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    Columns

    Managing Reputation Risks for Medical Device Companies

    ...

    Kevin M. Quinley, Quinley Risk Associates LLC11.13.14
    Warren Buffett, multibillionaire and investment oracle who often is called “the sage of Omaha” once said, “It takes 20 years to build a reputation and five minutes to ruin it.” Companies in the medical device field certainly can relate to this observation.

    In an age of viral videos and rapid-fire social media, corporate misadventures—real or imagined—receive swift air play and quickly can crater a company’s marketplace reputation. While all firms have a stake in preserving strong reputations, risks are elevated for medical device firms.

    Various triggers and events can dent a device firm’s reputation. Some examples:
    • A company recalls a product, rattling consumer and physician confidence in the device;
    • The U.S. Food and Drug Administration (FDA) issues a warning letter that criticizes a company’s manufacturing processes;
    • A prominent personal injury law firm files a class-action lawsuit, alleging a company’s devices harm patients. TV ads soliciting clients blanket the news media; and/or
    • A corporate whistleblower alleges underhanded financial dealings at the company and goes public.
    Multiple developments can threaten a medtech company’s reputation. In turn, the reputational hit can deflate a stock price, boost a competitor, erode market share and degrade employee morale.

    Managing reputational risk goes beyond having a public relations strategy, although this is a key component. Medical device manufacturers must monitor the external environment for events that could damage perceptions of the company and sway internal and external stakeholders. Upper management must task someone or some department with the duty to monitor developments that could hurt the company’s reputation. This could include something as basic as arranging for a Google Alert whenever the company’s name appears in the media.

    Life-science firms must preserve their reputation among various stakeholders, such as:
    • Physicians. Doctors are key market constituencies for most life-science companies. A strong reputation boosts the odds that doctors will prescribe or demand your products. A weak reputation opens the door to competitors. A strong brand perception among physicians drives sales, which, in turn, improves revenue, profitability and market share;
    • Hospitals. Increasing in the managed care era, purchasing agents  often are the ones who place orders for equipment and supplies. If they perceive that a company’s reputation is rock solid from a quality standpoint, they are more likely to order the company’s products and honor physician requests to buy a specific company’s devices; and/or
    • Patients. Patients rarely make the purchasing decisions (over-the-counter drugs and devices excluded), but they can influentially request a particular drug or device. Witness the multitude of direct-to-consumer ads with the tag line, “Ask your doctor about (insert brand name here).”  Why suggest this unless companies realize that patients exert a strong market “push” for certain drugs and devices? A good reputation strengthens this push. A weak one dilutes it. 
    With the proliferation of direct-to-consumer ads, a company’s reputation can reinforce patients’ perceptions and prompt them to request specific products from their physician. Simultaneously, a disproportionate number of lawyer television ads target pharmaceuticals and medical devices (transvaginal mesh, cold-therapy equipment, birth-control medication, etc.). Whether or not claims are well-founded, they can erode a company’s reputation in the absence of a well-designed program to project a brand and to manage a company’s image.

    Such ads can impact the perception of:
    • Shareholders/investors. A strong reputation for safe and high-quality products enhance the odds of attracting venture capital, institutional or individual investors;
    • Regulators. The FDA regulates life-science companies. Perceptions that regulators hold about the quality and safety of a manufacturer’s products can influence the degree to which companies invite closer scrutiny and sanctions;
    • Suppliers. Many companies producing medical devices rely on outsourcing and vital supplier networks to manufacture products. Companies with platinum reputations in the marketplace can leverage better terms on price, quality and delivery. By contrast, device firms with floundering reputations lack leverage and pay more for materials of less quality or on take-it-or-leave-it delivery terms. Thus, a company’s reputation matters when managing relationships with vital suppliers; and/or
    • Competitors. Regardless of whether a medical device company produces single-use disposables or intricate life-support electronic equipment, it wants to maintain a solid reputation among competitors. Rivals are less likely to enter a market against the company with a rock-solid reputation versus a company perceived as reeling from financial or product woes.
    Strong, positive reputations help firms forge positive relationships with patients, investors, physicians, suppliers, regulators and even competitors. Conversely, reputational hits erode firms’ business objectives, forcing them to play a game of catch-up. Reputation is closely related to, if not synonymous with, goodwill. It is an intangible asset.

    Difficulties in quantifying and monetizing reputation do not mean that it lacks value. When it comes to projecting one’s brand as a manufacturer of high-quality healthcare products—whether those are medical devices or pharmaceuticals—preserving and building on a solid reputation is a critical part of any life science firm’s business plan.

    Managing reputational risk includes putting yourself in the shoes of various stakeholders and asking yourself the tough question: “What scenario would pose the largest threat to the company’s viability?”

    Strategies to Manage the Risk
    Medical device companies should task someone or some department with the responsibility to monitor various media streams—including but not limited to social media—to see what others are saying about the company. This establishes early warning systems regarding potential challenges to a company’s reputation. In today’s world, many of these arise through social media. They also can surface in industry forums, academic papers, TV commentary and exposés, blogs, etc.

    Astute companies should establish an alert service of emerging risks and online reporting of risks to reputation or opportunities to burnish a company’s reputation.

    Here are 10 action items for management:
    1. Conduct a reputational “inventory.” Start by thoroughly assessing the device firm’s current risks and vulnerabilities. Consider all stakeholders, both internal and external, who will gauge your reputation and whose goodwill is critical for continued functioning.
    2. To thine own self (and others) be true. Tell the truth, and tell it immediately. Public relations experts say that if the news is bad, get it out and get it out early.
    3. Involve lawyers, but… Have legal counsel preview all corporate statements before release. But don’t embrace the “no comment” approach. The lawyer’s knee-jerk “no comment” response can undermine the long-term interest of the device firm.  While competent and seasoned legal counsel can protect a company’s reputation, their involvement can be overdone.
    4. Do not have lawyers steer the ship. Do not relegate crisis or reputational risk management to inside or outside legal counsel, though they should be part of the team in crafting policies and responses.
    5. Build a team for centralized communication. Designate a crisis management team or individual to address any and all media inquiries. Authorize no one else to speak for the company.
    6. Sweat the details on ethics and standards. Conduct rigorous due diligence regarding ethical practices and standards.
    7. Audit suppliers and business partners. Perform independent audits of third-party suppliers and subcontractors.
    8. Avoid hasty or premature liability concessions. Present a calm, sympathetic face but do not admit legal liability.
    9. Retain public relations professionals. Consider hiring a public relations firm or expert consultant in crisis management.
    10. Play offense as well as defense. Consider buying advertising in print, broadcast or Internet media to address the crisis and the company’s response.
    P. T. Barnum was wrong. There is such a thing as bad publicity. Shareholders of Toyota (recalls), General Motors (recalls) and British Petroleum (oil spill)—as well as many medical device companies—would agree. Intentional efforts to manage reputational risk are part of any prudent medical device firm’s risk management program.

    Medical device companies make products that save lives, prolong lives and enhance the quality of life. Dented reputations here can be matters of life and death, both for patients and to a company’s product liability. Use these tips and tactics to avoid calamities and to preserve your company’s strong image. 


    Kevin M. Quinley, CPCU, ARM, is the principal of Quinley Risk Associates LLC, a risk management consulting firm. He can be reached at kevin@kevinquinley.com or at (804) 796-1939. 
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