Drug Companies Rx For The Bottom Line

Dec. 21, 2004

In a pleasant Mexico City neighborhood overshadowed by the towering World Trade Center, a house of vibrant yellows, blues, and purples receives product donations from big American drug companies and distributes them to residents of 37 of some of Mexicos most impoverished villages. To reach the most remote communities, residents and volunteers carry the health supplies on their shoulders from the nearest bus stops. "In the places where you have to walk, it can take two [to] 12 hours," says Pilar de Ordua, director of the Foundation of Justice & Love. All the organizations operations are housed at the modest converted residence in the middle-class neighborhood of Colonia Napoli. De Ordua oversees the sorting of cartons from the United States. Most of the supplies are analgesics, antibiotics, antidiarrhea medicine, and treatments for parasites. "We send them a list so they know what we need," she says. Each pill and bandage dispensed is rigorously tracked. Last years supplies treated more than 58,500 ailments. "There is never enough," says de Ordua, who quickly met the drug companies requirement for detailed record-keeping. At the same time, her ability to gain customs and health ministry approval for swift processing into Mexico impressed the businesses. De Ordua succeeds, say her sponsors at the Catholic Medical Mission Board (CMMB), because she understands the U.S. pharmaceutical industry. "I would like to think that these big companies are interested in helping people," she says. "But I know that as a part of their business, the donations are a necessary part of their operations." Top U.S. drug companies are setting new standards in philanthropy. Among the first to refocus charitable contributions to bolster the bottom line, Americas pharmaceutical manufacturers are increasing product donations geared at growing future business. By giving away drugs in developing countries with the best potential to become future markets, pharmaceutical manufacturers can gain expertise, contacts, and demand for their products that will propel sales. In the Manhattan headquarters of Pfizer Inc., the strategy is called "venture philanthropy." At Merck & Co. Inc., Johnson & Johnson, Eli Lilly & Co., Bristol-Myers Squibb Co., or 3M Co. it might be called focused philanthropy, strategic giving, or corporate social investing. Whatever the label, the term reflects the efforts of many U.S. corporations to restructure their traditional charitable endeavors. "I cant emphasize enough how important it is for companies to utilize and integrate their giving with the core business," says Rick Luftglass, assistant director of Pfizers corporate philanthropy. "Whether were making grants and donating product in China, in Central or Eastern Europe, or in Latin America, those are very important markets for our company," says John Damonti, president of the Bristol-Myers Squibb Foundation. "I wouldnt say there should be a significant business reason for every social investment, but it should guide your overall thinking in regard to corporate objectives. When you align your contributions with your business focus, you then can draw on the greater wealth of the corporations people, information, and resources." Drug companies are some of Americas largest givers. The most recent Taft Corporate Giving Directory list includes five pharmaceutical manufacturers in its Top 10. No. 1 is Merck, followed by Johnson & Johnson, Pfizer, Eli Lilly, and Bristol-Myers Squibb. Together their 1996 contributions were valued at $445.9 million. The portion devoted to product and other nonmonetary donations amounted to more than two-thirds of the total value. "Our industry feels we are held to a higher standard and that we need to give something back," says Mark Grayson, a spokesperson for the Pharmaceutical Research and Manufacturers Assn., which represents about 100 U.S. drug firms. The mission of these firms, he notes, is treating ailments, curing disease, and enhancing well-being. The IRS gives industry a compelling incentive to donate goods. It is offered only to manufacturers that donate goods to nonprofit organizations that use the goods for care of the ill, the needy, and infants, or to schools and charities that use them for educating children. By far the biggest users of the write-off have been the pharmaceutical, computer, and food industries. Reaction to the philanthropic endeavors of U.S. drug companies is mixed. For the most part, company representatives say, shareholders tend to ignore the programs. The pharmaceutical industrys image, like that of many businesses, is one of extremes -- caring corporations devoted to the betterment of humankind contrasted with greedy profit-chasers not above shipping mistakes to nonprofits and taking a sweetened tax deduction as part of the deal. In the public mind, reports of such efforts as Smith-Klines commitment to eradicate elephantiasis or Johnson & Johnsons fight against intestinal parasites among Central American children dont square with the lawsuit that 40,000 retailers filed against pharmaceutical makers contending they conspired to fix prescription prices in the early 1990s. Most recently, Public Citizen, a consumer watchdog group, caught the attention of consumers with allegations that drug manufacturers are asking prices in the U.S. up to six times higher than in Europe. Despite the U.S. pharmaceutical industrys double-digit growth last year, theres an atmosphere of uncertainty among drug manufacturers. Patents on a large number of popular drugs will expire soon, raising the prospect of cheap generic substitutes entering profitable niches. And, even though exciting medications are in the pipeline, exclusivity periods are shrinking. Also unclear is the impact of managed cares cost containment efforts. The response has been a multibillion-dollar merger mania -- Glaxo Holdings and Wellcome formed Glaxo Wellcome PLC, Roche Holding and Corange merged into Roche Holding Ltd. An American Home Products Corp. and Monsanto Co. merger is in the works. Other firms are countering the mergers by buying smaller companies or establishing joint marketing arrangements with them. In this atmosphere, drug companies are looking to foreign markets, particularly in developing countries, for their future customers. Already U.S. pharmaceuticals companies possess an edge over their global competitors. They are world leaders in generating new medications. Their product donations give them an additional advantage. A history of spreading largesse across the globe has made the U.S. drug companies products and trademarks familiar to sizable populations of potential customers. The donations have become important, even vital, to Third World health care. Throughout many African regions, for instance, giveaways of U.S. drugs and medical services provide 30% to 70% of health care. If developing economies grow as anticipated over the next several decades, the results of strategic philanthropy might be tested at Johnson & Johnson. The New Jersey corporation, the worlds largest manufacturer of health-care products and No. 3 in U.S. corporate giving, has gone further than other drug companies in integrating its charitable and business activities. "You have to work very hard in choosing where to put time and money. And wherever we choose, we want to make sure we get good results," says Wendy Logan, vice president for corporate contributions at Johnson & Johnson. Philanthropic decisions take into account the charitable responsibilities the company feels toward its consumers, medical care providers, communities, and stockholders. The contributions department has relationships with Johnson & Johnsons operating companies around the world. In restructuring its donation strategy Johnson & Johnson, like other American drug firms, has shifted its traditional relationships with nonprofit organizations. Companies are demanding stricter accounting for the giveaways and, in many instances, developing partnerships that can enhance the corporate image. For business, partnering with nonprofits, especially advocacy groups, creates a supportive constituency in lobbying to get drugs to the market. Support of such groups is one way companies can mitigate negative publicity and establish relationships with health-care providers. Close ties to foreign-based advocacy groups are likely to smooth a companys move into the commercial market. Some organizations, in exchange for their know-how and connections, have gained special commitments from corporations. One example is CMMBs Produce to Give program, in which companies agree to operate manufacturing equipment for an extended period to provide product that will be dedicated to the charitable organizations. Nonprofits and businesses are working together to defeat a controversial guideline proposed by the World Health Organization. The measure encourages countries to reject medications with expiration dates that would occur within 12 months. Charities and corporations argue that distribution across the globe would be impacted and useable drugs would go to waste. Many nations already heed the guideline, says Maura ODonohue, programming director at CMMB, which last year distributed $43 million in pharmaceutical donations through charity groups in Africa, Asia, Latin America, and Eastern Europe. Because of the guideline, CMMB has had to refuse more than $20 million worth of medications. ODonohue, a nun who holds a masters degree in international community health and who has worked in many Third World countries, observes, "Ive been to some hospitals that have no antibiotics or where a pediatrician is making antibiotics for children from adult medication. . . . For those hospitals, those would have been useful pharmaceuticals." Organizations such as CMMB, AmeriCares Foundation, and Map Inc. are adjusting to the drug companies new strategic giving. "The bottom line is that it is contributing to the welfare of the poor in developing countries," says ODonohue. But nonprofit organizations rely on corporate charitable cash to survive. As additional companies adopt the strategic approach that centers on product donations, many of the more than 600,000 IRS-designated charities will find it more difficult to exist. This situation concerns Pilar de Ordua in Mexico City, even though the Foundation of Justice & Love she directs is considered a model partner. "As businesses, they should make money," she says. "But a part of that could be donated just to help people. Theres a humanitarian purpose that we shouldnt lose track of."

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