Is Glaxo's Charity Really Theft?
Jan 20 2010, 5:30 pm
by Daniel Indiviglio
Is there a fine line? Corporations have a duty to shareholders to maximize profits. But when they donate to charity -- which is regularly done these days, often through foundations -- this takes money out of shareholders' hands or stifles future growth. It instead provides that money to some cause that management deems appropriate. But Glaxo-SmithKline's recent decision to put thousands of chemical compounds which may cure malaria into the public domain gives this question a new dimension, adding additional complexity...
The story does not go where I expected. It is not talking about some kind of charity scam, in which they get PR karma for doing something that really only benefits themselves. Rather, the story is about the fact that Glaxo is releasing some of the compounds it has developed, into the public domain.
Indiviglio's story is posted on the Atlantic business blog. It is based upon an article in the (UK) Guardian. The Guardian version is reasonably thoughtful, whereas the Atlantic version is frankly offensive.
Indiviglio begins with the unfounded assertion that "Corporations have
a duty to shareholders to maximize profits." This provides a
frame for the discussion that follows, leading to a distorted view of
the issue. Although he does not draw a firm conclusion, there is only
one conclusion implied by his treatment of the subject: shareholders
should have been given the opportunity to approve of the release of
these compounds to the public domain.
It helps that he contacted a company spokesperson for clarification, but it appears that he asked the wrong questions. So it did not really clarify anything.
He quotes the Guardian:
Indiviglio's view:
What to make of this? First, as I mentioned, his opening statement, "Corporations have a duty to shareholders to maximize profits" is simply false. The reason is this: maximize is a strong word, like "always" or "never." Arguments built upon such assertions sound compelling, but are difficult to support. All you have to do is find one exception, and the argument falls apart.
If it is true that corporations should always maximize profits, that means that they should ignore legal and ethical obligations if they can get away with it. This leads to the paradoxical conclusion, that corporations are morally obligated to be immoral.
It is more reasonable, and more accurate, to say that the duty to maximize shareholder profit is one duty out of many; key decision-makers ought to weigh this duty heavily when they make decisions. That is the abstract view. But what about the details of this specific decision?
In practical terms, it is not possible for Indiviglio to assess the potential impact of this decision. Glaxo released 13,500 chemical entities into the public domain. He correctly states that "Maybe one of those compounds also holds a cure for some other disease completely unrelated to malaria, unbeknownst to Glaxo." This is true, but it also is true that the crumpled-up McDonald's bag that I passed on the expressway might contain a winning lottery ticket. I have a moral obligation to provide for my family. Did I act unethically when I failed to stop and pick up the bag?
Drug companies generate compounds, literally by the million, using a shotgun approach. They know full well that the overwhelming majority of them will never lead to anything marketable. Few will even be remotely interesting. That's the first important point.
The second important point is that drug companies can only pursue a finite number of leads. There are only so many scientists, so many labs, so many R&D dollars. If the company does not have the resources to develop a particular compound, then the potential for that compound is exactly zero.
The third important point is that drug development often is not done solely in-house. Commonly, the company relies upon basic science research that is done in academia. This may not be research that is done on the exact chemical entity that the company is pushing down the pipeline. Rather, it is research that is done to elucidate fundamental pharmacodynamic principles, perhaps using related compounds.
To illustrate: a company may have a compound that shows promise in screening tests, but which also shows signs of hepatotoxicity that would prohibit it from being used in humans. If someone would take that compound, and figure out exactly how it performs its beneficial function, then it could be possible to develop a product with the benefits, but without the risks. That would be good. Whether this idea applies to the compounds that Glaxo released, is something that neither Indiviglio nor I could possibly know.
Indiviglio did the right journalistic thing by calling the company spokesperson, but he asked the wrong question:
How are shareholders going to assess the value of the compounds that the company released? It simply is not possible for more than a few of them to have any idea. The correct questions have to do with the manner in which the compounds were selected. Was the company duly diligent in its efforts to screen the compounds, to select ones that would most likely be of value in basic research, but be unlikely to turn into a blockbuster? The thresholds are due diligence and reasonable confidence. Five scientists spend a year on this project. The scientists within the company devote their professional careers to selecting which compounds to put in the pipeline, and which to put on the shelf. They probably are pretty good at it, as much as anyone can be.
It helps that he contacted a company spokesperson for clarification, but it appears that he asked the wrong questions. So it did not really clarify anything.
He quotes the Guardian:
GSK will publish details of 13,500 chemical compounds from its own library that have potential to act against the parasite that causes malaria in sub-Saharan Africa, killing at least one million children every year.
It took a team of five investigators a year to screen the two million compounds in GSK's library - its entire collection of potential drugs and possibly the biggest such library in the world.
Indiviglio's view:
Here a company is surrendering its intellectual property for the greater good. While this might be admirable on a moral level, I'm not so sure shareholders should be pleased...don't get me wrong: on many levels a donation like this seems wonderful for the world. And if shareholders go along with it, then by all means, Glaxo should donate away. But without explicit shareholder approval, I'm a little unclear how this is different from taking investors' money and misappropriating it.
What to make of this? First, as I mentioned, his opening statement, "Corporations have a duty to shareholders to maximize profits" is simply false. The reason is this: maximize is a strong word, like "always" or "never." Arguments built upon such assertions sound compelling, but are difficult to support. All you have to do is find one exception, and the argument falls apart.
If it is true that corporations should always maximize profits, that means that they should ignore legal and ethical obligations if they can get away with it. This leads to the paradoxical conclusion, that corporations are morally obligated to be immoral.
It is more reasonable, and more accurate, to say that the duty to maximize shareholder profit is one duty out of many; key decision-makers ought to weigh this duty heavily when they make decisions. That is the abstract view. But what about the details of this specific decision?
In practical terms, it is not possible for Indiviglio to assess the potential impact of this decision. Glaxo released 13,500 chemical entities into the public domain. He correctly states that "Maybe one of those compounds also holds a cure for some other disease completely unrelated to malaria, unbeknownst to Glaxo." This is true, but it also is true that the crumpled-up McDonald's bag that I passed on the expressway might contain a winning lottery ticket. I have a moral obligation to provide for my family. Did I act unethically when I failed to stop and pick up the bag?
Drug companies generate compounds, literally by the million, using a shotgun approach. They know full well that the overwhelming majority of them will never lead to anything marketable. Few will even be remotely interesting. That's the first important point.
The second important point is that drug companies can only pursue a finite number of leads. There are only so many scientists, so many labs, so many R&D dollars. If the company does not have the resources to develop a particular compound, then the potential for that compound is exactly zero.
The third important point is that drug development often is not done solely in-house. Commonly, the company relies upon basic science research that is done in academia. This may not be research that is done on the exact chemical entity that the company is pushing down the pipeline. Rather, it is research that is done to elucidate fundamental pharmacodynamic principles, perhaps using related compounds.
To illustrate: a company may have a compound that shows promise in screening tests, but which also shows signs of hepatotoxicity that would prohibit it from being used in humans. If someone would take that compound, and figure out exactly how it performs its beneficial function, then it could be possible to develop a product with the benefits, but without the risks. That would be good. Whether this idea applies to the compounds that Glaxo released, is something that neither Indiviglio nor I could possibly know.
Indiviglio did the right journalistic thing by calling the company spokesperson, but he asked the wrong question:
I spoke to a spokesperson from Glaxo this morning. She informed me that the board is generally supportive of the initiative, but no formal shareholder feedback has been solicited.
How are shareholders going to assess the value of the compounds that the company released? It simply is not possible for more than a few of them to have any idea. The correct questions have to do with the manner in which the compounds were selected. Was the company duly diligent in its efforts to screen the compounds, to select ones that would most likely be of value in basic research, but be unlikely to turn into a blockbuster? The thresholds are due diligence and reasonable confidence. Five scientists spend a year on this project. The scientists within the company devote their professional careers to selecting which compounds to put in the pipeline, and which to put on the shelf. They probably are pretty good at it, as much as anyone can be.
Medicine & Health
Comments
I don't have a citation, but I'm pretty sure I recall a Supreme Court decision specifically saying corporate managers could have no higher responsibility than increasing shareholder value.
Posted by: cdrealist | January 25, 2010 8:47 AM
cdrealist:
That citation shows nothing more than that the Supreme Court are a bunch of hacks, whoring their legal education to protect the oligarchy. All the money in the world isn't enough for the moneyed class, so they bought the Supreme Court to try to make more than they have.
The fact is that corporations are creations of the public, because giving legal immunity to these shareholders is deemed to be a public good. Same with patents. They exist because it is a public good, not so that these companies can make billions and billions, while people die.
The minute these things STOP acting in the public good -- the minute people start seriously putting profits before people -- that is the time to step in and ensure that the corporations' obligations to the public are at least equal to that of the fat cats who hold its stock.
If it is their position that these mega-billion dollar corporations should sit on patents they aren't using while people die, then I say screw 'em. Strip the corporations of any patents not being actively and extensively used and make shareholders and officers personally liable for the corporate debts, actions, expenses, etc. The way it is is not the way it has to be.
Posted by: Woody Tanaka | January 25, 2010 9:55 AM
They all are unlikely to be blockbuster. Sub Saharan Africa is not exactly a dream environment for profitable pharmaceutical sales, just from a profit margin perspective.
Also, the formulation would likely need to be administered very infrequently, or even once, and may also need to be stable at high temperatures to satisfy the logistical needs of a third world tropical environment. All of which make actual product development very challenging, which means very expensive.
Mosquito netting is a better bet.
Posted by: Gingerbaker | January 29, 2010 1:53 PM