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What's driving Pharma's international bribery scandals?

Last year the authorities in China exposed a pattern of systematic corruption by GlaxoSmithKline (GSK) and other pharma companies.  Labeled as "Chinagate" in the media, it involved senior pharma managers in China that routinely bribed physicians, hospital administrators and government officials to favor the selection and use of specified drugs.  As an interesting wrinkle to the scheme, the pharmas laundered their bribe payments through travel agencies to make the payoffs appear on the books as travel expenses.

Now it appears that the industry regards Chinagate as "just a blip that it has resolved" (see here) to the point where it is "nothing more than a temporary setback."  For this reason the pharma companies feel they can continue pouring resources into growing foreign countries such as China and India.  Asked whether the China scandals have chastened the pharmas and led them to substantially revamp their operations in the emerging countries, one CEO revealed that any reforms will likely be limited because, "We don't want to do anything that puts us at a competitive disadvantage." (See here.)  Another CEO shrugged and stated that even the strictest compliances programs won't necessarily work if savvy employees in those countries seek to evade them.

Then this week, amidst the claims that overseas bribery is a thing of the past, comes word that GSK is under investigation for corrupt practices in, of all places, Iraq.  This controversy involves "claims that the company hired government-employed physicians and pharmacists in Iraq as paid sales representatives to improperly boost use of its products."  (See here and here.)  The Wall Street Journal's report on the matter cites sources that claim GSK's actions may violate the U.S.'s Foreign Corrupt Practices Act (FCPA) and the U.K.'s Bribery Act.

All of this raises the question of why pharma continues to practice systematic corruption overseas when their improper behavior exposes them to prosecution and fines.  The downside risks have even intensified.  In 2010, for example, the Securities Exchange Commission established a new whistleblower program that offers incentives as high as 30% of any fines the agency collects for FCPA or securities violations.

The immediate answer is that the fines are too small and the penalties too superficial to serve as deterrents.  Pharma's partisans also claim that business practices in many overseas countries require bribery as a key factor and any companies that disdain it would lose most of their business to competitors.

This excuse about necessary corruption sounds plausible, but then one has to wonder why so many of these foreign bribery scandals involve pharma far more frequently than other industries.  If the culture and incentives in other countries mean that physicians, administrators and health officials demand gratuities, wouldn't the same hold for IT officers or purchasing agents that affect other industries?

This week Citigroup analysts published an analysis that may offer a clue about why pharma feels compelled to run crooked operations overseas.

The Citigroup analysts showed that a growing proportion of new drug product launches exhibit rates of sales penetration uptake that are well below pre-launch expectations.  Moreover, their assessment concluded that a poor launch usually indicates disappointing sales performance will continue in subsequent years.

For its study, the Citigroup team looked at 210 new-molecule compounds that were launched between 2003-2009 where equity analysts developed consensus forecasts prior to launch.  They found that "over 2/3 of drugs failed to meet analyst estimates."  Moreover, "average new drug sales 3 years post-approval is on the decline...[and] there is a strong correlation between launch performance in the first year and in subsequent years."

In other words, the launch year sales of new drug products are falling short of expectations and this is reflected in poorer sales during subsequent years.  The fact that a growing proportion of pharma's new products are failing to meet sales expectations may be what's tempting the industry to practice rampant bribery overseas.

Citigroup's findings beg the question of why more new drug products are generating disappointing sales.  A clue to answering that one comes from an unlikely source.  John LaMattina formerly headed R&D at Pfizer and since leaving that company he has been a forthright apologist for most of pharma's current practices.  As such he is an unlikely source to be quoted favorably here, but fair's fair and he makes a good point in his Forbes guest column this week (see here).

To illustrate what he considers a major change in pharma R&D during the past few decades, LaMattina discussed the recent fates of two compounds under development for cardiovascular disease: Novartis' LCZ696 for heart failure and GSK's darapladib for chronic coronary heart disease (CHD).  Interim results on the Novartis compound were so favorable that the monitoring board stopped the study early so that all patients could receive it.  Things worked out altogether differently for the GSK compound.  Results from a large clinical trial that lasted more than three years showed darapladib offers no outcomes benefit to CHD patients beyond the standard therapies.

According to LaMattina, although results for the two products differ enormously, in both cases the sponsors found it necessary to compare their respective compounds to current therapies rather than just placebo.  That is because comparison to available, usually generic alternatives is increasingly necessary if new products wish to obtain reimbursement for their higher, branded prices.  Many observers, especially advocates for a legitimately functional market, would consider this a good thing.  Payers have finally started assuming some responsibility for controlling health care costs, while elevating quality, instead of automatically paying the spiraling costs for every new product and passing those costs onto consumers/taxpayers.

LaMattina made the point that studies using active comparators (the so-called standards of care) instead of placebos are usually longer and more expensive.  That tends to be true, but the other shoe he neglected to drop is that in many if not most cases, the new compounds offer only marginal benefits over the older, cheaper alternatives.  As a result, when the FDA and its counterpart agencies elsewhere approve the new products, their sales during launch year and afterward appear far more modest than what their sponsors and the analysts predicted.

So a discernible picture begins to emerge.  Payers will no longer pay rising prices for marginally improved new products and pharmas must now justify those higher prices by demonstrating substantially greater benefits.  That means new drug development requires more time and cost to make the case for improved cost-benefit and, more often than not, the effort fails.  As a result the sales revenues for new drugs suffer both initially and over time.  Then in their insatiable demand to maintain a profitability that exceeded all other industries over the past thirty years, pharmas have turned to the emerging countries as their golden goose.  There local conditions and the inexorable greed of pharma companies combine to produce a way of doing business that is intrinsically corrupt.

Once again, a progression first attributed to Steve Jobs and previously cited here applies to pharma.  When a company and its industry are growing and producing products of value that its customers want to buy, then their scientists, engineers and other R&D people drive the business.  Once the innovation and the value of new products decline and demand slackens, then marketing and sales drive things.  That works for a time until it no longer remains possible to continue selling old wine in new bottles.  Then finance drives everything, catering to Wall Street with cost cutting, layoffs, mergers, divestitures, and arithmetic sleights of hand.  That also works for a while, until it no longer does.  In the final stage, some businesses resort to cheating, bribery or other underhanded methods.

Pharma's operations are most decidedly under the management of their finance departments.  Whether or not they have progressed to the last stage remains to be seen.

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