The Pharmaceuticals & Biotechnology industry: high potential to drive positive social change, yet increasing prices, anti-competitive practices and high R&D costs are among the challenges to be tackled
Despite a slight improvement in the sector’s approach to product safety and providing information to customers, the risks posed by opioids are yet to be adequately managed.
In particular, the sector’s response to the addictive nature of opioids and their harmful health effects appears to be weak, with remedial actions not yet being systematically adopted.
The report provides Vigeo Eiris’ exclusive opinion on 150 Pharmaceuticals & Biotechnology companies, including the sector’s strengths, innovations and best practices as well as controversies, vulnerabilities and emerging challenges such as the opioid epidemic, the high price of medicine, the industry’s increasing consolidation through M&A and trends in R&D investment. Performances and indicators are provided on critical issues such as business ethics, human capital and human rights, governance, integrity of lobbying practices, sustainable products & services and contribution to the UN Sustainable Development Goals.
The Pharmaceuticals & Biotechnology industry is composed of two sub-sectors: traditional pharmaceuticals and biotechnology companies. The industry’s value chain starts with the manufacture of medicine and includes research, development and regulation. Next is the distribution and handling of medicines from the manufacturer to the end user (through retail, pharmacies, hospitals or dispensing doctors). The final part of the value chain is commercialisation and providing the appropriate dosage, medicine format and advice to patients.
Vigeo Eiris awarded an average overall score of 27/100 to companies in the Pharmaceuticals & Biotechnology sector on a scale of 0 to 100. The sector’s score has not changed since our previous analysis.
The sector ranks 37th out of Vigeo Eiris’ 39 sectors, covering a total research universe of 4,500 companies. The sector’s ranking has not changed since our previous review.
Sector leaders are concentrated in Europe such as GlaxoSmithKline (United Kingdom), Novartis (Switzerland) and Sanofi (France), due to their higher level of transparency and disclosure of key CSR challenges relating to their operations. Laggards are mostly listed in Emerging Market and Asia Pacific countries.
The Pharmaceuticals & Biotechnology sector reporting rate is 52%, below the universe average (56%), with European companies communicating most comprehensively on their ESG policies, practices and performance.
ESG risk mitigation scores are weak in relation to reputation (27/100), human capital (24/100), operational efficiency (28/100) and limited in relation to legal security (31/100). The area of human capital achieves the lowest score as the reported policies and efforts to manage employee-related impacts (such as the respect and promotion of fundamental labour rights; health and safety; impact of reorganisations and the management of layoffs; and career development) generally lack substantial and consistent disclosure across the majority of companies. The highest score is achieved in the area of legal security, although this is still somewhat limited. The industry is highly regulated and under significant stakeholder scrutiny, increasing its exposure to legal and regulatory risks and requiring companies to monitor and enhance their approach to compliance in response to heightened transparency expectations and potential controversies. Whilst many controversies are observed within the Pharmaceuticals & Biotechnology sector, companies are generally considered to be reactive. However, proactive management and corrective measures are not demonstrated, leading to a limited overall score for the sector’s performance on legal security risk management.
The sector faces 312 controversies affecting 36% of companies. 13% of these companies are involved in cases of critical severity, 52% in cases of high severity, 33% in cases of significant severity and the remainder (2%) in cases of minor severity. The most recurrent controversies concern product safety, information to customers, anti-competitive practices, corruption and access to medicines.
Opioid epidemic: the sharp increase in opioids being prescribed for pain relief since the 1990s has fuelled the opioid epidemic. In recent years, the number of deaths resulting from opioid addiction and overdose has increased to such an extent that in October 2017 the United States declared it a public health crisis. Opioid manufacturers’ marketing and information strategies are primarily under examination, as well as their capacity to ensure product safety – particularly for medicines containing controlled substances. In this regard, the industry shows limited capacity in providing adequate information and responsible marketing (36/100) and ensuring product safety (29.9/100). Opioid manufacturers are facing lawsuits from different stakeholders over their role in causing the opioid epidemic through over-distribution and over-promotion, which they are fighting mostly through outreach programmes, grants and donations. Collaborations between companies within the sector have been announced with the aim of developing new therapies, but systematic remediation is yet to be observed.
Access to medicines: despite different stakeholder expectations about the role of Pharmaceutical & Biotechnology companies in increasing access to medicines, the industry shows a weak average performance in this regard (21/100). Less than half of the sector (37%) is committed to increasing access to medicines that treat WHO (World Health Organization) priority diseases. One of these companies is Sanofi, which reports a commitment to keeping a rotating stock of its malaria medicine available for immediate delivery to patients. In addition, other firms such as Novartis and Bristol Myers Squibb report on their commitments, projects and efforts such as building new delivery systems and price-cutting schemes to address shortages of medicines that treat WHO priority diseases.
Use of medicines and disposal of unused medicines: the improper disposal of pharmaceutical compounds is a source of both land and sea pollution and includes negative impacts on human health. About 70% of companies do not disclose any commitments to adequately tackle the environmental impacts at the end of a product’s lifecycle, contributing to an average score of 12/100 for the sector. Among the companies adopting good practices, GlaxoSmithKline discloses its assessments of environmental impacts from individual APIs (Active Pharmaceutical Ingredients) and reports on a Green Chemistry Performance Unit (CPU) to replace hazardous or unsustainable chemicals with lower impact alternatives. In 2011, GSK also launched an inhaler reclaim scheme which was piloted in the US and has since been extended to the UK.
CSR risk management: the industry’s business model is capital intensive and exposed to different operational, legal and reputational risks; the importance of suitable risk management and resilience is therefore crucial in this sector. 28% of companies report on the presence of a CSR committee that is part of their Board. More than 40% of companies report that CSR is integrated into their risk management framework including through risk mapping, monitoring key risk indicators and specific reporting systems to the Board. A similar percentage of companies provide evidence that their internal controls cover CSR risks relating to their business operations. While the inclusion of CSR-related pay criteria helps align executive incentives with CSR objectives, this practice remains relatively scarce within the Pharmaceuticals & Biotechnology sector, with only seven out of 150 companies linking executives’ variable remuneration with CSR metrics.
M&A: pharmaceutical & biotechnology companies often acquire other companies in order to create more value and long-term growth and help them the address challenges associated with expiring patents and increasing R&D costs. Although the industry conducts large mergers and acquisitions in terms of value and scale and this trend is expected to continue, the sector’s overall performance on the responsible management of reorganisations remains weak at 18/100. Only 5% of companies commit to responsible reorganisations, while 77% fail to disclose any measures in this regard.
Corruption: the pharmaceuticals & biotechnology industry is involved in frequent corruption controversies, the majority of which are of high severity. Specifically, 41% of all controversies observed are related to corruption, with none of the companies involved reporting on their remedial actions. Overall, the industry demonstrates limited capacity to prevent corruption and its associated risks, shown by an average score of 34/100, with only a few companies providing formal training, dedicated controls and due diligence in this regard.
Best performing areas:
Board of Directors
Audit & internal controls
Worst performing areas:
Environmental impacts from transportation
Use and disposal of products
Atmospheric emissions not related to energy consumption
Top Performing Companies:
Europe: GlaxoSmithKline (61/100)
North America: Johnson & Johnson (52/100)
Asia Pacific: Takeda Pharmaceutical (44/100)
Emerging Markets: Dr Reddys Laboratories; Aspen Pharmacare Holdings (34/100)
Companies making best progress since 2017:
Europe: Novozymes (+9)
North America: Mylan (+14)
Asia Pacific: No progress
Emerging Markets: Shanghai Fosun Pharma (+34)
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