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      ESG considerations for rating pharmaceutical companies
      TUESDAY, 29/03/2022 - Scope Ratings GmbH
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      ESG considerations for rating pharmaceutical companies

      When evaluating the ESG factors and risks that are relevant to rating the pharmaceutical industry and pharma companies, we highlight three interlinked challenges: litigation risk, pricing, and innovative power as business-model sustainability.

      Pharmaceutical companies have long been exposed to litigation risk. Various lawsuits have alleged over-charging, harmful drug side effects, manufacturing issues, lack of oversight of opioid distribution and deceptive marketing. The more complex the companies become, the higher the range of liability issues. A tighter focus on ESG will help companies reduce litigation.

      “Litigation risk and credit ratings have an inverse relationship. Major lawsuits can cause serious reputational damage, which may push investors and relevant parties to boycott companies, indirectly impacting their market position,” said Azza Chammem, a senior analyst in Scope’s corporate ratings team. “Litigation can cost companies billions of dollars, which can materially affect cash generation, squeeze market capitalisation and constrain access to capital. Credit quality may worsen as a result of extraordinary expenses or cash outflow.”

      From a social standpoint, the pricing of medicines is the most pressing issue. Not all demographics or countries can afford treatments. As the wealth gap increases, the challenge for pharma companies is to ensure that new treatments and vaccines are affordable such that they do not become unavailable in certain countries and companies can avoid accusations of discrimination.

      “Being seen to make profits at the direct expense of people’s welfare can hurt the industry. Increasing drug prices will boost short-term revenue but if done in a dubious manner, negative social impacts are likely to lead to negative press and social media reaction. This is clearly an ESG and a financial issue as it could affect reputation and brand value as well as a company’s overall cost of capital and could impact future sales and operations,” said Zurab Zedelashvili, a senior analyst in the corporate ratings team.

      The pharma industry is facing considerable productivity challenges in terms of identifying, testing, and bringing new drugs to market, especially in the context of highly innovative and technology-driven solutions. Manufacturing technologies continue to evolve as the emergence of the Internet of Things, artificial intelligence, robotics and advanced computing a.k.a. Industry 4.0 begins to challenge traditional approaches, practices, and business models.

      Industry 4.0 has the potential to dramatically increase the agility, efficiency, flexibility, and quality of the industrial production of medicines. This underlines the increased importance of efficiency in R&D, which will likely become a major driver towards a more sustainable future.

      “Companies that have demonstrated a capacity of efficiently delivering their product pipeline will be in a better position to meet forthcoming industry challenges and maintain competitive advantage. There is a clear correlation between R&D expense and product pipeline. The main challenge is efficiency. In our rating approach, we consider product pipeline to be one of the main components of business-model sustainability,” said Olaf Tölke, head of corporate ratings.

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