George Pitcher: A bitter pill to swallow for a better world tomorrow

Giant pharmaceutical companies are under pressure from all sides to act in seemingly contradictory ways. A compromise can be found.

Poor GlaxoSmithKline (GSK) must be wondering why it bothers. Only recently, animal rights activists were threatening to divert their disruptive attentions from Huntingdon Life Sciences (HLS) to the pharmaceutical conglomerate, because it’s a major client of the beleaguered animal experimentation concern.

As if trouble at the research and development (R&D) end of its market were not enough, GSK now faces pressure at the consumer end from what might be called human rights activists. Oxfam last week launched its Cut The Cost campaign, which aims to force drugs companies such as GSK to loosen their patent-protection rights, which Oxfam claims are squeezing low-cost copies out of the market in the Third World.

I’d like to know how many of those lobbying for GSK to abandon its links with animal research are the self-same people who are demanding that the company does more to assist underprivileged people in the developing world, who are bedridden with major killers such as HIV/AIDS, respiratory tract infections and childhood diarrhoea.

Were GSK to give in to all the lobbyists’ demands, it might indeed save more lives in the Third World, but it would also make a lot less money and consequently find the development of new drugs was severely constrained. Not a strategy consistent with securing a long-term future for the company (or its board).

Visit GSK’s website and you read that the newly merged company “is committed to improving the quality of human life by enabling people to do more, feel better and live longer”. These are grand and rather pious claims. One might add that GSK is also, perhaps primarily, committed to the quality of its earnings, enabling its shareholders to do more, feel better and live longer. That, after all, was the point of the merger between Glaxo and SmithKline Beecham.

But the two motives – the communal and the commercial – are not incompatible. And this, I guess, would be Oxfam’s point. Its report last week warned that GSK risked doing severe damage “to its reputation if it does not do more to help poor people get access to affordable, life-saving medicines”. If reputation declines, so does the share-price and so do shareholders’ earnings. This is the kind of issue that companies such as GSK, watched carefully by their shareholders, need to manage correctly.

It’s not just about – or even mainly about – public relations. Institutional shareholders know that. I gather that representatives of eight City institutions met at investment management house Friends Ivory & Sime last week to consider best practice in this area.

I wrote a month ago that ethical investment policies don’t make much money, but that is not to say that ethics are not a consideration for shareholders. This is a tremendously complex area, in which it would be just as stupid for GSK to eschew all experimentation on animals, to drop all legal defence of its patents in the developing world and to donate wholesale treatments to the needy, as it would be to ignore Oxfam altogether. And it is for the likes of GSK and governments to find solutions, not for shareholders and lobby groups to dictate solutions to GSK.

Let me elaborate. Drugs patents are not there just to make their owners rich and to provide employment for lawyers and anti-trust regulators. They are there as part of the mechanics of the pharmaceuticals economy. R&D cycles are notoriously long and risky in the pharmaceuticals industry. Investments in R&D by companies such as GSK are highly speculative and the return on such capital is likely to be measured in decades. This is a fantastically long-term business cycle – there is nothing else like it in the world. Hence mergers such as GSK’s.

In order to make its business work, GSK has to have patents of sufficient strength, durability and length to make enough from developed drugs to pay for its investment in R&D. It’s as simple as that – no patents, no life-saving drugs.

That said, companies such as GSK have global responsibilities commensurate with their global powers. They are part of a western culture that, generally speaking, has an urgent interest in eradicating unnecessary disease from developing economies. It follows that a balance needs to be struck between the desire of GSK to defend its economic environment and the desire to serve a compassionate purpose.

But that is a balance to be struck by GSK and the governments of the territories in which it operates, not by GSK alone in a commercial environment. It is simply inequitable to demand that GSK sacrifices its competitive position in some markets, just because it is bigger than its rivals. It needs to maintain its size if it is to maintain its levels of investment.

A couple of years ago, I went on television to argue against wholesale write-off of Third World debt, precisely because in some brutal regimes it would serve to strengthen oppressors and further undermine the needy. A similar principle applies in the drugs industry.

Western governments can come up with incentives and tax-breaks for companies such as GSK to serve the best interests of the poor and needlessly diseased. But we cannot expect the GSKs of this world to do it on their own, without crippling the hand that cures us.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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