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The Ethical Biotech

With ImClone Systems' chief executive Sam Waksal under indictment for insider trading and fraud, the black cloud over corporate business ethics that first rose over Enron now hovers above the biotech industry. While Waksal may be an outlier, the problems at ImClone have prompted the industry to once again examine ethical standards. Perhaps more than any other industry, biotech is experienced in dealing with ethical issues, with managers constantly embroiled in hot-button debates over stem cell

By | September 16, 2002

With ImClone Systems' chief executive Sam Waksal under indictment for insider trading and fraud, the black cloud over corporate business ethics that first rose over Enron now hovers above the biotech industry. While Waksal may be an outlier, the problems at ImClone have prompted the industry to once again examine ethical standards. Perhaps more than any other industry, biotech is experienced in dealing with ethical issues, with managers constantly embroiled in hot-button debates over stem cell research, cloning, and patenting DNA.

Now, biotech companies are focusing on ethical issues not just in the lab, but also in the corporate suite. "Biotech companies are going to face the same kind of business ethics as everyone else, but on top of it they have all the other issues in doing cutting-edge work in poorly understood technology and in the face of mercurial public opinion," says Chris MacDonald, an ethicist and philosophy instructor at Saint Mary's University, Halifax, Nova Scotia.

"For the most part ethics in biotech has been about health care ethics," he says, "but increasingly it will be about looking at corporate ethics." After questions arose at British Biotech in 1995 over disclosure of a cancer drug's test results, for example, the British Bio-Industry Association (BIA) developed its own set of guidelines. The trade group also requires all its public companies to submit to audits to assure compliance.

"We had our own scandal a few years ago that led to a flurry of issues having to do with corporate disclosure," said Simon Best, vice chair of BIA and chief executive of Ardana Bioscience, an Edinburgh, Scotland, biotech firm. "Unfortunately a crisis led to action in our case."

Photo: Courtesy of Ardana Bioscience
 Simon Best

Carl Feldbaum, president of the Biotechnology Industry Organization, says BIO staff, including its general counsel committee, spent the summer working on initiatives to help its members, biotech investors, and the media better understand business ethics. He says BIO's bioethics committee, which usually works on scientific issues, is developing of a set of ethical best practices.

"We have been focusing intently on business ethics," says Feldbaum. "We are working as hard and fast as we can to deal with this. This is really a new pantheon of issues." However, Feldbaum warned against reading too much into the ImClone story, which he says was overblown by the media's focus on Waksal, a New York socialite, and the company's best-known investor, Martha Stewart.

"The image of the CEO as socialite was particularly horrific to the rumpled academics who are biotech CEOs," Feldbaum says. "And the idea that Martha Stewart is part of a biotech story is somewhere between incomprehensible and galling."

ETHICS IN INFANCY ImClone aside, the biotech industry has some unique traits that put it at risk of running afoul of business ethics, says O.C. Ferrell, director of the E-business Ethics Center at Colorado State University. At many biotech firms there are no revenue or profit numbers to fudge, only a burn rate, or the speed at which companies spend money. For these companies, business ethics revolve largely around the disclosure of critical information to investors and regulators, Ferrell says.

At small biotech firms many people have key knowledge about products, and they may not understand the rules about disclosure of corporate information. "People like to talk about their work," says Ferrell. "But at these companies if you're talking to your brother, or your sister, or your best friend and you have a couple of drinks, you've got to be constantly vigilant."

Ferrell also says it is difficult for outsiders to even discern what information may or may not be meaningful, so it may be easier for biotech companies to get away with improper disclosure: "Wal-Mart is not likely to have some kind of major breakthrough that changes dramatically the value of its stock from one day to the next."

The make-or-break involvement of the US Food and Drug Administration in the industry also adds a layer of complexity that can generate trouble, says Ferrell, who argues for greater transparency at the agency. He questioned why the FDA gave Waksal information about its decision to temporarily reject the experimental cancer drug Erbitux a day before it disclosed the information to the public. "It is clear that we truly do not have enough information about the relation between biotech companies and the FDA, and why certain things must be reported and why others should continue to be confidential," Feldbaum observes.

But Feldbaum, who worked on the Watergate prosecution team, says biotech companies have no excuse for disregarding the laws that bind companies in all sectors. "You don't break the law," he says. "You don't even put your toes up to the line." Ferrell says sensitivity to ethical issues must be consciously built into companies. "Unfortunately many people view the world of business ethics as it relates to personal ethics--individuals either have it or they don't," he says.

Many other fields, such as medicine and law, have well-developed ethical standards that have evolved over centuries. They also have strong professional organizations that enforce those codes. Biotechnology is a relatively young industry and has had less time to develop and enforce ethical standards.

Rahul K. Dhanda, business development associate and director of the bioethics program at Interleukin Genetics in Waltham, Mass., adds that basic accounting rules are no different at biotech firms than at other companies. "What's more of a concern is how the attitudes that compromise corporate ethics may have a broader effect in a biotech company," says Dhanda, author of the book Guiding Icarus: Merging Bioethics with Corporate Interests. "If there is an attitude about cutting corners in accounting that might spill over to science, that is very disturbing."

Photo: Courtesy of Margaret Eaton
 Margaret Eaton

BUILDING EQUITY IN ETHICS Margaret Eaton, senior research scholar in the Center for Biomedical Ethics at Stanford University and a lecturer in management at the university's graduate school, observes that many biotech firms have ethics officers or advisory boards in place. After this summer's scandals, she says, that trend might spread to more industries.

Eaton also says universities are stepping up programs to help scientists learn business management. "Typically the founder of a biotech firm is a scientist who patented the technology and does not have business training," Eaton explains. "You want to see a balance between the science and business acumen, but sometimes in a small company, especially early on, you don't see that."

Although ignorance may be one pitfall, optimism is another ethical risk for biotech executives, Eaton adds. "Enthusiasm might cross the line into over-enthusiasm that ignores signals in preclinical [trials]," she relates. "It's not consciously misleading. It's just that interest in the product and the degree to which it can be a super product might propel it longer into the development cycle."

Eaton points to a conflict that biotech managers face between demands by the Securities and Exchange Commission to disclose significant milestones and by the FDA, which prohibits companies from promoting a product that has not been approved for marketing. "It's pretty tricky for managers to walk between those two requirements," she says.

However, Eaton says the stakes grow higher when companies are under pressure to hit certain milestones to receive funding from investment partners. "There might be a tendency of companies to overpromote that they've reached milestones when the data may not justify it," she says, "but that's probably true at any company."

Most venture capitalists and early-stage biotech investors have seen companies go through cycles of enthusiasm and failure and are savvy about the risks, according to Eaton. Many firms have hired scientists to help them evaluate biotech firms, she points out. But the outcry over corporate finance scandals, and government moves to remedy the problems, may only divert attention from larger problems, Dhanda cautions.

"The big problem I have with these scandals right now is that they're really limiting the definition of corporate ethics and changing it from the world of ethics to the world of law," he says. "You end up focusing entirely on corporate finance, which is only one component." The danger now, he says, is that by correcting accounting abuses, government officials may think they can stop worrying about corporate ethics. He says in all industries ethical questions can spill over into other broader issues, such as protecting the environment or labor rights.

"These issues deserve as much attention as corporate accounting, but because they are not so easily defined, we focus only on finance," he says. "We may very well be setting ourselves up for another loss of consumer trust and investor confidence."

Susan Warner (swarner@comcast.net) is a freelance writer in Philadelphia.

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