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In Defense of Pharmaceutical Industry: Ethics, Pricing, and Distributive Justice Sachin Menon, Yashasvi Giridhar Faculty of Aerospace Engineering, Delft University of Technology, Netherlands

Abstract This article explores the business dynamics of international pharmaceutical companies operating within a globalized free-trade market from an ethical standpoint. We review the consequentialist moral philosophies that shape the private drug industry. This is contrasted with a growing consumer frustration based on a social intuitionist model that argues for cheaper—even free-of-cost—drugs as a human right. Comparisons are drawn across different political and economic systems across the world where a common strain of growing resentment is observed against a perceived greedy and heartless drug industry. We examine the rationale for this case of distributive justice violations stemming from a seemingly unfair system of drug pricing and a lack of government intervention. Several mechanisms proposed to address these issues are analyzed on merits of ethical justifications and pragmatic efficacy. Case studies related to the effects of government intervention, effective implementation of intellectual property rights and an upcoming generic drug industry are looked upon. Finally, we argue in defense of pharmaceutical industry’s freedom to make business decisions pertaining to drug pricing; as a means to sustain growth, innovation and achieve collective human prosperity through an ethical commitment towards protection of private enterprise. Keywords: Drug pricing, business ethics, medical ethics, stakeholder theory 1. Introduction Medicine began as a religious and mostly philosophical exercise, unique to each region and tribe (Herodotus) (Horstmanshoff, Stol, & Van Tilburg, 2004) (Breslaw, 2012) (Harper, 2005). Over time, our growing scientific curiosity and technological development led to real abilities to cure illness and disease. As societies developed these technologies, so did the branch of medical ethics. One of the earliest element of this ethical thought is found in the texts of Hippocratic Corpus, later known as the Hippocratic oath. Its ideas of beneficence, non-maleficence, and medical confidentiality are now common to every practice of healthcare. With the establishment of this philosophy which grew over time a relationship between the physician and the patient was born. Since this relationship was based on a mutual trust of each other it was not difficult to imagine this bond in social and communal terms. The modern medicine man, however, is different. He does not search for nor create the drug that relieves pain; at least not the same man. Physicians today diagnose and administer the drugs needed to cure ailments, whereas the task of creating those drugs has shifted to a new entity— the drug companies. Though rapid advances in science and technology created a need for these two different roles, it seems that our social psyche has not quite accepted this change yet (Chang, 2006) (Huebner, 2014). We continue to view both the physicians and pharmaceutical companies through the same lens and apply same ethical standards. The drug companies, however, view themselves as a business with all its, relatively alien, ethics. This perception problem has come to characterize the fissures between the public expectation and the actual conduct of these companies. Nowhere are these differences more visible than when it comes to the ever-rising drug prices (Blendon, Brodie, Benson, Altman, & Buhr, 2006) (Levy, 2017). The common public sentiment resents the Submitted in partial fulfilment for the course of Ethics and Engineering for Aerospace Engineering(WM0324LR)

treatment of human life as a commodity for profit-seeking business ventures. On the other hand, drug companies seek to minimize the damage to their public image by educating masses of the necessities of rising costs due to their expensive research budgets for new drug development. Meanwhile, nations either cater to populist sentiments and set up collective bargaining measures to bring down prices (e.g. Germany, France) or create tax incentives for researching new drugs (e.g. USA). Though somewhat effective, these measures bring in to question the ethical implications of both the demands and the solutions implemented to tackle these problems. We ask this question: What is the just price for a drug and who decides it? The answer to this question, if any, is likely very complex. For the most part, literature indicates a preference of researchers to view this issue through the lens of the patients dependent on drug manufacturers for their prescription drugs. With an application of deontological reasoning and even consequentialist ideas, these works make a case for exercising control over drug prices using a quasi-public mandate (Banerjee, 2006) (Spinello, 1992) (Angell, 2004) (Brennan & Baines, 2006) (Wicks, 1995). In this article, a contrarian view is presented where we share the perspective of these businesses and the ethics governing their pricing policies, or lack thereof. It is important to note that in this context, the authors make an assumption that businesses conduct themselves ethically and in keeping with good-faith. In keeping with this viewpoint, we will begin with an examination of the asymmetry in the businessconsumer relationship from a moral psychology perspective. This involves reviewing the ‘perceived’ obligations of corporations towards societies and people sentiments towards commodification of humanlife. This is will serve as a foundation for the analyses of competing ideas of Kantian and consequentialist ethics, natural law, principles of corporate ethics, and property ownership rights. Finally, we move away from the idealistic discussions of ethics and consider real-world implications of public policy driven by these ethical considerations. Towards this end, we look at highly developed societies (the USA and Europe), their attempts at conflict resolution and their ethical implications. A similar analysis is then conducted for emerging countries such as Ghana, India, Kenya, and Uganda. 2. Social responsibility vs. fiduciary duty: where do corporate loyalties lie? The current debate surrounding the ideal conduct of private drug manufacturers though complicated is nevertheless quite old. Literature evaluating a business’s role in the socio-economic health of a community can be found in the 20th century, starting around 1930s. A more modern analysis of Corporate Social Responsibility (CSR) is found in Bowen’s work, Social Responsibilities of the Businessman (Bowen & Johnson, 1953). Operating on the assumption that large industries were power-centers and affected lives of most people; he questioned what reasonable expectations could be made of the business executives in charge of these industries. His answer to this question provided the first formal definition of CSR as: It refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society His thought was carried on later through the works, giving shape to the modern definition of CSR [ (Davis, 1960) (Davis, 1967) (Davis, 1973) (Davis & Blomstrom, 1966) (McGuire, 1963) (Walton, 1967)]. Over time this definition evolved from a business’s economic and legal responsibilities to include philanthropic and ethical responsibilities [ (Carroll, 1991) (Carroll, 1999)]. It is to be noted that though

fulfilling CSR is laudable, it is not something that is enforceable neither can it be demanded from a company. In practical terms, it makes up for nothing but a tool to disseminate company goodwill. Thus, in purely business ethics sense there exists no obligation for corporations, including pharmaceuticals, to cater to what might be publicly deemed as a ‘right’ thing to do. Public sentiments however, remain indifferent to these nuances. Backed with presuppositions derived off of deontological reasoning and a ‘result-oriented’ consequentialism (Banerjee, 2006), they expect drug companies to take up a moral stand in their pricing policies. Failing to achieve this, public outcry and indignation results in face of impossible business decision making. To explain this behavior requires a review of moral psychology. Such an approach (Huebner, 2014) attempts to explain this behavior using Haidt’s ‘social intuitionist model’ (Haidt, 2001) of reasoning. Haidt argues against Kohlberg’s moral development theory (Kohlberg & Hersh, 1977) (Duska & Whelan, 1975) as ‘post-hoc rationalization of intuitive decision making’. Thus, Haidt’s model challenges the commonly held conception that our reasoning is defined by rational thought and insists that they are instead governed by the emotional elements of our thought which later turn to reasoning to explain them rationally. Huebner argues that this allows us to evaluate public perception as an intuitive response rather than one based on reason. To accomplish this, he refers to Fiske’s ‘social relational theory’ (Fiske, 1992) which models social exchanges in four distinct categories. Using this model, he posits that public sentiment stems from one extreme of the spectrum (communal sharing) whereas business ethics and practical realities dictate drug manufacturers operate on the opposite extreme of the spectrum (market pricing). This difference, he suggests, is further exacerbated by a skewed information sharing between the consumer (the patient does not know what medication to take) and the care-giver (physician supported by drug manufacturers). This information asymmetry begets a ‘dyadic trust element’ (Larzelere & Huston, 1980) that governs their relationship. Huebner states that instances of misconduct on the part of the care-giver and a confirmation bias sympathetic to one’s own cause may fuel a ‘betrayal aversion’ response (Koehler & Gershoff, 2003); this is what we see as the growing consumer resentment. Thus, one can establish that the friction between two parties exists due to fundamentally different views on individual roles and responsibilities. This claim is supported when public reasoning is juxtaposed against that of the drug companies’. It is interesting to note that though both parties make use of consequentialist and deontological ethics to build their arguments- laden together with a stakeholder model- they arrive at different conclusions. This only further indicates that the problem lies deeper than judging the validities of ethical arguments and is on the level of moral psychology and intuitive associations formed. In the following section, we consider the arguments made by proponents of ‘backward responsibility’— who favor shifting responsibility towards the drug companies and the State (Banerjee, 2006). We also look at their respective counterpoints— ‘forward responsibility’. However, the nature and scope of these arguments vary based on the social and economic conditions within which the ethical considerations take place. 3. Ethical arguments and counterarguments There are a host of valid arguments which demand that drug manufacturers comply with the public mandate and lower the cost of medicines, especially for those with rare diseases. Despite many of them arguing from a standpoint of accepted ethical philosophies, there are serious deficiencies when it comes to the soundness of these arguments. As pointed out previously, these arguments often originate from an intuitive thought process as opposed to a rational perspective. Emerging from the extreme end of Fiske’s

continuum of Communal Sharing, these arguments tend to associate incalculable value to human lives. Thus, on observing commodification of the same in form of drug prices leads to indignation [ (Huebner, 2014), (Tetlock, 2002), (Tetlock, Kristel, Elson, Green, & Lerner, 2000)]. The justifications for assigning the responsibility of failure to save lives through unethical drug pricing comes in the following categories [ (Chang, 2006), (Huebner, 2014)]: i) Intentional agency and proximity This reasoning suggests that since the drug manufacturers are best positioned to deliver help to those suffering there exists an obligation for these companies[ (De George, 2005), (Singer, 1972)]. The argument’s validity stems from a consequentialist point-of-view as this promotes scope of welfare that can be provided to people at large. Since the State is restricted in terms of its jurisdiction whereas international corporations are not, they can overcome these barriers. Furthermore, this plays well into the libertarian approach of solving social problems through private enterprise. However, the similarities of these ideas end there. At the core of this reasoning lies a conflation of communal focused medical care and a private sector business, which cater to profit-driven goals, that are entirely divergent approaches. Furthermore, the comparison of the State and private enterprise is inherently unjustified; since the State’s legal power is assumed directly and are responsible for the welfare of its subjects. It can also be argued that wasteful government spending of scarce resources may be put to better use in purchasing drugs from manufacturers and distributing to the consumer instead of shifting responsibility entirely. ii) Reciprocity Here the proponents [ (Banerjee, 2006), (Angell, 2004), (Maitland, 2002)] argue against viewing drug companies as an isolated source of innovation. Instead, they argue that every invented drug is performed using incremental research work where the work of other people has been built upon. Thus, they suggest, their work is not really an isolated achievement but rather something achieved through communal spirit and its benefits should be shared in the similar spirit. In support of this reasoning, they point towards the number of sources that are used in research and development of new drugs. Since a number of these sources are funded through public taxpayer money, the research of the new drugs is essentially funded by the public who are made to pay for it all over again at the pharmacy. However, this argument fails to acknowledge that the amount of funding for developing new drugs in itself is a big investment made by the company (Holmer, 2000). Further, we should not discount the number of failed new drug development research funding that leads incrementally to this new drug. Furthermore, Chang invokes the idea of ‘symmetry property of coherent moral theories’, where she argues that: It would be incoherent for utilitarians to say that some people should act to maximize happiness while others need not do so. Kantians would be regarded as unreasonable if they held that some rational beings were bound by the categorical imperative, but others were not… As with moral theories applied to individuals, the symmetry property is necessary for the coherence of corporate theories of obligation (p.471)

As these claims are not made for other public sector funding based industries such as aerospace and textiles, consistency in moral theories demands that similar concessions be made to the drug industry as well. iii) Regulated profit margins This argument holds that since the profit margins of these drug companies are among the highest in the private sector industries and excessive even to call them a profit, they should lower or cap their profit margins where the needs of the manufacturers, as well as that of the people, can be met equally. Using the same principle as before, Chang again argues for the need to maintain consistency as there are several other industries which make hefty profits and yet never face this criticism. Furthermore, a famous rebuttal of this argument was given by the noted consequentialist economist Milton Friedman [ (Friedman, 2007) (Friedman, 2009)] where he stated that intentionally depriving the company of its profits amounts to stealing money from its investors and shareholders. Still further, what this claim fails to acknowledge is that there exist several other ways for a company to share in its profit so that the society benefits. One such way is donating to charities and important causes. However, above all the ethical arguments, a pragmatic view of the merits of this argument is necessary as well. Though well-meaning in its intentions, what this suggestion seeks to do is remove the incentives which lead companies to come up with effective drugs- profits and growth. This flies directly in the face of the common economics of profit-seeking. iv) Intellectual Property Forgiveness This reasoning is based on the idea that since the drug manufacturers mostly seek profits from in developed markets, they could relinquish their intellectual property rights to important drugs in developing countries (Chang, 2006) (Greve, 2008); this would make everyone better off. However, the principle of coherent moral theories compels us to re-evaluate our position. Furthermore, there is no guarantee whether such an action will not lead to the propping up of a parallel economy as has been observed in the European price controlled market system (Bale, 1998) (Kanavos, Costa-i-Font, Merkur, & Gemmill, 2004) (Maitland, 2002). Further still, most developing countries lack the skill and manufacturing capability to produce and distribute these products (Bale, 1998) (Leisinger, 2005). Here we also note that here considering developing nations to be poverty-stricken entities by default, projects an unfair notion that their governments have ensured a fair system and they still face an unsolvable problem- this is simply not true. Most African nations and poor countries in South Asia have a lack of regulatory mechanisms that allow for fair play and protect the openness in the marketplace. We will expound on these issues in the following section. 4. Case studies: Policy implementations and their consequences We now consider the cases that reflect practical consequences that stem from policy-making based on ethical considerations we argue against and suggest possible alternatives. First among these examples is that of the famous drug company, Merck and the disease of river-blindness in Africa. 4.1. Cost of innovation: USA & Europe Widely cited as a rare example of corporations behaving ‘ethically’[ (Wicks, 1995) (World Bank, 2014) (The New York Times Archives, 1987)], Merck’s corporate drug donation programme of ivermectin to regions of central and west African countries is used to back up an argument of corporate goodwill that is usually missing. We concede that this was indeed an example of corporate largesse in public interest,

however, it is crucial to investigate the reasons that made it possible. Hernando et.al. (Hernando, Colwell, & Wright, 2016) identified this need and made estimations into the benefits that Merck received while donating this drug in its forty-year collaboration with the USA government, World Bank, WHO, UNICEF and the Task Force for Global Health. Their research shows that though the free-of-cost donation of this drug cost Merck estimated US$ 600 million for the period of 2005-11, the tax deductions received as a result of this effort led to a net cost of US$ 180 million; this added to the indirect market benefits and goodwill generated among the public is a good bargain for the company. This example is relevant to our position since in this case, it was the US taxpayer who effectively subsidized costs for the drug to be donated. This was not so much a case of ethical corporate behavior but a rather misinformed effort by the US public; as a result, all the involved parties (African people, Merck, and US public) were better-off at the end. A similar case occurred in the case of Glaxo-Smith Kline (GSK) pricing of antiretroviral drugs (ARVs) for HIV/AIDS patients in Africa (Brennan & Baines, 2006), however, GSK had the misfortune of stating its position rather frankly and witnessed a huge damage to its public relations. This is not, however, an isolated example of US public ‘footing the bill’ for people of other countries. European countries, in general, apply price control methods for bringing down the prices of drugs in their local markets (Burstall, 1991) (Rietveld & Haaijer-Ruskamp, 2002). However, this leads to more problems than it solves; though price controls solve the symptom of rising problems, they demand increasingly careful monitoring of market trends and restrict open market pricing systems. As a result innovation and discovery is stifled. Studies have shown that an open and free market system such as that in the USA has produced more new drugs than all of the European companies combined. This is generally attributed to this system of controls which reduces incentives of growth. Even so, the proponents of this ‘cost-containment’ argue that this system has led to less burden on the patient. Though it seems so on the surface, there are indirect means where the consumer is charged, such as through the government-sponsored R&D subsidy provided to local manufacturers, co-payments and funding for government monitoring activities. Add to these, there are other administrative problemssince there exists no pan-European system of controls, there are different price ranges available across country borders. This leads to an unchecked parallel distribution system where the locally costlier retailers are undercut by lower prices. For international drug manufacturers, this means higher drug prices for US public so that higher market penetration in Europe may be achieved [ (Burstall, 1991) (Rietveld & Haaijer-Ruskamp, 2002) (McArdle, 2013)]. As an unintended consequence, this has given rise to the generic drug manufacturers to gain a foothold in their domestic markets. On the other hand, the US system is relatively free for trade and manufacturers. This is reflected in the innovation statistics of new drugs mentioned above. However, mechanisms to avoid price-gouging of drugs for rare diseases exists, though they take a different form as compared to their European counterparts. The Orphan Drug Act is one such example (Herder, 2017); it supports the drug manufacturers in developing new drugs that would otherwise be considered non-profitable. Through this program, the government either subsidizes the drug development or hands-out tax breaks afterward, thus creating an incentive for their development. Despite the benefits of their relatively open market system, the manufacturers face difficulties in getting Food and Drug Administration (FDA) approval for new drugs whereas European systems for the same are notably faster. On a whole, however, the both US and European systems largely accommodate their public needs either through direct or indirect government intervention. On a global scale, however, examination reveals another factor that has helped these western countries keep alive a robust drug industry- patent protections.

4.2. The rise of Indian pharmaceutical industry The Indian market was famously protectionist for the most part of its independent creation, as a result, many of its legislative policies did not promote a competitive free market environment; where, if allowed, the technologically superior foreign companies would dominate. One such example was the patent law of India which recognized ‘process patents’ that secured the rights of manufacturers to protect processes used to produce a drug. This rule allowed local companies to develop alternative methods of essentially copying the new drugs with different mechanisms. As a result, foreign companies were forced to sell drugs cheaper. However, this was to the impediment of development of entirely new drugs. This, coupled with poor economic conditions meant reduced welfare for the needy. However, as India adopted trade liberalization during the 1990’s, a key agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was reached. This forced the government to scrap the process patents and put in place product patent laws. Owing to the export-oriented nature of the Indian pharmaceutical industries, this led to higher foreign investment into the local markets, where foreign companies partnered up with local ones in order to produce and distribute goods more efficiently (Chaudhari, Park, & Gopakumar, 2010) (Palit & Bhattacharya, 2008). This led to higher investment in new drug development and led to the rise of the Indian generic pharmaceutical industry (4th largest in the world). A famous case study pertaining to the patent rights is that of Novartis v. Union of India & others. This landmark case brought to light the administrative and logistical issues that created complications when international drug companies plan to enter new markets. Much to the chagrin of foreign companies, the Indian patent law does not recognize incremental drug development processes, thus forcing the lapse of drug patents of essentially same drugs. This goes to show that instead of promoting donation by companies, more welfare in poorer countries can be achieved through trade liberalization, privatization, and free-market systems. 4.3. The ‘Good African Societies’ Botha (2016) published a list of African countries which he evaluated and ranked on several parameters of Human Development Index; he named this index as the 'Good African Society Index' (GASI). In keeping with a normal distribution, a group of countries clumped around the average with countries such as Tunisia and Ghana near the top, and Chad and Central African Republic (CAR) on the bottom. We studied three of these- Ghana, Kenya and Uganda. In countries such as Uganda and Kenya, the failure of government intervention becomes clearly apparent. A fledgling economy struggling with high inflation does not encourage an active free market system. Further still, poor distribution networks and low skilled labor numbers contribute to a feeble domestic market (Kelly, 2009). Not surprisingly, the pharmaceutical market is heavily dominated (nearly 90%) by Asian companies. The government of both countries continue to invest huge sums of their GDP to stimulate the healthcare sector (3.5% in Kenya and a massive 11% in Uganda); however despite the theoretical efficiencies of their models (Center for Health, Human Rights and Development, 2013) (World Health Organization Global Health Expenditure database) (Wamai, 2009), no success is visible on ground. Contrast this to the healthcare system of Ghana (Schieber, Cashin, Saleh, & Lavado, 2012) where dependency on foreign investment is considerably less. This was achieved through the creation of an effective drug distribution network that allowed local manufacturers to compete with foreign companies. Add to these, a restricted space for outside competition has allowed for some domestic space.

However, if Ghana is to develop further open market systems should be encouraged so as to prevent a local company monopoly. Here again, we observe the need for a thriving private enterprise, unburdened by government intervention and sentimental public demand, in order to maximize prosperity. 5. Conclusions and recommendations We examined the ethics of the arguments made in favor of cheaper drug pricing and their validity. Having explored the moral psychology that is at the root of these arguments we form our counterarguments exposing the weakness in their moral constructs. Essentially we argue that the proponents of just pricing of drugs conflate the idea of business with medical ethics (applicable to practitioners). Furthermore, in formulating their arguments from a perspective of utilitarian, deontological and even virtue ethics they either ignore or obfuscate competing interests such as ownership of property, free-will, and resultoriented consequentialism; all of which are embedded in natural law espoused through all these ethical theories. Finally, we propose that an open market price for a drug is the just price. Concessions can be made in exceptional situations considering the value of stakeholders involved, however, it should be seen as an act of corporate largesse and not as an obligation. As for welfare, promoting sound economic and fiscal policies lead to a free-market system, where the welfare can be left to private enterprise which more efficient than their current government counterparts. References Angell, M. (2004). The truth about drug companies. New York: Random House. Bale, H. E. (1998). The conflicts between parallel trade and product access and innovation: the case of pharmaceuticals. Journal of International Economic Law, 637-653. Banerjee, A. (2006). Who has responsibility for access to essential medical drugs in the developing world? Ethics and Economics, 4(2), 1-23. Bowen, H. R., & Johnson, F. E. (1953). Social responsibility of the businessman. Harper. Brennan, R., & Baines, P. (2006). Is there a morally right price for anti-retroviral drugs in the developing world? Business Ethics: A European Review, 29-44. Burstall, M. L. (1991). European Policies Influencing Pharmaceutical Innovation. In A. C. Gelijns, & E. A. Halm (Eds.), The Changing Economics of Medical Technology (Vol. 2, pp. 123-141). Washington D.C.: National Academy Press. Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34, 39-48. Carroll, A. B. (1999). Corporate Social Responsibility: Evolution of a Definitional Construct. Business & Society, 38(3), 268-295. Center for Health, Human Rights and Development. (2013). Promoting Local Pharmaceutical Production in Uganda. Uganda: UNDP. Chang, P. L. (2006). Who’s in the business of saving lives? Journal of Medicine and Philosophy, 31, 465-482. Chaudhari, S., Park, C., & Gopakumar, K. M. (2010). Five Years Into The Product Patent Regime: India's Response. United Nations Development Programme.

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