Thursday, October 3, 2013

Heart Medicine Cheating: Are the Top Firms the Worst Firms?

Today's news contains a note on well-known pharmaceutical company Novartis punishing some of its executives in Japan as a result of a scandal related to its heart medicine Diovan. Both the content of the scandal and the firm raises worrying questions. Novartis is being checked by Japan Health Ministry after two independent studies found that data in research on Diovan had been altered to produce inaccurate results, which in turn were used in Japanese advertising for the drug. Misleading advertising for heart medicine is a serious breach of trust. Novartis is a major pharmaceutical company with more than 100,000 employees that is marketing a broad range of medicines.

But the case is not unique, and Novartis is not the only well-known pharmaceutical firm in the news these days. China is moving against corruption in the medical industry, and firms suspected of bribing doctors to favor their medicines include GlaxoSmithKline, Novartis, AstraZeneca, Sanofi, Eli Lilly, and Bayer. Although the evidence is not clear yet, the accusation is familiar – authorities in the USA monitor pharmaceutical sales practices closely because of the potential for corruption.

So is there something special about large and famous firms that make them particularly drawn towards questionable practices? One would think so based on the familiarity of the names in the previous paragraph. But actually a lot of less-known firms have problems too. For example, Ranbaxy, an Indian maker of generic medicines, has repeatedly had unacceptable production quality in its factories, and was caught manipulating data for an application for drug approval. Ranbaxy also makes Diovan, but is likely to have to wait for approval in the USA given its history of problems.

Recently published research in Administrative Science Quarterly gives an interesting view on the problem of size, fame, and misbehavior. In the research, Scott D. Graffin and his coauthors examined the 2009 expense scandal in the UK Parliament, finding that the better-known members of parliament were just as likely to cheat on their expense reporting as the less-known members. So not more likely, nor less likely. But fame did have one effect: the best-known members were much more likely to be reported in the press, so for a newspaper reader they would appear to be much more likely to cheat.

Is this the case for firms too? It seems likely that the press would investigate and report the best-known firms first, and possibly journalists would even choose the best-known firms to name in a report if they had names of many cheaters available. In fact, the corruption investigation in China also involves a number of Chinese firms, but these are less known abroad and are usually not mentioned in articles. But does that mean we can be sure that the largest, most famous companies are just as good (just as bad?) as the others? Not really; unfortunately it is hard to be sure about something that is revealed as rarely as cheating and misbehavior.

Ranbaxy's Chronic Maladies. The Economist, September 21 2013.
Graffin, Scott D., Jonathan Bundy, Joseph F. Porac, James B. Wade, and Dennis P. Quinn. 2013. "Falls from Grace and the Hazards of High Status: The 2009 British MP Expense Scandal and Its Impact on Parliamentary Elites." Administrative Science Quarterly 58(3):313-45.
Inagaki, Kana. 2013. Novartis Sanctions Executives at Japan Unit amid Research Scandal. Wall Street Journal, October 4, 2013.