16 Jun 2020 15:13 IST

Should global healthcare companies foot the bill for their innovations?

The Novo Nordisk competitiveness-compassion debate stresses the need for new business model

As the world is in the grip of a pandemic after a century’s gap, and healthcare companies are racing to discover a vaccine against Covid-19 or a medicine that will be effective in its treatment, people may be wondering who will pay for the medicine or vaccine, once it is available. A section of the population will be able to afford it, but what about the much larger number of people who may not be able to afford it on their own? Will the government or some other entity come forward to cover the true cost of innovation, or will the innovator be expected to foot the bill on compassionate grounds?

Such a ‘compassion vs. competitiveness’ dilemma had played out many a time in the past involving healthcare companies. Often, it has presented itself as a “patent rights vs. patient rights” debate, and sometimes in other variants. For instance, Danish pharmaceutical company, Novo Nordisk (Novo), found itself amidst such a debate in 2010, when it briefly stopped selling its drugs in Greece as the crisis-ridden government there ordered a 25 per cent cut in the prices of all medicines sold in the country.

A sustainability champion

Novo’s primary market was insulin, estimated to be a $15.4-billion market in 2010. The market for insulin had quadrupled between 2000 and 2010, and Novo was the leader with $7.1 billion in sales of insulin in 2010. The company faced tough competition from Eli Lilly and Sanofi-Aventis, with the trio making up a “hard-to-penetrate oligopoly” in the insulin market. Novo was one of the world’s top healthcare companies with global sales of €8.16 billion ($9.87 billion) in 2010, up from €6.86 billion ($8.3 billion) in 2009.

Novo had a reputation for being a champion for sustainability. Its values highlighted a commitment to the triple bottom-line philosophy. In the new millennium, Novo placed global health at the centre of its sustainability strategy.

Sustainable Pricing

Drug pricing has been a contentious issue between pharmaceutical companies and their critics. Research-based pharmaceutical companies such as Novo develop proprietary medicines that are novel, and obtain patent protection ranging from 15-20 years. They claimed that to bring a new drug into the market it took more than $800 million (new estimate in 2020 pegs it at $1 billion), and they had little time to recoup their expenses and earn profits.

Moreover, they argued that the drug development process takes time (more than 15 years) and is fraught with many risks. Many of the drugs being investigated do not make it to the market as they fail at different development stages. Activists scoff at the $800-million figure and argue that many drugs were discovered and developed with a significant investment of government and other public funds. They also harp on the ethics of keeping a medicine away from a patient who would die without treatment.

In the new millennium, Novo started supplying insulin to the 50 poorest countries designated by the United Nations at 20 per cent of the average price in North America, Europe, and Japan. The then CEO, Lars Rebien Sorensen, said that through its “sustainable pricing”, Novo did not earn any profits on its sales in poor countries and also ensured that the R&D costs for its drugs sold in poor countries were borne by consumers in the developed world.

Novo had often stated in its communications to investors that the company had been able to steadily increase prices of its insulin products, particularly in North America, which resulted in higher profit margins for these products. It was reported that by mid-2010, Novo had steadily raised the price of its insulin products for six consecutive quarters.

The Greek Tragedy

Europe was the second largest geographic segment for Novo, accounting for 34.34 per cent of its global sales in 2009. In Greece, Novo maintained drug prices that were among the lowest in Europe. The country generated annual sales of €48 million ($58 million) in 2009 for Novo.

In May 2010, the Greek government decreed a 25 per cent cut in the prices of all the medicines sold effective May 3. Facing a debt crisis since 2009, the country had implement several austerity measures. By the end of the month, Novo stopped selling some of its insulin products in Greece, which included the higher-priced ‘modern insulins’ and costly pen devices.

Novo contended that the price cut would result in a loss to its business, and lead to similar moves in other countries where the prices in Greece were taken as reference prices, and would result in serious financial consequences for the drugmaker. At the same time other European governments (including Germany, Italy and Spain) were also taking a hard look at high drug prices in a bid to tackle runaway budget deficits.

Novo attracted severe criticism from patients and NGOs as there were more than 50,000 people suffering from Type 1 diabetes in Greece at that time, who used the company’s insulin products for their survival. The Greek diabetes association called its decision a “brutal blackmail and a violation of corporate social responsibility”.

Novo responded to the criticism saying that the Greek government owed it $36 million in the form of unpaid bills, and Sorensen blamed the improper handling of Greece’s economy by its government for the crisis. Novo pointed out that it had stopped selling only its modern products like pen devices and patented insulin products in Greece. The company said that it continued to sell its other insulin product, Novolin biosynthetic human insulin. It also continued to provide another of its cheaper insulin products, Glucagen insulin, free of charge in Greece. Novo claimed that these products were sufficient for the survival of any person suffering from diabetes. Sorensen also said that the price cuts prevented the company from running a profitable business in Greece and, in the long term, could prevent Novo from providing and improving treatment for the people who most need it.

However, there was some respite for Novo. Pavlos Panayotacos a Greek economist whose 10-year-old daughter suffered from diabetes, said that while he understood a company’s need for making a profit, being in the healthcare industry, Novo could have acted in a more sensitive way during a economic crisis.

An uneasy truce

In July 2010, Novo resumed selling all its insulin products in Greece after the government issued a new price bulletin for 48 insulin products which became effective June 14. The new prices were 7-8 per cent lower than the average of the three lowest prices in Europe. But by that time, Novo’s image as a champion of sustainability was dented.

Nevertheless, Novo continued selling its insulin products at a subsidised price in 75 per cent of the least developed countries, and it took up a long-term target of making its cheaper insulin products available in 100 per cent of the least developed countries. The question before Sorensen and other members of the senior management team was, as a global healthcare company, how to strike the right balance between business and global health? Sorensen and his team were not the first healthcare industry professionals confronted with the compassion vs. competitiveness dilemma, nor will they be the last.

ANALYSIS

This case offers vital lessons on what could be the way forward for healthcare companies tackling global public health crises, and the role of other stakeholders. The situation faced by Novo is unique in the sense that it raises the issue of how to define the duties of companies in countries where a government has proved incapable or unwilling to perform its functions.

Healthcare is more than a business

People who did not support Novo’s decision to temporarily exit Greece may argue that:

  • The decision ran contrary to the social responsibility that Novo espoused. A responsible company which placed global health at the centre of its sustainability initiatives would not leave its patients to die or take them hostage in its negotiations with the government.
  • The company raised the price of its insulin products for six consecutive quarters. So, how could it still lose money with a 25 per cent price cut in a relatively small market?
  • The claims made by pharmaceutical companies about the cost of innovation and the risk of drug R&D are debatable.
  • Novo’s rivals Eli Lilly and Sanofi-Aventis did not follow suit and leave the market.
  • Healthcare companies have a more heightened social responsibility towards their customers than other companies as they are in the business of saving lives. In such a case, do the same rules that apply to other companies hold good for them? Moreover, by virtue of being a global healthcare company Novo might have some special obligations as it possessed unique competencies and comparative advantage over other parties in tackling health issues. The diabetes pandemic easily meets the criteria of a grave human catastrophe. Since diabetes overlaps with Novo’s core competencies and the company produced and distributed medicines for the disease, held patents for key medicines, held special knowledge concerning treatment regimes and future research in the field, it can be said to possess a unique rescue competency related to the diabetes, and thus had a moral obligation towards the patient.
  • Access to essential medicine is a human right. Novo is providing subsidised or free medicines to patients in the poorest countries, but it decided to exit the Greek market as it was not ready to accept a price cut. Is the value of life of a patient in Greece less than that of a patient in an underdeveloped or developing country?

Who will cover the cost of innovation?

Those who support Novo’s decision may argue:

  • Novo is in the business of selling medicines and, like any other business, cannot operate at a loss. The Greek government already owed the company $36 million in the form of unpaid bills. A 25 per cent price cut did not allow Novo to run a sustainable business in Greece. In the long term, if the company cannot maintain profitability, it will be unable to fund innovations and provide and improve treatment of the people who need it the most.
  • Selling at the new prices was not only uneconomic for Novo, but would likely lead to parallel trading and calls for reductions in other markets in Europe, jeopardising one-third of its global sales.

· It could cause a breakdown of Novo’s business model which relied on cross-subsidising its products sold in developing countries from the higher prices in developed countries, and hinges on these developed countries’ willingness to subsidise developing countries.

  • It made sense for Novo to exit the market as Greece generated annual sales of only €48 million in 2009 compared to its global sales of €6.86 billion for that year. Moreover, the prevailing prices for Novo’s medicines in Greece were already among the lowest in Europe.
  • Novo is engaged in discovering new medicines which are intended to benefit patients as well as society. The price of a new medicine should not only reflect the clinical benefit as well as the societal value of the therapeutic innovation, but also takes into account the cost of innovation. New drug R&D is a risky business and if pharmaceutical companies cannot recoup their investments in R&D, the business of pharmaceutical innovation will not be sustainable. The innovation model that led to new medicines being discovered would be eroded and the possibility of future better treatment options will elude the millions of people suffering from diabetes and other pandemics.

· Greece’s problems are of its own making. Why should a company suffer for ineffective handling of an economy by the government? Moreover, price controls seldom work; they distort the market, create delays and lead to limited access. This is not how prices are determined and it only seems fair that Novo have the right to object to a unilateral decision regarding the price of its products.

Unfair criticism

Far from the criticism it was facing, Novo had not left its patients to die. It had only stopped selling some of its more costly products and pen devices. The other products were available and Glucagen was provided free of cost to the patients. Moreover, the rivals of Novo were also present in the market to cater to the demand.

While healthcare companies should be more responsible, they are for-profit companies and not charities. Pharmaceutical companies are just a sub-system of the healthcare system which falls under the category of quasi-public goods. Government has a responsibility in ensuring public healthcare services.

If healthcare is available to everyone, more people will be able to receive treatment for illness and vaccinations preventing illness. This leads to a healthier population and, in turn, more productivity. Moreover, Novo did not cause the diabetes pandemic, nor can it be held accountable for the inability of the Greece government to address the pressing healthcare demands of its citizen. It is absurd and counter-productive to penalise pharmaceutical companies (who make the care possible).

Crisis management

Faced with social criticism, Novo had to respond quickly and decisively to manage the crisis. Its senior management fell back on its governance mechanisms to justify its decision. CEO Sorensen defended Novo’s decision to withdraw from the country, reconciling it with Novo’s Triple Bottom Line philosophy. He argued that the price cuts could threaten Novo’s ability to realise the right to health globally. To ensure the greatest level of health for the greatest number of patients and to cater to the needs of future patients all around the world, the company had to remain financially sustainable. Acceding to the demands of the Greek government could cause a breakdown of its business model and could destabilise the company.

Novo further contended that it was the state that should take responsibility for the consequences of its inability to function properly. Nevertheless, it moved quickly to ensure that people with diabetes in Greece had continued access to medicine. The company provided insulin treatment and free Glucagen, further highlighting its commitment to the right to health, while trying to balance the need for financial sustainability.

When faced with situations like the ones faced by Novo in Greece, where financial interests conflict with responsibilities, companies should first check whether it is absolutely necessary to resort to the extreme step. Once the decision is made, companies should enter into a proper dialogue with all the stakeholders to resolve the dispute. Together they can negotiate for the next best solution which is acceptable to all the parties.

For instance, in the case, we saw that after negotiations, Novo accepted the new prices, as the government made some concessions. In the past, the management of companies worked overtime to insulate their business from government intrusion. However, today they will have to engage with the government, understand their concerns, and play their part in resolving these problems. So, rather than wasting valuable resources and energy in trying to shield themselves from ongoing reforms in different countries, pharmaceutical companies should work with the government to make the healthcare system more efficient and affordable.

When they cannot find an appropriate solution despite all the efforts, companies can educate the various stakeholders regarding the reasons for the steps they had to take.

Balancing act

The dilemma of balancing competitiveness with compassion is not going to die down any time soon. The situation in Greece presented an intersection of corporate social responsibility, public policy, and international law, and involves multiple stakeholders. Similarly, issues such as what role global healthcare companies should assume in developing countries and how new sustainable business models should be developed are multidimensional in nature, involving many stakeholders. Novo has taken up ambitious challenges to tackle diabetes globally, but its success hinges on the willingness of others stakeholders to play their respective parts.

A look at the salient stakeholders and what they want shows that most of them demand major concessions from pharmaceutical firms. For instance, patients and doctors essentially want affordable/free medicines. Government wants patients to have access to the medicine at little or no cost to itself. A large majority of the patients (particularly in developing countries) could not pay and the government were also not ready to pay, but were pressuring pharmaceutical companies to pay for the treatment of the patients. NGOs, activists and the general public want the pharmaceutical companies and the government to take responsibility, but often end up demonising the pharmaceutical firms as they feel that the companies are rich, they control the medicines, and are in a position to tackle the problem.

On the other hand, the company’s shareholders want a high return on their investments. Reconciling these differences is not easy, and requires a tough balancing act. Companies like Novo will have to explore ways to meet these demands without breaking its fundamental way of doing business, while tackling public healthcare crises, including chronic ailments like diabetes or that created by a contagion.

(Debapratim Purkayastha is a Professor at ICFAI Business School Hyderabad, and Director of IBS Case Research Centre.)

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