Small Molecule / Compliance Management

Pharma's Damaged Reputation

Can the industry fix its image problem?

By Meagan Parrish, Senior Editor

Screen Shot 2019 03 18 at 4.10.18 PM

Say the words “Big Pharma” outside of the industry and images of life-saving drug discoveries rarely come to mind. Instead, the public perception of pharma is often shaped by issues like drug costs, prescription drug abuse, the supposed dangers of vaccines or corporate greed. 

One would think that when you’re in the business of saving lives, it would be easy to stay in the public’s good graces. But despite the good intentions of most pharma companies, the actions of a few bad actors continue to cast a cloud of mistrust over the entire industry. And pharma’s image in the public eye has suffered.

In 2018, Gallup asked Americans to rate their perception of over a dozen sectors in the U.S. — out of all the business industries, pharma came in last. Reputation Institute (RI), a consulting firm which devotes a yearly index to measuring the reputational standing of major pharma companies, also found that between 2017 and 2018 the industry’s reputation declined by 3.7 percent — its first drop in years. 

While changing public perception may seem like an intangible goal that’s out of the hands of everyday companies, it should nonetheless be top of mind for pharma firms looking to keep their businesses healthy.  

What can pharma companies do to win the public over? Here’s a look at why reputation matters and how companies can make sure the value of their work doesn’t get tarnished by the industry’s bad image. 

Why Pharma Should Care

It only takes one misstep or scandal to sink a company’s reputation, which can rattle shareholder confidence, hamper employee recruitment and cause a company to lose credibility. In the most extreme cases, unsavory behavior can cost pharma companies big. 

Mylan, for example, was at the center of a hailstorm of criticism after it raised the price of EpiPens, a life-saving allergy treatment, by about 400 percent between 2010 and 2016. As public outrage over the price hikes hit a fevered pitch in 2016, Mylan’s market value took a massive dive — between August and November the company’s stock dropped from about $49 to $34. 

In the midst of the public scrutiny, the Department of Justice also discovered that Mylan had been misclassifying EpiPens as a generic to lower its Medicaid rebate payments — which prompted a lawsuit and a $465 million settlement with the government in 2017. As part of the settlement, Mylan had to pay the higher rebates, which, along with generics entering the market, hit EpiPen sales revenue hard. In the third quarter of 2017 alone, analysts estimated that EpiPen revenue fell by $184 million — down 57 percent from the previous year.

On the flip side, pharma companies who are at the top of their reputational game have shown time and again that good governance can be a key driver of profitability and success. Analysts at RI, which measures reputation across numerous industries, have continued to find a strong link between reputation and a company’s bottom line.

“People increasingly care about intangibles just as much as they care about products,” says Meghan Burke, a research analyst with RI. “Markets are saturated these days. And if companies are not differentiating and putting value on reputation, they will lose out to competitors quickly.” 

Screen Shot 2019 03 18 at 4.10.32 PMReputation vs. Brand 

We all know when a company has a bad rep — or when just the mention of its name invokes suspicion and mistrust. These days, one of the most conspicuous examples of a company name becoming damaged goods is Monsanto, which has been the target of public scorn for years for producing genetically modified seeds and a potentially cancer-causing weed-killer. This toxic legacy is why Bayer dropped the Monsanto moniker from its products after merging with the mega-chemical company last year. However, analysts continue to speculate that the negative connotations associated with Monsanto could haunt and possibly hurt Bayer for years. 

But there’s more to reputation than just the brand association. According to Dr. Nir Kossovsky, CEO of Steel City Re, an insurance company that specializes in reputational risk, the pharma industry has grown increasingly interested in the issue of reputation in recent years — but companies often confuse it with marketing and public relations. 

“Brand is the promise made by a firm to its stakeholders,” Kossovsky explains. “Reputation is how that promise is received and interpreted to create informed stakeholders expectations.”

Kossovsky says the trouble starts when there’s a mismatch between the expectations of stakeholders — which includes customers, board members and regulators — and what the company is delivering.

For pharma, Kossovsky points to six unique reputational issues that can vex a company’s good name: ethics, innovation, safety, sustainability, quality and security. If a company isn’t living up to their promises in these areas, its reputation will take a hit, which could anger stakeholders and lead to economic, and importantly for pharma, political losses. 

The Challenges for Pharma 

When gauging reputation in pharma, RI takes a slightly more emotional approach by conducting a yearly survey that asks respondents four key questions about the industry’s top 22 companies: Do they have a good feeling about that company? Do they admire the company? Do they trust the company? And do they find the company reputable? 

To ensure that the respondents are representative of the “informed general public,” RI tracks down about 2,600 people in the U.S. who say they are at least somewhat familiar with the industry. After starting with its four key questions, RI then drills down into more specific perceptions of the company, asking respondents about how they view each company’s governance, leadership and general performance. 

The results are used to rank the industry’s top-performing companies for reputation, while also offering key insights into how the public defines reputation for pharma.

Between 2017 and 2018, RI found that there was a significant erosion of trust in pharma: In 2017, 48 percent of respondents reported that they gave pharma “the benefit of the doubt” — last year, that number fell to 35 percent. Over half (54 percent) of those surveyed in 2017 also said that they trust pharma “to do the right thing” — in 2018 the rate plummeted to 40 percent.* 

According to Burke, the 2018 data showed that pharma has a major “depth of understanding” issue. 

There’s a threshold of familiarity at around 30 percent or above, that indicates as to whether a company is relatively well known. In pharma, the average is only 20 percent,” Burke explains. “And we notice that when familiarity rises, so does reputation.” 

RI has also found that the drug pricing debate has had a negative impact on the industry. 

“With pharma, the highest impact on reputation is the question of whether or not companies ‘offer products and services that are a good value for the money,’” Burke says. “For this question, pharma scores very low…and has lost five points on this issue since 2017.”

According to Kossovsky, part of the problem in pharma is that companies often rely too heavily on regulatory compliance to gain public trust.

“As long as pharma companies view their regulatory arm as their biggest stakeholder, that is where the bulk of their efforts are being placed,” he says. “That may help explain why the industry has not been very communicative and why it has not developed better strategies around ethics and innovation.” 

Screen Shot 2019 03 18 at 4.11.30 PMTransforming Reputation

What can drugmakers do to form a solid strategy for boosting reputation? 

Inside the Company
When looking at the companies who get the highest scores in RI’s annual “RepTrak” survey, several key patterns emerge. At these companies, policies focused on good governance, robust sustainability practices, connecting profits to purpose, strong ethics and celebrating the company brand have helped weave a positive public image. 

For Celgene, which got the third highest score in RI’s 2018 RepTrak survey, one of the biggest factors contributing to the company’s good standing is its focus on patients to drive “bold pursuits in sciences as well as the creation of transformational medicines.” 

“Celgene has reinvested a major percentage of its revenue back into R&D each year, with an average of more than 38 percent being reinvested over the last five years — one of the highest rates of any company in any industry around the world,” says Zeba Khan, the company’s vice president of Corporate Responsibility. 

Celgene has also positioned itself as a top company for employees. In addition to focusing on diversity and inclusion with its hiring practices, Khan points out that the company promotes benefits like its flexible work arrangements, increased paid parental leave, and paid caregiver leave, among others — which are all efforts that helped land the company on Forbes’ Top 10 List of the World’s Best Employers in 2018. 

Sustainability has also been a top priority for Celgene and the company has announced four measurable environmental goals to hold itself publicly accountable. Khan says that Celgene has already hit two of its 2020 targets: purchasing renewable electricity and waste reduction. 

“Reaching these goals is good for the environment, and it helps us improve our bottom line,” Khan says. 

The Global Level
What’s good for the world can also be good for business — which is a fact that many top drugmakers have leveraged wisely. It’s also a key point underscored by Access to Medicine Foundation, a nonprofit devoted to motivating Big Pharma to tackle global healthcare challenges.

Access to Medicine Foundation publishes several indexes that compare which major pharma companies are more successful at providing wider access to medicines and vaccines in lower income countries, and at innovating new treatments, including drugs to fight antibiotic-resistant super bugs. The indexes are widely reported on in major media — and by changing policies to move up in the rankings, Access to Medicine Foundation says that companies can use the indexes to improve their reputation. The organization also notes that pharma companies can use these efforts to better manage the risks and opportunities of entering emerging markets

“It’s a way for companies to reach more patients with the understanding that the traditional business model of ‘high margin, low volume’ may not be the best way to succeed in emerging economies,” explains Damiano de Felice, Access to Medicine Foundation’s director of strategy. “High volume might be better in the long run.”

According to de Felice, the top drugmakers on the indexes are companies that discuss global health issues on the board level, and systematically work to improve the affordability and accessibility of their products for people living in lower-income countries. These companies also understand that despite the value of their products, they still have to sell their image to the public. 

“The general perception is that pharma creates just a win for the companies and not society,” de Felice says. “We see that many investors and stakeholders now frame the conversation around the ‘license to operate’ … and the importance of pharma maintaining that societal contract so that their business is a win-win for both.”

Casting a Safety Net

Kossovsky’s distinction between branding (the promises made to stakeholders) and reputation (how those promises are interpreted) is critical when it comes to knowing how to manage reputational risk. One option companies can explore is getting insurance to protect the business from reputational damage. Kossovsky’s company, Steel City Re, provides a comprehensive risk management solution that includes reputational insurance.

In pharma, Kossovsky says that this kind of insurance can help cover a company from a variety of potentially damaging situations such as an ethical breach (if a rogue employee releases a drug that’s not safe); innovating drugs that are shown to have bad side effects later; cybersecurity problems such as being hacked; supply chain dilemmas; or a failure in the company’s governance to oversee and predict a crisis. 

Insurance options from firms like Steel City Re can shield companies in two ways. First, it helps protect short-term cash flows. 

“One part of our insurance is the instrumental value, which tells creditors that the short-term cash flow is protected because there is contingent capital. This improves bond ratings and risk profiles, which raises your earnings multiple,” he explains. 

Secondly, insurance can create “expressive value” for the company.  

“The expressive side tells about the company’s governance, which indicates that a firm is in control of the big six risk areas and is more likely to behave in a way stakeholders expect. It says that the products are safer and that regulators can manage your company with a softer touch,” Kossovsky explains. “It indicates that you can trust the company because you can trust the leadership.” 

Kossovsky says that by just going through the process of getting reputational insurance, a company can better pinpoint where it’s most at risk. 

“A company needs to understand what drives its reputation and what that value is,” he says. “Then if they make decisions to mitigate those risks, they’ll get a return on investment for doing so.” 

The Key Takeaway

According to Kossovsky, what is relatively unique about the pharma industry is the prevalence of “vicarious risk.” 

“This is when the bad behavior of one firm tarnishes many others,” he says. 

In pharma, the image of the industry is too frequently being controlled by the media. In an age when information is dispersed at a breathtaking clip, social media discussions dominate the public consciousness and people love to be outraged, the odds of swaying opinion can seem insurmountable. 

But challenges always have a way of presenting opportunities. For pharma, that means getting in the conversation — using social platforms and the media to tell your company’s story and controlling the narrative around your brand. And if one company succeeds, it can help buoy the entire industry, and may even transform the discourse around the industry’s toughest issues. If, for example, the general public better understood the value of drug research, they would be more likely to accept pricing. 

“If the stakeholder community expects companies to produce new products that have not been built before, and that do a better job of treating disease more effectively for a larger population, they will be more tolerant of the cost of innovation,” Kossovsky argues. 

And as many of the industry’s top firms have shown, there are ways to break through the noise and effectively tell your company’s story. 

“Communicate your accomplishments, but also the challenges you’ve faced and how you are working to solve them,” Khan says. “This is key to gaining trust.”

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