Case: Merck and River Blindness Headquartered in New Jersey, Merck & Co. is one
ID: 356222 • Letter: C
Question
Case: Merck and River Blindness
Headquartered in New Jersey, Merck & Co. is one of the largest pharmaceutical companies in the world. In 1978, Merck was about to lose patent protection on its two best-selling prescription drugs. These medications had provided a significant part of Merck’s $2 billion in annual sales. Because of imminent loss, Merck decided to pour millions into research to develop new medications. During just three years in the 1970s, the company invested over $1 billion in research and was rewarded with the discovery of four powerful medications. Profits, however, were never all that Merck cared about. In 1950, George W. Merck, then chairman of the company his father founded, said, “We try never to forget that medicine is for people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered that, the larger they have been.” This philosophy was at the core of Merck & Co.’s value system.
River Blindness
The disease onchocerciasis, known as river blindness, is caused by parasitic worms that live in the small black flies that breed in and about fast-moving rivers in developing countries in the Middle East, Africa, and Latin America. When a person is bitten by a fly (and some people are bitten thousands of times a day), the larvae of the worm can enter the person’s body. The worms can grow to almost two feet long and can cause grotesque growths on an infected person. The real trouble comes, however, when the worms begin to reproduce and release millions of microscopic baby worms into a person’s system. The itching is so intense that some infected persons have committed suicide. As time passes, the larvae continue to cause severe problems, including blindness. In 1978, the World Health Organization estimated that more than 300,000 people were blind because of the disease, and another 18 million were infected. In 1978, the disease had no safe cure. Only two drugs could kill the parasite, but both had serious, even fatal, side effects. The only measure being taken to combat river blindness was the spraying of infected rivers with insecticides in the hope of killing the flies. However, even this wasn’t effective since the flies had built up immunity to the chemicals.
Merck’s Ethical Quandary
Since it takes $200 million in research and 12 years to bring the average drug to market, the decision to pursue research is a complex one. Resources are finite, so dollars and time have to go to projects that hold the most promise in terms of making money to ensure the company continues to exist as well as of alleviating human suffering. This is an especially delicate issue when it comes to rare diseases, when a drug company’s investment could probably never be recouped because the number of people who would buy the drug is so small. The problem with developing a drug to combat river blindness was the flip side of the “orphan” drug dilemma. There were certainly enough people suffering from the disease to justify the research, but since it was a disease afflicting people in some of the poorest parts of the world, those suffering from the disease could not pay for the medication.
In 1978, Merck was testing ivermectin, a drug for animals, to see if it could effectively kill parasites and worms. During this clinical testing, Merck discovered that the drug killed a parasite in horses that was very similar to the worm that caused river blindness in humans. This, therefore, was Merck’s dilemma: company scientists were encouraging the firm to invest in further research to determine if the drug could be adapted for safe use with humans, but Merck knew it would likely never be a profitable product.
1. What are the potential costs and benefits of such an investment?
2. If a safe and effective drug could be developed, the prospect of Merck’s recouping its investment was almost zero. Could Merck justify such an investment to shareholders and the financial community? What criteria would be needed to help them make such a decision?
3. If Merck decided not to conduct further research, how would it justify such a decision to its scientists? How might the decision to develop the drug, or not to develop the drug, affect employee loyalty?
4. How would the media treat a decision to develop the drug? Not to develop the drug? How might either decision affect Merck’s reputation?
5. Think about the decision in terms of the CSR pyramid. Did Merck have an ethical obligation to proceed with development of the drug? Would it matter if the drug had only a small chance to cure river blindness? Does it depend on how close the company was to achieving a cure, or how sure they were that they could achieve it? Or does this decision become a question of philanthropy only?
6. How does Merck’s value system fit into this decision?
7. If you were the senior executive of Merck, what would you do?
Explanation / Answer
1.Potential Costs and Benefits of such investments:
The potential to discover a drug for this terrible disease certainly exists and the company’s research scientists think it is possible. The outcomes for those with the disease would be very positive and there could also be very positive media attention and reputational effects. But, there is also the potential to invest years and millions of dollars, and come up empty handed. Employee morale is a potential cost or benefit. Scientists are extremely important to pharmaceutical companies and Merck’s research scientists wanted to pursue this.
The organizations invest huge budgets and dollars in continuous research and development so new drugs, which can be patented and once these are patented the benefits are also multiple folds till the patent protection is available.
The investments in research and development have following unique problems:
Uncertainty about the funds required.
Uncertainty of the instruments and equipment required.
Issue regarding the confidentiality of the research.
Other competing agencies might also be working on similar projects and may complete the research before you and register it for patent in their name, in such a scenario the whole effort and cost goes down the drain.
The research may ultimately fail for other reasons.
The tests of the researched medicines may fail and cause some ill effects, leading to legal suits.
The ultimate developed medicine may not be as effective as predicted and may have some serious side effects.
Benefits of such investments:
Huge profits in the initial period of patent protection, leading to recovery of total investment, breakeven and profits to fund the next research.
Customers and other stake holders look at you with anticipation and high regards for the brand.
International and National rewards for the company scientists.
Income from other than core business in the form of contribution to the trade magazines and contribution to institutes.
2.There appears to be an issue with the language of the question, I am answering for the question how Merck could justify an investment in a research whose cost could not be recouped?
Answer :
Merck is clear on its website about its commitment to corporate social responsibility and to philanthropy. So, investors have the opportunity to freely decide, whether they wish to invest in a company with these values or not. Companies do not justify every investment to shareholders, so we are not convinced that they would need to justify this one. But, they certainly would not be able to justify it in terms of the financial bottom line. They would have to justify it in terms of goodwill, or some other more difficult to measure criterion.
some shareholders are very interested in CSR. Are we talking about those, or about day traders who have little interest in the company, other than whether they can make a short term gain? One of us heard a representative of the Business Roundtable refer to the fact that we no longer have shareholders. We have share “renters.” These are people with only short-term financial interest in the company. So, we think companies will need to look beyond these shareholders, if they wish to think about the long-term greater good of the firm and society.
The stake holders should understand the probability of failure of a research or converting the research results into a profitable business to recoup the cost invested in the research. The failure can be due to reasons of the market environment and from any corner of the world.
Normally when a project of a new research is taken up (Launched) the stakeholders are informed of such risks, as are seen at that point in time, in the initial project plan.
It is also pertinent to mention here that all the stakeholders might not be informed of a research project being taken up in the organization for the sake of maintaining it confidential. The leakage of the information about any such research project, possibly which in the end, can be a huge financial success, leads to the risk of competitor parallel investment also.
The organizations which invest in researches in a big way are all matured organizations and know of these hazards, at the same time they are into the business and can justify as is evident from the present case study also. The owners of Merck, understand so well the risk in research and development, but for the core values of the company they agree to invest in such risks.
3.Answer:
Merck has a reputation of an organization culture to maintain and uphold research and development as one of its core values of the business.
The employees are motivated to join this organization for their interest to grow as research scientists. They look up at Merck as an organization which offers them opportunities to grow in their careers as scientists.
If Merck decides to discontinue the investments in continuing research, all their business model, vision and mission statements change and have to be redesigned.
It shall certainly have serious demotivating effect on the employees, who may look for better opportunities elsewhere.
Their market and business volumes nay also shrink.
How would the media treat a decision to develop the drug? Not to develop the drug? How might either decision affect Merck’s reputation?
Answer :This is tough to predict. The media may or may not even be aware of this. As noted earlier, Merck has not “promoted” itself in this way. It is possible that a media outlet would pick up the story and run with it. But, in our view, this is not a good reason to do it or not do it. A decision like this must be based upon deeply held values.
Answer 5:This is mostly a question of philanthropy. The other questions raised here are difficult to answer, because, when the decision must be made, we know very little about the chances of success. But, the case does raise an important ethical question that seems to affect some companies more than others. For example, if a company has information that no other person or company has and it could help people with that information, does the company have an ethical duty or obligation to act? Remember that this drug was based upon an existing Merck veterinary drug. So, we feel quite sure that Merck would not be interested in sharing its proprietary information. That leaves it with an ethical dilemma. Does it have an obligation to pursue this, because it alone has the information to do so?
How does Merck’s value system fit into this decision?
Answer :Merck’s value system is very important here. If a company says that it values people over profits, it should act that way. Otherwise, it is just going to create a lot of cynical employees. If you do not mean it (your values, that is), do not say it! That goes for individuals too!