Bedminster, N.J., July 1, 2005 -- The latest research on ethics reputation by Rating Research LLC (RRC) holds, on balance, good news for the pharmaceutical industry. But there is bad news for some companies and clear evidence that the industry is not doing a good enough job of communicating is ethical strengths to American consumers.

Despite all the challenges stemming from problems with Cox-2 inhibitors and a host of other issues, pharma executives can take heart in the fact that their industry peers and the financial analysts that watch their stock prices together rank the industry’s ethical reputation as a “high quality” E2 on average currently, just the same level as they did in RRC’s 2003 study.

Once again, as shown in Figure 1, two biotech firms, Amgen and Genentech, have claimed RRC’s “highest quality” E1 ratings for ethical reputation. Both industry insiders and financial analysts gave the firms high marks when asked about their performance in the key components underpinning ethics reputation.

On another positive note, survey respondents were sufficiently enthusiastic about the ethics performance of Eli Lilly and Johnson & Johnson to warrant rating upgrades for both firms to E1 ratings, up from “high quality” E2 status in RRC’s 2003 study.

Eli Lilly improved results dramatically since 2003 in the eyes of industry insiders to tie with Genentech for top rankings from those respondents (see Figure 2). The company scored strongly in the areas of corporate governance, financial transparency and being open and honest with the public. In addition, financial analysts placed the firm in a sold sixth-place ranking for ethics.

For its part, Johnson & Johnson has shown solid, sustainable support from both executives and analysts, each of which gave the company a fourth-place ranking in ethical reputation. It performed well on CEO leadership and corporate governance.

Given the controversy surrounding Merck since late fall of 2004, however, the company declined from first-place in the opinion of industry executives in 2003 down to ninth-place currently. Contrarily, financial analysts continued to place Merck at a very high second-place in the rankings of RRC ethics scores; but that was not sufficient to avoid a rating downgrade for the firm to E2 from E1.

Meanwhile, Bayer showed a significant drop in the minds of both groups of respondents, as its ethics ranking dropped to 17-th place out of 19 in the eyes of industry insiders, 16-th place from the point of view of financial analysts. As a result its ethics reputation rating was downgraded to E3 from E2.

IMPROVING STAKEHOLDER PERCEPTIONS
In the current media environment where ethical breeches by corporations and their CEOs are a daily topic of news, it is not surprising that ethics has become an increasingly important driver of reputation strength across corporate America. Indeed, RRC’s most recent study of reputation in the pharmaceutical industry found that Ethics is now the most important driver of reputation, ahead of other key dimensions such as Workforce Quality and Financial Stability. (See PE, February 2005: “The Rise and Fall of Pharma Reputations.”)

To find out more about the factors underpinning Ethics that companies may use as guidelines for efforts to improve stakeholder perceptions, RRC used its Ethics Reputation Model and statistical analysis to assess which factors are most closely aligned with strong or weak ethics reputation. These are shown in Figure 3.

The relative importance of each of the 12 elements (or “components”) cited by survey respondents, varies markedly each year. On average, however, RRC found the strongest increases this year in the component “lead by talented management,” followed by “positive relationships with vendors and suppliers,” and “positive relations with regulators.”

Further supporting its strong image of ethics reputation, the industry scored well across the 12 components. Figure 3 presents the industry’s average performance on each ranked by quintile, with the first quintile representing the highest quality. Most companies earned second-place rankings; very few had low fourth-place rankings. One notable exception is Schering-Plough, which scored poorly on almost half of the component questions, suggesting significant ethical weakness and a risk of ethical distress. The industry performed well on having talented management, strong CEO leadership and being open and honest.

A TROUBLING DISCONNECT
Now the not-so-good news. In an effort to find out more about the opinion of the pharmaceutical industry’s other key stakeholders, RRC worked with affiliate Opinion Research Corporation to find out how the American public perceives the pharmaceutical industry in today’s challenging environment. The results point to a troubling disconnect between the views of industry insiders and consumers.

In a nationwide poll conducted in early February this year, only 44% of the 1,000 Americans surveyed “agreed” or “strongly agreed” on average that the senior leadership of major drug companies “engage in ethical business practices.” By comparison, 65% of executives interviewed in RRC’s latest survey expressed confidence that senior leadership of the major drug companies “adhere to ethical business practices.”

Just as worrisome in the same nationwide survey, consumers ranked the ethics of drug company managers well below average in corporate America. More than half of the respondents (51%) said they are “very” or “somewhat” confident in the ethical behavior of senior leaders of American companies generally. Looking at specific industries, 57% of the same respondents said they are confident in the ethical behavior of electric power companies.

UNDERSTAND, THEN ACT
What’s the impact of this? Professor Stephen A. Greyser, Richard P. Chapman Professor of Business Administration at Harvard Business School, cautions that “companies which operate with such a serious misperception of their public image are in danger of unknowingly falling into a state of reputational distress that can hinder their ability to outperform their peers, ultimately impacting their bottom lines.”

With such a difference in opinion, one of these groups—either executives or the general public—must be wrong. “If it is the executives,” says Dr. Greyser, “then the industry must think more deeply about the perceptions of its ethical behavior and to get a more precise understanding of the sources of the public distrust, then act on that assessment.”

“ On the other hand,” he adds, “if it is the public that is mistaken, then industry leaders must do a much better job of communicating the true basis of their ethical grounding to the general public.”

FIGURE 1

FIGURE 2

(1) Ranking of RRC Ethics Reputation Scores – RRC 2005 study
(2) Ranking of answers to question, “Adheres to Ethical Business Practices” – RRC 2005 study


FIGURE 3