Pharmacanomics - the ethics and economics of drug development

It's fascinating how investor pressure has changed the behavior of pharmaceutical companies. They're not alone, of course, but we like to think of medical firms as being a bit more altruistic than most. I remember when I thought it was noble that a firm would go after "previously unmet medical needs." It wasn't until I talked to a pricing specialist at such a highly successful firm that I realized that's not nobility, that's a competitive advantage, and one which allows the company to price their goods as high as possible.

We saw this a few years ago, with the shortage of flu vaccines. Suddenly it was painfully obvious that very few companies made drugs that had such small profit margins.

We see it again today with news that fewer antibiotics are now in the pipeline. New antibiotics are harder to develop, and they aren't the blockbuster that investors are looking for.

"Drugs that treat chronic conditions such as heart disease, arthritis and diabetes must be taken for a lifetime. A good antibiotic can clear an infection in a week to 10 days. With the cost of developing new drugs ranging between $110 million and $800 million, cautious investors are putting their money into research that promises the biggest payout."

So what about the argument that companies need blockbusters, and they have to charge huge prices in order to better fund drug development? Most early-stage drug discovery takes place in universities and research institutions, not pharmaceutical firms. What's more, a study published earlier this year in the journal PLoS Medicine found that US pharmaceutical companies are spending twice as much on marketing as they are spending on the research and development of new drugs. While $57.5 billion was spent on drug promotion in 2004, only $31.5 billion dollars was spent on industrial research and development.

These same economics also prevent drug companies from sharing their product with sick people in developing countries. As an investor, I want the highest return for my money. As a citizen, I want drug companies to do the right thing for their consumers and society. Unfortunately, there are penalties for not giving me the highest return, but there are no penalties for not doing the right thing for society. Which has the greater pull?

Cityphilia

I found this article to be a fascinating (if rambling) study of how financial deregulation has contributed to deteriorating societal values. It's easy to fall into the habit of seeing each new scandal, each new corporate misfortune as an aberration, rather than seeing indications that we're overdue for reform and regulation in the banking sector.

Oh, wait! Maybe we can just cut rates again and drive up confidence, right? Right?

Why is Corporate Social Responsibility so hard?

35 years ago, Milton Friedman observed that Corporate Social Responsibility might ultimately pit corporate goals against social goals. "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” In his view, CSR creates impediments in the running of business and can make for confusion about the true goals of the firm. With growth in the complexity of business and concerns about sustainability, there may be conflict between the enhancement of a company’s long-term profitability and its contribution to the public good.

The situation is often exacerbated by the apparent lack of rewards in following a CSR strategy. For example, Wal*Mart is rewarded by the market for cutting costs; Costco, which offers better insurance and benefits to its workers, is penalized by the market for not cutting costs as well, and therefore not being as profitable as Wal*Mart.

I started reading Robert Reich's new book, "Supercapitalism," with the sole intention to get myself annoyed. I had read in an Economist article that he trashes the concept of CSR, saying that that companies getting involved in socially responsible behavior was nothing but a dangerous distraction. However, his argument is more complicated than that. He argues that companies who don’t embrace the principles of Corporate Social Responsibility are neither brutally insensitive nor ruthlessly greedy. “They’re doing what they’re supposed to do, according to the current rules of the game – giving their customers good deals and thereby maximizing the returns to their investors.” Just as games require rules to define fair play, the economy relies on government to set the economic ground rules. If government wanted to change the way Wal*Mart does business, it would change the current rules – making it easier for employees to unionize, to get health insurance and pensions, and to grant a living wage.

Reich's book, so far, is one of the best I've read in years. No one wants to hear that CSR is ineffective, and the wrong answer to the problem. Like providing evidence that microfinance doesn't work, it's not the kind of conversation that gets you popular at cocktail parties. He gives a clear account of how democracy and capitalism have become decoupled, and maybe were never really an item in the first place. Why should companies be thought of as exceptionally good citizens if they treat their workers well, if they adopt sustainable practices, if they don't actively destroy society with their supply chain? The very fact that we find these actions exceptional is indicative of the fact that the wheels have fallen off our capitalist system. What is needed is, instead of a feel-good band-aid, massive reform.

how to perform strategic planning for a non-profit

I received a few more questions in response to my last post on how to get started in strategic planning if you have limited experience. I have a few resources that I would recommend. This book is a facilitator's guide to conducting strategic planning. Several of the exercises I did with my organization's strategic planning team I took directly from this book. It has great exercises to help you come up with a concrete vision for your organization, for example.

This other book is really useful to help you figure out how to implement Balanced Scorecard in a non-profit environment. It's not just a fad, a newer way of doing strategic planning -- it's the only tool I've come across which really ties strategy to execution, and helps you come up with targets so you know where you're going, how to get there, and when you've accomplished your goal. The book focuses more on governments than non-profits, but it's still useful in figuring out how to apply a business-oriented strategic measurement system to an organization whose ultimate goal isn't to make a ton of money.

A friend suggested that I offer a jumpstart workshop to help get organizations off and running on these concepts. It's an interesting idea, and could be a lot of fun.

So the excruciatingly short version of what strategic planning for a non-profit looks like:

1. Figure out what business you're in.
2. Identify, as clearly as possible, what your future looks like. This one is harder than it looks. It requires talking to your members, understanding a couple scenarios about how the environment will change in the future, and determine how to change to help your members adapt to that new environment.
3. Break that vision into components, in much the same way that you'd break a project down into a work breakdown structure. In what areas do we need to improve in order to achieve our vision?
4. Determine strategies in each of those component areas. For example, if you have a group around improving how you work with volunteers, you may have a couple strategies to help you get there, like developing a volunteer lifecycle, and developing strategic competencies in the board.
5. Now it's starting to look more manageable. For each strategy, create projects to help you achieve the goal. Determine a target, or how you know you will have that strategy addressed. Targets don't need to be too detailed -- it's just how you ultimately know you hit the mark. So for our volunteer example, your target might be increasing your number of volunteers by three times, etc.
6. Throughout the process, communicate and iterate. Now you have more of a purpose for meetings, and folks should get more excited -- they can see that they're progressing towards a real, important goal, instead of just performing operational tasks.

Does that start to address the question? It's still a bit of a longer view, so it doesn't get into the details of how to perform each step. I think that's the book that I need to get started on one of these days. = )

Happy New Year!