shares they own and are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds.’ Moreover, they are both physically and psychologically distant from the activities of the companies they invest in, and may generally buy and sell these shares without restrictions.

Nevertheless, such strong and ever increasing demands put the top pharma managers under increasing pressure to deliver faster and more predictable returns, regardless of the headwind that the business is facing. The issue becomes more complex when temporary-holders of large blocks of shares intervene to reconstitute a company’s board, change its management, or restructure its finances to drive up the share price, only to sell out and move on to another target, without ever having to answer for their intervention’s impact on the company or other parties, the article highlights.

Export business – the pain points:

“Pharma stocks take a beating on renewed US FDA scrutiny” – flashed the headline of a recent media report of June 12, 2017. As I see it, in the export business, especially in the top pharma market in the world, there appears to be a strong possibility of further worsening the business environment, especially for the Indian drug exporters.

Wave after wave of US-FDA import bans involving many India made drug formulations and Active Pharmaceutical Ingredients (API), since over last four years, have significantly affected the short-term export sales of the domestic pharma exporters. Alongside, these have seriously dented the image of the Indian pharma players, collectively, which encompasses the critical area of regulatory compliance – to offer well-documented safe and effective drugs, as required by the regulator, for the patients in the United States.

The situation gets messier with media headlines, such as, one from Bloomberg’s on January 24, 2017, conveying to the world community – “Document Shredding at Night Raises FDA Eyebrows During India Visit.”

Besides current drug pricing pressure, President Donald Trump’s election pledge for local manufacturing of products consumed in the United States, for more job creation in the country, sends another possible storm signal in this area. This is serious too, as Indian generic drug producers cater to around 40 percent of the total generic drug consumption in America.

Overcoming the odds in export business:

While taking corrective and effective measures for a sustainable long-term business performance, doing the same things more intensely that precipitated the current crisis, would be counterproductive.

Improving the situation, would also call for a strong preparedness for launching new generic products at a regular interval. However, in tandem, there is a crying need for the concerned pharma companies to take a pause, and conclude, a well-structured and expert-guided corporate introspection and brainstorming process, on priority. This will help them to arrive at a set of actionable strategic plans to effectively address each of the pain points, in a meticulous and time-bound manner.

Investors must necessarily be taken on board by opening appropriate communication channels, accordingly. This is to enable them to understand and accept the reasons for a short-term pain for a sustainable long-term gain. The tangible results of corrective measures should subsequently unfold to all concerned, with minor course corrections on-the-run, wherever necessary.

Domestic business – the pain points:

This is again another complex issue, which is often manifested through pressure on drug prices. The blame for such a situation, though originates from somewhere else, generally falls on the Government and the drug price regulator, for obvious reasons. It has a palpable boomerang effect, that is brought out by various research studies, and captured in consumers and the expert opinion, such as one that was published by the Washington Post on June 14, 2017 with the title, “The pharmaceutical industry puts profits above people.”

In the United States, where the drug pricing pressure is widely believed to have primarily originated from the escalating cost containment pressure of the Government and the key health care providers – triggered by a dangerous drug-pricing trend. Whereas in India, in addition to the latter that is related to non-schedule branded generic drugs, it is mostly related high out of pocket expenses on drugs, attempts to dodge various drug price regulations, and ignoring several ethical marketing practices related issues. The net outcome of all this is growing trust deficit on the pharma industry, in general.

Let me illustrate this point with a very contemporary example.  On May 18, 2017, Reuters reported, “India’s drug pricing regulator has demanded explanations from 65 domestic and global drug makers for selling new forms of essential diabetes and antibiotic drugs without its approval.” Interestingly, these companies reportedly include many big names, such as, Abbott Laboratories, Sanofi, Novartis and Indian firms such as Sun Pharmaceutical Industries and Lupin.

According to a circular of the National Pharmaceutical Pricing Authority (NPPA) of May 17, 2017, the above companies have allegedly launched formulations by altering an essential drug formulation with strength/dosage other than as specified in the Drug Price Control Order (DPCO) 2013 or combination with another drug not under price control, without even applying for price approval from NPPA as required. NPPA also doesn’t seem to be sure, whether such Fixed Dose Combinations (FDC) are rational or irrational and have the approval of the Central Drug Standard Control Organization (CDSCO).

If so, it’s indeed a sad development and a sorry state of affair, especially for those companies, which do some chest-thumping on ethics and compliance, often browbeating many Indian players, especially on USFDA related issues, besides pharma marketing practices.

As on date, Union Ministry of Health has banned several hundreds of such FDCs – on the ground of being irrational, launched without proper regulatory approval, lacking in therapeutic efficacy and safety profile, which may even cause harm to patients. March 11, 2016 notification of CDSCO banned 296 irrational FDCs.

However, many pharma players have succeeded in obtaining stay orders against almost all such regulatory bans from various High Courts. Nevertheless, the good news is, from July 2017, the Supreme Court is expected to hear all these cases, collectively. There could be another possible downturn in the market, if the Government wins the case.

Overcoming the odds in domestic business:

In these specific areas, there doesn’t seem to be any other option left to satisfy the long-term interest of the investors, other than addressing the ethics, values and compliance issues of the company on the ground, head on. It doesn’t really matter, what is displayed on the subject in their respective websites. Thus, in this area too, there is a crying need for a well-structured and expert-guided corporate introspection and brainstorming process to disrupt the status quo from its very root.

The above process would help the pharma players to arrive at a set of actionable strategic plans to effectively address the ethics and compliance issues in all the pain points – regulatory, marketing or financial, in a meticulous and time-bound manner. Alongside, all the stakeholders, including the investors, to be taken on board through customized content and the engagement platforms, to put the companies back into the long-term growth trajectory.

In conclusion:

Investors are very important, but if they aren’t an integral part of the corporate management team, should not try to overwhelm the business management process, especially for any short term financial gain. Attributing such authority to investors, involves a challenging problem of accountability for action, as they can get in or out of their investments at any time they choose to do so.

However, it’s also one of the key responsibilities of the management to listen to them, seriously. Take them on board by appropriately explaining to them in every critical situation, the broad strategic direction that the company would follow in pursuit of excellence. Thereafter, demonstrable outcome of all management action against the top operational goals, should be placed before them at a periodic interval, on an ongoing basis.

This process, if carried out with absolute transparency, integrity and seriousness, could help the Indian pharma players getting enough breathing space from the investors, for making the right operational interventions, before it’s too late.

Earlier this year, stepping down of former CEO of GSK – Andrew Witty, was reported to be due to pressure from investors for below par sales and profit in the past three years, besides a few other reasons. Another recent report of June 15, 2017 on “rebel investors looking to remake the board of Mylan” would possibly reinforce this point, further.

Outside the pharma industry, such a situation is not uncommon now, even in India. Besides, what happened recently in Tata Sons,  the June 14, 2017 media headline highlighting “Infosys flags ‘activist shareholder’ as risk factor”, vindicates the same point, yet again.

Thus, managing pharma investors’ expectations through a process of continuous engagement with them, effectively, especially when the chips are down, as it is today, is so critical for the long-term success and sustainability of pharma business.  Maintaining the status quo any further, would possibly make a high-flying pharma player to experience the strong gravitational pull, uncontrolled, with its its serious but avoidable consequences.

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.

Pharma industry requires striking a right balance between ethical obligations to shareholders and ethical obligations to patients

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On September 15, 2012, while delivering his keynote address in a pharmaceutical industry function, Dr. Sam Pitroda, the Chicago based Indian, creator of the telecom revolution in India and the Advisor to the Prime Minister on Public Information, Infrastructure & Innovations, made a profound comment, for all concerned to ponder, as follows:

“Everyone wants to copy the American model of development.  I feel that this model is not scalable, sustainable, desirable and workable.  We have to find an Indian Model of development which focuses on affordability, scalability and sustainability.”

The above comment assumes greater significance, as the U.S. has been the number one pharmaceutical market of the world over a long period of time, although currently growing at a snail’s pace, as compared to the emerging markets of the world or even in absolute numbers.

Being impressed by past success record of America in the pharmaceutical sector, many countries of the world are being influenced to imbibe the U.S. models in various areas of the industry like, R&D, product commercialization process, focus on the “Wall Street” and even the way America walks the talk in fulfilling its various ethical obligations.

As the popular saying goes ‘proof of the pudding is in the eating’, gradual drying-up of the R&D pipeline, significant decline in the pharmaceutical business growth rate with commensurate adverse impact on the “Wall Street” and regularly published media reports on ‘unethical marketing practices’, lead to pertinent questions on the longer-term sustainability of the U.S. model in all these areas.

It appears, prompted by the prevailing reality in the U.S since quite some time, Dr. Pitroda made the above comment in a wider context of the pharmaceutical industry, including very important scalability, sustainability, desirability and workability of the ethical values in the Indian pharmaceutical business operations.

A burning issue:

As stated above, even in areas related to ethical issues in the pharmaceutical industry, global media reports indicate, as Dr. Pitroda commented above, the American model has not been successful to set an example for others, as yet. Thus, here also India will possibly need to find an Indian model that works and is sustainable.

We have been witnessing, for quite some time from now, among many other burning issues, ethical concerns related to the pharmaceutical industry across the world, have been hugely bothering a large section of its stakeholders, solely for the interest of patients and India is no exception to this stark reality.

Such concerns emanate from widely circulated media reports on legal fines levied to large pharmaceutical companies or out of court settlements on such fines due to alleged ‘unethical’ business practices of some large companies in various parts of the world including India.

Civil Society and other stakeholders including governments do allege that the prescription decisions made by the doctors, having received expensive free products and services from the pharmaceutical companies may not entirely or always be in the best interest of the patients.

In a situation like this, overall robust and healthy bottom line of the pharmaceutical industry in general, may be a tad lesser now, calls for a proper balancing act between its ethical obligations to shareholders and the ethical obligations to patients of all class, creed and color together with the civil society, at large.

Unique situation for the patients:

Healthcare sector in general and the pharmaceuticals in particular is unique in many respects. The Department Related Parliamentary Committee on Health and Family Welfare in its 59th Report clearly articulated that:

Medicines apart from their critical role in alleviating human suffering and saving lives, have very sensitive and typical dimensions for a variety of reasons. They are the only commodity for which the consumers have neither a role to play nor are they able to make any informed choices except buying and consuming whatever is prescribed or dispensed to them because of the following reasons:

  • Drug regulators decide which medicines can be marketed
  • Pharmaceutical companies either produce or import drugs that they can profitably sell
  • Doctors decide which drugs and brands to prescribe to their patients
  • Patients are totally dependent on and at the mercy of external entities to protect their interests.

Such a scenario gives rise to a situation where patients, by and large, are compelled to buy medicines at any price, which leads many to conclude that the pharmaceutical industry is ‘recession proof’.

The perspective of the Global Pharmaceutical industry:

The global pharmaceutical industry is primarily research driven, as the low cost generic drugs flow from the patent expiry of innovative drugs. Moreover, the R&D process is arduous, expensive (reportedly costs over US$ 1.8 billion), risky and quite lengthy involving, besides others:

  • Discovery and development process of the New Chemical Entity (NCE) or New Molecular Entity (NME)
  • Pre-clinical trials
  • Clinical trials, Phase I, II and III and IV
  • Stringent marketing approval process

Thus they believe that to foster innovation to meet the unmet needs of patients, the Intellectual Property Rights (IPR) of such products must be strongly protected by the governments of all countries putting in place a robust product patent regime.

Further, the industry strongly argues that to recover high costs of R&D and manufacturing of such products together with making a modest profit, the innovator companies set a product price, which at times may be perceived as too high for the marginalized section of the society, where government intervention is required more than the innovator companies.

Aggressive marketing activities, during the patent life of a product, are essential to gain market access to such drugs for the patients.

In support of the pharmaceutical industry the following argument was put forth in a recent article:

“The underlying goal of every single business is to make money. People single out pharmaceutical companies for making profits, but it’s important to remember that they also create products that save millions of lives.”

Marketing expenditure becoming more productive than R&D investments:

It is indeed interesting to note that expenditure towards marketing by the pharmaceutical companies is becoming more productive than the same towards R&D. This is vindicated by the article titled “R&D and Advertising Efficiencies in the Pharmaceutical Industry”,  published in the International Journal of Applied Economics, 8(1), March 2011.

In this research study the authors stated that although advertising as a percentage of sales has not increased during the past twenty years, its effectiveness in generating sales has improved dramatically by way of the Direct-To-Consumers-Ads (DTCA) strategy, which encouraged patients asking their healthcare providers for brand name drugs rather than cheaper generics. The paper also supports the notion that advertising replaces R&D investments when those investments fail to live up to their promise.

Many experts opine that the above scenario is prevailing today, especially when the global innovator companies are passing through a ‘patent cliff’.

Marketing expenditure far exceeds investments in R&D:

Another article concludes through its research paper titled, “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States” that pharmaceutical companies spend almost twice as much on promotion as they do on R&D, quite contrary to the claim by the industry.

The study endorses the public image of the pharmaceutical industry as a marketing-driven sector when it should invest more for research and development and much less for promotion, that too many a times is not ‘ethical’ in nature, as cited above.

Patients are the ultimate victims:

A relatively recent report on India dated January 11, 2011, published in ‘The Lancet’, which vindicates the fact, in a similar (though not the same) context, that the alleged ‘unholy relationships’ between many pharmaceutical companies and the doctors, as a result of such aggressive and alleged ‘unethical’ marketing practices, has resulted in over-prescribing and irrational use of injection and drugs causing hardships to the patients.

Conclusion:

As stated above, many experts have been arguing since long, based on available data, that the current business models of many pharmaceutical companies are heavily tilted towards their obligation to the shareholders. These thought leaders are increasingly raising their voices to put forth the view that the industry continues to live in a self-made and a fire-walled cocoon, always trying to change others and refusing to change itself, unfortunately, even for the patients’ sake.

Despite the experts making above comments, my personal view is that in this direction, we have been witnessing no better attitude from our own government either to usher in a much desirable and long pending change in the prevailing scenario, solely for the patients, which is indeed even more disappointing.

In a situation like this, to be ‘patient centric’ in a real sense, there is an urgent need for the industry to first walk the talk along with their respective voluntarily codes of ethical marketing practices both in the letter and spirit.

If voluntary mechanism fails to work, a legal or statutory mechanism should be implemented, like what the Department of Pharmaceuticals had articulated in its draft ‘Uniform Code of Pharmaceutical Marketing Practices’, last year.

Thus, I reckon, to enhance its image, the pharmaceutical industry in India, as advised by Dr. Sam Pitroda, should imbibe a transparent, workable, scalable, demonstrable and a sustainable business model to strike a right balance between its ethical obligations to shareholders and ethical obligations to patients of all class, creed and color together with the civil society, at large

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.