This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
- Sector: Healthcare
- Industry: Pharmaceuticals
- ESG Issue: Access and Affordability
Risk: Putting a price on life-saving drugs
A common practice by drug manufactures in the U.S. when a drug is coming off-patent – meaning competition, and particularly cheaper, generic competition, can come to market – is to raise prices on the patented drug in the years just before competition does hit the market. As generic competitors to the EpiPen were expected to hit the market in 2015, Mylan took the opportunity to gouge the price of a 2-pack of the life-saving drug from about $100 in 2007, when the pharmaceutical company first acquired the rights to the drug, to $600 per pack less than 10 years later.i The notable price hike garnered attention from consumers, the press, Congress, and the Department of Justice as the first generic version of the drug, also produced by Mylan, hit the market at $300 per 2-pack – a roughly 200% increase from the brand name version’s 2007 price.
Legal risks from anti-competitive behavior.
On top of the price-gouging, Mylan was found to have knowingly misclassified the EpiPen to avoid paying rebates and allegedly colluded with pharmaceutical benefit managers in a price-fixing scheme. By 2017, the company faced litigation and investigations from numerous State Attorneys General, the Department of Justice, and Congress, including a class-action racketeering lawsuit related to the EpiPen. The pharmaceutical company has since made settlements in the hundreds of millions and to this day continues to face legal action related to its EpiPen pricing practices.ii
Opportunity: It’s good to be needed
Obesity historically has been viewed as a result of lifestyle choices. More recently, it’s being classified medically as a chronic disease. It’s estimated that obesity afflicts more than 10% of the global population, and around 42% of the U.S. population. As obesity treatment moves into the realm of primary care, it’s more likely that it will be diagnosed and treated, as many cases still go undiagnosed. These conditions present opportunities for the market to provide anti-obesity and weight-management drugs. The global obesity treatment market was valued at USD 14 billion in 2021 and is expected to grow at a CAGR of 10.1% through 2030.
Semaglutide, the active ingredient in Ozempic and Wegovy, has gained international attention for its off-label use as social media influencers and celebrities from Elon Musk to the Kardashians have admitted to using the drug as a quick weight-loss solution. Semaglutide is an incretin mimetic, a type of anti-diabetic and weight management drug. Wegovy alone doubled the market value of Novo Nordisk A/S since 2021. Clinical trials of incretin mimetic have proven to be effective for diabetes management and obesity reduction, however, there is uncertainty with the long-term side effects. Trial data transparency and stringent marketing oversight are critical.
The opportunity in being essential.
The World Health Organization, meanwhile, is considering whether to include liraglutide, another incretin mimetic, in its Essential Medicines List. Drugs are added to the EML when they address “the priority health care needs of the population,” giving consideration to the efficacy and cost-effectiveness of the drug, as well as the prevalence of the disease the drug combats. The result of getting added to the list is typically increased accessibility, as the list serves as a guide to governments around the world as to which drugs should be made available and even purchased. Because the drugs currently have prohibitive prices, getting added to the EML could increase access and availability around the world. Pharmaceutical companies benefit from increased scale and demand from the designation.
Impact: Not all impact is positive
The impact that Purdue Pharma’s business practices to sell oxycontin have had on communities and families across the country are well-documented at this point. While the impact can be more clearly quantified in the lives lost, families broken, and communities destroyed, a group of academics have sought to measure the impact of the crisis through a community’s ability to raise capital. Researchers from Penn State, University of Georgia, and UNLV conducted an analysis on the impact to municipal bonds. They found not only a correlation between higher rates of opioid misuse and difficulty in raising funds through municipal bonds, but that a higher prevalence of misuse actually causes significantly higher yields and lower issuances compared to economically similar communities with lower levels of misuse.
Did you know?
The study, Opioid Crisis Effects on Municipal Finance, found that, on average, communities impacted by the crisis lost out on $15 million in funding which is roughly the average price of two new elementary schools.
Impacts to community building.
Communities across the U.S. rely on municipal bonds to finance basic services, infrastructure, and public works like roads, parks, libraries, and schools. For communities already devastated by this epidemic, the heightened cost of financing for these essential services further deteriorates their ability, not only to prosper, but even to simply build back in the wake of the crisis. The repercussions to these predominantly rural communities will likely be felt in the years to come as the impact to their ability to raise capital perpetuates the prosperity gap.
Questions an analyst might ask
Does the company:
- have a regulatory/quality division for products?
- implement clear product and service safety programs in place?
- disclose an ethical marketing program?
- have clear QMS standards in place for its facilities?
- provide transparency when disclosing clinical trial data?
- provide intellectual property access, such as technology transfer agreements, to low-income countries?
In the case of a recall, is the company prompt in issuing the recall and transparent regarding the risks and costs of the recall?
The bottom line
The healthcare sector is bursting with emerging risks and opportunities, and companies inherently carry both positive and negative impacts on society (and we didn’t even touch antibiotic resistance! More on that in a future post).
Investors who incorporate ESG information may be considering any of these lenses within their investment process. Like all data, this information can be used in different ways by different people to do different things, and that includes different of investment goals. There is no one size fits all, and there shouldn’t be. That’s the opportunity of ESG.