Part II: Issues for the Pharmaceutical Industry

Liana Bernstein
Matthew Pilsbury
October 9, 2016
Introduction
There are a number of issues that a company in the pharmaceutical industry faces. Those issues
include but are not limited to product safety and quality, corrupt practices, access to healthcare,
human capital and development, toxic emissions and waste, business ethics and fraud, corporate
governance, and weakening patent protection. Out of those eight issues, the two most important
are corrupt practices and business ethics and fraud.
Significant social and environmental issues
1. Product Safety & Quality
Firms face risks related to unethical or illegal marketing tactics. This risk is exacerbated by
the fact that these firms also face increased scrutiny on their products due to their regulatory
nature. Firms in this industry caught participating in marketing misconduct are most often
charged with manipulating prices and minimizing associated risks. This misconduct can lead
to large fines, recalls, and the compromise of consumers safety
(Industry Report, 2015).
Product Safety and Quality affects companies in the industry and stakeholders by:
- Companies will lose revenue and market share after participating in marketing
misconduct. Their reputation will suffer.
- Companies face costs to handle marketing misconduct (legal, communications,
operations)
- Companies may face increased government regulation or the imposition of fines.
- Public safety and health may be endangered in cases of serious marketing misconduct.
2. Corrupt Practices
Firms in this industry face the risk of perceived unethical business practices. Approximately
35% of major pharmaceutical companies have been accused of involvement in corrupt
business

practices (Industry Trend, 2015). Firms in this industry accused of participating in

corrupt practices are most often charged with kickbacks, illegal payments, bribery, and
unethical marketing. Corrupt practices lead to unethical decision making and the
misallocation
of resources (Industry Report, 2015).
Corruption and Instability affects companies in the industry and stakeholders by:
- Regulatory bodies may impose regulations, fines, or audits.
- Companies may face reputational damage.
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Companies may potentially lose market access (Especially in certain markets such as
China).

3. Access to Healthcare (ATH)

Over 2 billion people worldwide, primary in lesser developed nations, do not have access to
adequate healthcare. Approximately 23% of major pharmaceutical companies have pricing
policies that take into account the purchasing power parity of foreign nations. (Industry
Report, 2015).
Access to healthcare affects companies in the industry and stakeholders by:
- Global public health can be improved if firms act to increase access to pharmaceuticals.
- Governments and companies may work together to serve a market through incentives
(subsidies, tax breaks) or direct help (labor and logistics).
- Companies can take advantage of underserved pharmaceutical markets using a
low-margin, high-volume approach.
- Companies have the opportunity to infiltrate developing markets to gain, with the goal of
retaining, market share.
4. Human Capital Development
Firm ownership in the pharmaceutical industry is relatively concentrated, increasingly so. As
a result, approximately 40% of major pharmaceutical companies experience merger or
acquisition activities. The reorganization that occurs during mergers and acquisitions often
lead to a decrease in maximum potential productivity and a loss in human capital efficiency
(Industry, 2015).
Human capital development affects companies in the industry and stakeholders by
- Companies may experience decreased efficiency during and after mergers and
acquisitions.
- Companies may experience increased employee turnover during and after mergers and
acquisitions.
5. Toxic Emissions & Waste
Pharmaceutical supply chains are the most at risk to environmental hazards, yet the industry
still has little disclosure about supply chain environmental risks. Pharmaceutical companies
often have a problem with air ventilation during manufacturing, exposing chemicals and
other toxins into the air. Some companies have taken it upon themselves to come up with
more environment friendly ways to dispose of their waste such as AstraZeneca and Merck.
(Industry Report, 2015)
Toxic emissions and waste affects companies in the industry and stakeholders by

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Customers are not going to want to buy these companies drugs if the manufacturing of
the drugs is adding to the pollution in the environment, specifically the air, that they are
being exposed to.

6. Business Ethics & Fraud

Business ethics and fraud in the pharmaceutical industry can qualify as anything from
fraudulent pricing, improper billing of federal and state-run healthcare programs such as
Medicare or Medicaid. There are several different levels of fraud, such as pharmaceutical
manufacturer noncompliance, drug diversion, retail pharmacy and prescriber systems and
flawed reimbursement schemes. In the past, pharmaceutical companies have been charged of
charging the government too much for their government health programs by not giving them
the cheapest (in price) drugs they have. They have also been charged for inflating average
wholesale prices, and turning in false data to regulation agencies for approval. In 2009 the
Department of Health and Human Services and the Department of Justice created HEAT,
which stands for health care fraud prevention and enforcement action team. HEAT
essentially ensures that pharmaceutical companies are being ethical. (Industry Report, 2015)

Business ethics and fraud affects companies in the industry and stakeholders by:
- Healthcare fraud can lead to a loss of license to do business in the state and/or federal
markets.
- Customers do not want to shop from an unethical business. They also might not be able
to afford the products due to price inflation from the company.
7. Corporate Governance
Corporate governance in the pharmaceutical industry refers mainly to accounting, but also
encompasses poor pay practices, compromised board structures and ownership structures.
About 34% of U.S. pharmaceutical companies are below average, and 9% are worst in class
in regards to accounting in comparison to global pharmaceutical companies. Only 7% of U.S.
pharmaceutical companies are below average, and 5% are worst in class in regards to
ownership structures. 30% of U.S. pharmaceutical companies are below average in pay, but
only 2% are in the worst class. 23% of U.S. pharmaceutical companies are below average in
board, but only 1% is in the worst class in comparison to global companies. (Industry Report,
2015)
Corporate Governance directly affects companies in the industry and stakeholders because it
is the set of rules that directly affect stakeholders, as it involves balancing the interest of all
the company's stakeholders. If a company does a bad job of this, they inevitably will upset
one of their stakeholders, risking the loss of their support.
8. Weakening Patent Protection
There is an increase in patents being challenged by generic manufacturers because there is an
increase in demand for generics from healthcare providers that are tight on money. There is
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also an increase in patents being challenged by developing countries because they are
struggling to afford the prices of brand name products. Some pharmaceutical companies are
combating the loss of patent by making their products more available to less developed
countries. (Baines, 2010)
Weakening patent protection affects companies in the industry and stakeholders by:
- More people want to buy generic brand products because they are less expensive, so
companies are either going to have to lower their prices or make some sort of deal with
generic brands.
2 Most Important Issues
1. The issue of Corrupt Practices is important to address. Over one-third of major
pharmaceutical firms have been accused of involvement in corrupt business practices.
The allegation can result in fines, increased regulation, audits, and potentially the loss of
operating licenses. Moreover, regardless of whether unethical business practices are only
perceived or real, a firm accused of corrupt practices reputation will suffer. In the status
quo, the average major pharmaceutical company has moderately high risk exposure and
only moderate risk management (See Figure 1). It is imperative for companies to address
corrupt practices through the implementation of third party audits and extensive ethics
codes, among other measures.
2. Business Ethics and Fraud is an important issue to the pharmaceutical industry because
there is a lot at stake for companies that violate moral ethics and partake in fraud such as
a loss of license to sell in the state or federal market. Also the reputation of the company
is also at stake.
Conclusion
The pharmaceutical industry is extremely complex - its extensive regulation and competitive
rivalry make the industry difficult to act in a manner that is socially responsible. When firms in
the industry address the issues of corporate social responsibility, as they must, it is imperative
they focus first upon mitigating corrupt practices and bolstering their business ethics. All of these
issues - product safety and quality, corrupt practices, access to healthcare, human capital and
development, toxic emissions and waste, business ethics and fraud, corporate governance, and
weakening patent protection - are extremely pertinent to any firm operating in the
pharmaceutical industry and must be addressed if a firm wishes to be successful and socially
responsible.
References
Baines, Donald A. Problems Facing Pharmaceutical Industry and Approaches to Ensure Long
Term Viability. (Web.) 2010. Retrieved 9 October 2016.

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Industry Report: Pharmaceuticals (Publication). (2015). MSCI. Retrieved January 26, 2016.
Industry Trend Analysis - Pharmaceuticals & Healthcare Global Q415 Round-Up (Publication).
(2015, December 18). Retrieved February 3, 2016, from BMI Research website.
Exhibits
Figure 1 - Major Pharmaceutical Company Performance on Corrupt Practices (Industry Report,
2015)

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