Some big Pharmas step in duck sauce

Over the past several weeks GlaxoSmithKline (GSK) has contended with a major scandal at its national affiliate in China.  Chinese Justice officials obtained testimony from numerous GSK employees, including some managers, that the company regularly paid bribes to physicians, hospital administrators and government workers in return for preferential prescribing and use of the company's drugs.  The revelations included the fact that GSK used travel agencies in China to launder these bribery payments, for which the company maintained a $5 million slush fund.

More recently the probes by Chinese authorities have been extended to include other pharma companies, specifically, Novartis, Sanofi and Eli Lilly.  Last week Chinese officials were quoted about imposing "astronomical" fines on GSK (see here and here).  Meanwhile Justice officials in the US and the UK are considering going after these companies for violating their respective laws against corrupt foreign practices. 

As this scandal represents something beyond pharma's usual violations involving off-label marketing, ghost-written journal articles and lavish payouts to investigators and speakers, some reflections are in order. 

First, it seems almost doubtless that fiduciary corporate officers at the various company headquarters knew about what was going on.  Public relations statements from some of the implicated companies claimed that if there were any improprieties, they were entirely the work of rogue employees in China.  That appears most unlikely.  Given the fact that corporate finance offices set the ground rules and implement many tactics for all of pharma's operations these days, it strains belief that a local affiliate could have evaded financial controls and hidden multi-million dollar slush funds for several years.  

That recognition then raises the central question of what the hell Finance was thinking in deciding to wink at a massive bribery operation?

Most likely Finance made a typical, "pragmatic" decision that since corruption throughout China's health care system runs rampant, establishing a significant place in the Chinese pharmaceutical market requires going along with the standard practices.  While that was the likely thought process, it reveals why Finance exerts such a pernicious influence over the pharmaceutical industry. 

The mindset of Finance consists of abstracting any reality into an axiomatic rule or process.  They are especially delighted if they can express those rules in the forms of mathematical formulas or ratios.  Change and process are handled by what physicists call an approach of "comparative statics."  In other words, a formula holds until things change, at which time the analysts need to develop another formula for directing the action.

This is essentially an ahistorical cognitive framework.  The formulas and ratios rarely reflect the shakiness of some assumptions on which they're based.  Rarely can they take into account the nuances of situations, the pace at which things are changing or, especially, the underlying social and political realities affecting those assumptions.  Moreover, the assumptions generalize past realities and are abstracted into discreet designations that assume their applicability to current realities.

That means while health care in China has been a corrupt cesspool, Finance's go-along-to-get-along thinking failed to take into account that the government there was looking to pin a scandal on foreign-based, multinational pharmas because it would provide them with an internally less divisive means of shaking up their health care system. 

A more historically grounded, nuanced approach to doing business in China, one typically derided by Finance as "soft," would have counseled more caution and a slower annual pace of growth, instead of one predicated on fast growth through bribery.

The unfortunate result of this China scandal won't be the several billion dollars in fines that will be levied against some of the companies.  GSK already paid a $3 billion fine here last year that didn't derail the company.  The dollar amounts of fines in this case won't set them back very far. Instead the likely upshot will be that the companies elevate lawyers into the position of controlling all operations.

Nothing can be so stifling to innovation and destructive to productivity as putting lawyers in charge.  Both IBM and then Microsoft fell from their respective perches atop tech when antitrust proceedings against them in the US and Europe turned them into lawyer-ridden companies.  Pharma is already in a trough of innovation and if lawyers take control, the industry will become completely moribund.  Growth and innovation require considered risk taking and the core of corporate lawyers consists of eliminating risk.

One would think that the recent experiences with lawyers as CEOs at Pfizer and Merck, two of pharma's biggest and most prestigious companies, would alert savvy board members to the folly of putting such people in charge.  But boardrooms learn lessons badly, halfways or not at all, so while many of them understand that lawyers are a bad choice for CEO, they also think that lawyers overseeing mid-level operations "will keep us out of court."

They're probably correct if the courtrooms they have in mind are venues for criminal proceedings and civil liability actions.  On the other hand, lawyers have a high probability of leading pharmas on slow walks to courthouses that adjudicate bankruptcies and fire sales.  The gentlemen and ladies of the bar generally replace one set of problems with another. 

But why are the choices limited to soulless Finance and initiative-killing Legal Counsel?  R&D constitutes pharma's heart and soul, so one might reasonably ask why no one seems to suggest that the spirit and approach of clinical research should animate pharma's many mid-level operations.

Unfortunately the troubles of pharma R&D are what opened the door for dysfunctional leadership by departments such as Finance and Legal Counsel.  After all, if R&D were as productive now as it was during the 1990s and prior decades, discussion about the industry would sound very different and involve much less hand wringing.

Part of this research falloff stems from the typical ebb and flow of scientific progress.  But another part is due to the fact that the industry never organized the process and management of pharmaceutical research to deal with underperforming periods.  Until the past few years, R&D budgets increased every year and new products more than made up for revenue shortfalls created by patent expirations.  As a result pharma does a poorer job of industrial project management than other industries with long, product development periods.  If disappointing patient recruitment on a clinical trial, for example, delays the projected date for bringing a new product to market by six to twenty-four months, program managers typically respond by just developing a new timeline schedule.

The entire situation illustrates Steve Jobs' maxim that R&D drives innovative manufacturing industries that develop high value products demanded by consumers.  Once that productive innovation stalls, marketing and sales drive things until new bottles can no longer sell the same old wine.  Then Finance and Accounting put their autistic savant constraints on everything.  That also works for a time, until an industry's ability to attract capital becomes problematic.  Then a fourth stage takes over, one of misdirection and cheating.  Pharma's efforts to distract investors with emerging global markets, together with the current bribery scandal in China, clearly place the industry in stage four.  It remains for a reorganized R&D to advance pharma toward a newly innovative stage one.

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