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that it would accept SLBs as collateral if they are linked to environmental Recommendation on mentioned bond issuers
objectives (starting January 2021). We see it as likely that this AstraZeneca (Marketweight)
Bayer (Marketweight)
requirement could be extended to social objectives. Many European Merck KGaA (Overweight)
pharma companies, such as Sanofi, Novartis, Bayer, Merck KGaA, Novartis (Marketweight)
GlaxoSmithKline (GSK), have already updated and increased their ESG Pfizer (Marketweight)
Sanofi (Overweight)
targets and are candidates for this ESG issuance type, in our view. TEVA (Hold)
■ COVID-19 provides a unique opportunity for the pharma sector to ACCESS TO MEDICINE INDEX: RANKING (2018)
demonstrate its value to society. Access to medicine is the key social
factor for pharma companies, and is likely to become more important in the Eli Lilly
Astellas Pharma
near term due to the distribution of COVID-19 vaccines and medication. Daiichi Sankyo Co
AbbVie
AstraZeneca, Pfizer and Sanofi are the key players in vaccine development, Bayer
Bristol-Myers Acquibb
while Roche is most active in the production of diagnostic tests. Many large Boehringer Ingelheim
Gilead Sciences
Merck & Co
pharma companies have integrated access to medicines as a core part of Pfizer
Roche Holding
their business strategies. Every two years, the Access to Medicine AstraZeneca
Eisai Co. Ltd
Foundation ranks the top pharmaceutical companies according to their Sanofi
Novo Nordisk
Takeda Pharmaceutical
efforts to advance global access to medicines. The companies in our Merck KGaA
Johnson & Johnson
coverage had the following positions in the latest ranking (2018): GSK (1), Novartis
GlaxoSmithKline
Novartis (2), Johnson & Johnson (3), Merck KGaA (4), Sanofi (7), 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
AstraZeneca (9) and Roche (10). In our view, these pharma companies are
potential candidates for sustainability-linked issuance. Source: Access to Medicine Index 2018, UniCredit Research
■ Pharma companies have received good ESG ratings from the main MEDIAN DRUG PRICE DEVIATION (%)
sustainability-rating providers. Merck KGaA, Sanofi and Novartis hold
the best ratings and Bayer (after the Monsanto takeover) is at the bottom 350
300
end of the range. However, Bayer has initiated several sustainability 250
initiatives. We assume that its ESG rating has upside potential in the 200
150
medium term and that an SLB with a focus on its access-to-medicine 100
50
projects would support the steady improvements in ESG-related KPIs. 0
-50
■ In this sector report, we provide an overview of ESG topics in the -100
Iceland
Egypt
Russia
South Africa
India
Maylaysia
USA
UAE
Turkey
Indonesia
Kenya
Thailand
Germany
Italy
Denmak
Netherlands
Israel
South Korea
Summary
The number of sustainability The Pharma sector is underrepresented in the ESG bond market. In 2020, issuance from
bond issuers in the Pharma
sector should continue to grow Novartis and Pfizer has put “social” in the spotlight of ESG issuance. In this report we take a
closer look at the green, social and governance components under the ESG umbrella. We
draw the following conclusions:
■ In the first ten months of 2020, there was again strong supply in the ESG bond market,
driven by a COVID-19-related move from green to social and sustainability bonds, which
have both entered a new stage in the market. However, issuance in the pharma sector is
limited to two issues, Pfizer (social bond) and Novartis (sustainability-linked bond).
■ Sustainability-linked bonds (SLBs) are a fairly new instrument. The first SLBs were issued in
the US by Enel (Utilities) in September 2019. In 2020, SLB issuance amounted USD 10.7bn.
The six SLB issuers then (Suzan, Novartis, Chanel, Enel, Tauron, Holcim) came from different
sectors. The only thing the issues have in common in general is that failure to meet the targets
triggers a step-up of the coupon.
■ We see further sustainability-linked bond issuance in the pharma sector as likely. This is
supported by the ECB’s decision to accept bonds linked to environmental issues, with single
or multi-step coupon changes, as collateral (starting in January 2021). We see it as likely that
this requirement could be extended to social objectives. SLB issuers have to achieve their
KPIs, which are traceable, thereby warding off accusations of “social washing”.
■ COVID-19 presents an opportunity for the pharma industry to demonstrate its importance to
society. Access to medicine is the key social factor. The sector plays a key role in the search
for a vaccine or treatment for COVID-19. Many European pharma companies like Sanofi,
Novartis, Bayer, Merck KGaA, GSK have already updated and increased their ESG targets.
■ Pharma companies have received good ESG ratings from the main sustainability-rating
providers. However, differences remain. According to Merck KGaA’s Corporate Sustainability
Report 2019: facts and figures (page 42) 1, Merck KGaA received a top rating by MSCI, but its
score by ISS ESG is in line with those awarded to AstraZeneca and Novartis and is slightly
below that awarded by Vigeo Eiris. Bayer’s current ESG ratings are positioned at the bottom of
our pharma coverage. Portfolio changes, notably with regard to the acquisition of Monsanto’s
agriculture business, have resulted in metrics deteriorating from 2018 to 2019. Current
sustainability measures at Bayer offer upside potential.
■ The pharma sector is exposed to product governance issuance due to litigation over opioids,
generic price fixing and glyphosate. In our view, the current situation due to COVID-19 allows
the sector to more than compensate for this risk.
■ R&D spend remains a key driver in healthcare innovation, often generating global benefits.
In terms of R&D, AstraZeneca, Roche and Novartis have the highest R&D/sales ratio
within European large pharma companies.
■ According to our calculations Roche, Sanofi and AstraZeneca showed the greatest
reductions in GHG emissions. All companies showed only limited energy reduction. Roche,
Sanofi and GSK are the top performers in energy transformation (Vigeo Eiris).
■ According to the research of Vigeo Eiris, GSK, Sanofi, Merck KGaA and Novartis are the
leaders in human rights, community involvement and human resources.
■ Data protection has become a notable social risk in light of emerging data privacy and
protection laws. Roche is the leader in digital health care with several initiatives.
1
https://www.merckgroup.com/en/cr-report/2019/servicepages/downloads/files/facts_figures_merck_crr19.pdf
Short explanation of Sustainability-linked bonds are a forward-looking performance-based instrument. The bonds
sustainability-linked bonds, financial or structural characteristics are adjusted depending on the achievement of pre-
social bonds and green bonds defined sustainability targets. The adjustment can be in both direction, e.g. an increase in
coupon rate if targets are met, or the opposite. Social bonds are use-of-proceeds bonds that
raise funds for new and existing projects that address or mitigate a specific social issue and/or
seek to achieve positive social outcomes. Sustainability bonds are bonds where the proceeds
are exclusively applied to finance or re-finance a combination of both green and projects.
Green bonds were created to fund project that have a positive environmental impact and/or
climate benefits.
Green bonds Social bonds Green bonds Social bonds Sustainability bonds
600 200
Sustainability bonds Sustainability-linked bonds 570 182
20 180
20
Amount issued in USD bn
500 70 160
140
60
120
Amount (USD bn)
400
366 220
320 100
58 80
300 43 57 63
60 50
19 12 102 12
202 119 6 12
178 40 23
200 16 8
14 20 39 28
27
254 260 0 9
100 172 184
158
0
2017 2018 2019 10M20 2021F
2
Source: CBI, Bloomberg, UniCredit Research
2
UniCredit Research: ESG Outlook 2021:
https://www.research.unicredit.eu/DocsKey/credit_docs_9999_178602.ashx?EXT=pdf&KEY=n03ZZLYZf5miJJA2_uTR8iZxZZJxHyivVN_fl7gg8oM=&T=1
A review of the first ten months The first ten months of 2020 saw strong supply in the ESG bond market again, driven
of 2020
by a COVID-19-related move from green to social and sustainability bonds. In 10M20,
the issuance of green, social and sustainability bonds totaled a record USD 366bn (up 37%
yoy). The issuance of social bonds was up by 670% yoy to USD 119bn and of sustainable
bonds up by 64% to USD 58bn. Green bond issuance decreased by 14% yoy to USD 184bn. 3
Outlook 2021 Outlook 2021: We expect the ESG bond market to continue along its growth path in 2021 and
estimate global issuance of green, social, sustainability and SLBs to amount to USD 570bn.
We expect to see increased issuance of SLB’s, with a total volume of USD 20bn in 2021. 4
Issue Date Issuer Target Penalty Maturity Volume USD equiv. ECB eligibility*
9/10/19 Enel increase renewable energy 25bp coupon step-up Sep-24 USD 1.5bn USD 1.50bn No
generation
10/17/19 Enel increase renewable energy 25bp coupon step-up 24-Jun EUR 1bn USD 1.19bn Yes
generation
10/17/19 Enel increase renewable energy 25bp coupon step-up Jun-27 EUR 1bn USD 1.19bn Yes
generation
10/17/19 Enel GHG reduction 25bp coupon step-up Oct-34 EUR 0.5bn USD 0.59bn Yes
9/14/20 Suzano GHG reduction 25bp coupon step-up Jan-31 USD 1.25bn USD 1.25bn No
9/23/20 Novartis Strategic innovative therapies 25bp coupon step-up Sep-28 EUR 1.85bn USD 2.20bn No
patient reach and flagship
programs patient reach
10/1/20 Chanel GHG reduction 75bp additional redemption 31-Jul EUR 0.3bn USD 0.36bn No
payment at maturity
10/1/20 Chanel 100% renewable electricity 50bp additional redemption 26-Jul EUR 0.3bn USD 0.36bn No
by 2025 payment at maturity
10/20/20 Enel increase renewable energy 25bp coupon step-up 27-Oct GBP 0.5bn USD 0.67bn No
generation
10/30/20 Tauron CO2 emissions, renewable 5bp coupon step-up per Oct-25 PLN 1bn USD 0.27bn No
energy capacity installed target
11/23/20 Holcim GHG reduction 75bp coupon step-up at Apr-31 EUR 0.85bn USD 1.14bn Yes
maturity
Total USD 10.7bn
Novartis’s sustainability-linked Novartis’s SLB highlights the importance of social factors from an ESG perspective for
bond
the pharma industry. A key challenge for issuers is how to make sure that ESG objectives
used to determine the performance are transparent, measurable and auditable. In our view,
Novartis was successful in defining this requirement. Bondholders will receive higher interest if
Novartis fails to meet targets for increasing access to specific drugs in developing countries.
3
The Green Bond and ESG Chartbook, November 2020
4
ESG outlook 2021, 26 November 2020
The targets are linked to its 2025 Patient Access Targets program (September 2020). The
targets include increasing patient reach in low and middle-income countries by at least 200%
by 2025 for specific drugs, and by at least 50% for programs in leprosy, malaria, Chagas
disease and sickle cell disease. Novartis will report on its performance each year.
Sustainability-linked bonds: In our view, the issuance of SLBs remains a growth area supported by the ECB’s
a growth area
announcement (on 22 September) that it would accept them as collateral from 1 January
2021. The coupons must be linked to a performance target referring to one or more of the
ECB accepts them as collateral
environmental objectives set out in the EU Taxonomy Regulation and/or to one or more of the
UN’s SDGs relating to climate change or environmental degradation. The announcement signals
increasing support for such instruments and could facilitate further growth over time. See the
ECB’s press release “ECB to accept sustainability-linked bonds as collateral”, 22 September.
Coronavirus pandemic will In our view, the coronavirus pandemic will drive interest in social bonds and in SLBs.
drive interest in social bonds
and in SLBs Some investors have flagged the risk of “green washing”, arguing that there is a lack of
transparency with regard to how the bonds’ proceeds will be used. Pfizer’s social bond
issuance in March 2020 was criticized in this respect, with social benefits often seen as more
qualitative than quantitative (e.g. Financial Times, “Rise in Covid-19 bond-issuance fans fears
over ‘social washing’”, 30 June). In our view, SLB issuers have to achieve KPIs that are
traceable, which runs counter to the argument of “social washing”.
The SLBP The ICMA's Sustainability-Linked Bond Principles (SLBP, June 2020) outline best
practices for financial instruments to incorporate forward-looking ESG outcomes and
promote integrity in the development of the SLB market by clarifying the approach for
issuance of SLBs. The SLBP comprise five core components: 1. the selection of KPIs, 2. the
calibration of SPTs, 3. bond characteristics, 4. reporting and 5. verification.
Bond characteristics The financial and/or structural characteristics of a bond can vary depending on whether
or not the predefined KPIs achieve the predefined SPTs. A potential variation of the
coupon is a common example. The ICMA recommends that financial and/or structural
characteristics should be commensurate and meaningful when compared to the issuer’s
original bond characteristics. Potential “fall-back” mechanisms, for example, if the SPTs
cannot be calculated, should be explained and potential exceptional events, such as
significant changes in underlying KPIs caused by material M&A activities, should be
considered by the issuer and included in the framework.
ESG ratings
Sustainability-rating providers Sustainability-rating providers verify and certify the quality of an issuer’s bond
framework and its alignment with market principles. MSCI ESG rates companies on an
“AAA” to “CCC” scale according to their exposure to industry-specific risks and their ability to
manage those risks relative to peers. Sustainalytics’ ratings follow a five-level scoring scale
from 1 (low ESG risk) to 5 (high ESG risk). Vigeo Eiris, an affiliate of Moody’s, includes a
conventional four-level scoring scale in its ratings (obtained based on a score out of 100). ISS
ESG’s ratings follow a 12-level scoring scale (from D to A+).
ESG by rating agencies Rating agencies have included ESG factors in their analysis for a long time, but ESG
factors are reflected in ratings only when they have a material impact on
creditworthiness. S&P introduced an analytical methodology called ESG Evaluation, which is
a standalone analysis separate from S&P’s rating criteria. Similar to S&P, Moody’s also
incorporates ESG factors in its credit ratings when these factors have material credit
implications. With regard to social risks, Moody’s published what it refered to as a Social
Heatmap in October 2019. Fitch has an integrated scoring system that shows how ESG
factors impact individual credit-rating decisions.
Sustainability reports shed To inform investors of their performance in the area of sustainability during each
light on ESG performance
financial year, many European pharma companies have started to publish sustainability
reports. These include details pertaining to non-financial performance in ESG fields and are
intended to help investors gauge performance in these areas over a certain period.
Pharma companies have good Pharma companies have received good ESG ratings from the main sustainability-rating
ESG ratings
providers. However, differences remain. According to Merck KGaA’s Corporate Sustainability
Report 2019: facts and figures (page 42), MSCI gave Merck an “AAA” rating, its highest ESG
rating, in May 2019 and put the company in the top 2% of the companies it evaluated. MSCI
highlighted Merck’s group-wide ISO 9001 certification, its compliance activities and its robust
quality management 5. ISS ESG’s rating for Merck KGaA is “Prime” but only B- (slightly below
those given to AstraZeneca and Sanofi). The rating agency added that Merck’s governance lacks
some important elements, namely, that Merck has not establishedan independent sustainability .
Moreover, sustainability performance targets do not seem to be part of Merck’s executive
remuneration plans. Sanofi has received a good ranking from sustainability-rating providers.
According to Sanofi’s homepage (Socially Responsible Investment) 6, its MSCI score (A) and ISS
ESG score (B) reflect that Sanofi is ranked third, in this regard, among the five largest
pharmaceutical companies.
Bayer is the exception Bayer’s current ESG ratings are positioned at the bottom of our pharma coverage. Portfolio
changes, notably the acquisition of Monsanto’s agriculture business, have resulted in metrics
deteriorating in 2019 compared to 2018. According to Bayer’s ESG-investor conference-call
presentation (17 September 2020, page 34) 7, MSCI reduced Bayer’s ESG rating from BBB
(2018) to BB (2020). Its Sustainalytics’ score nearly halved from 69 (outperformer) in 2018 to 34.4
Increased likelihood for a rating
improvement in the medium- (high risk) in 2020. Its score at Vigeo Eiris fell slightly to 47 in 2020 from 52 in 2018. Its ESG score
term from ISS ESG remained stable, at C+. Bayer’s management is focused on the company’s
sustainability targets, and the company is on the path towards achieving 100% carbon-neutral
operations in 2030. It aims to broaden access to its pharmaceutical products to 100mn people in
low and middle-income countries. As a result of these initiatives, we see an improvement in
Bayer’s ESG ratings as likely in the medium term.
5
according to Merck’s homepage https://www.merckgroup.com/en/cr-report/2019/facts-figures/recognition-and-rankings.html
6
Sanofi homepage: https://www.sanofi.com/en/investors/company-overview/socially-responsible-investment
7
Bayer homepage: https://www.investor.bayer.com/en/nc/events/live-events/esg-investor-conference-call/
Source: Bayer
Novartis B- 54 https://www.novartis.com/sites/www.novartis.com/files/novartis-esg-
Prime ratings-overview.pdf
Sanofi B 58 https://www.sanofi.com/en/investors/company-overview/socially-
Prime responsible-investment
Social risk
Introduction In the following, we discuss the main ESG factors for the pharma sector. We analyze the
environmental, social and governance risk with an emphasis on social risk. COVID-19
presents an opportunity for the pharma industry to demonstrate its importance for society.
Access to medicine is the key social factor. The sector is playing a key role in the search for a
COVID-19 vaccine or treatment. We analyze the access to medicine programs of the pharma
companies in our coverage. Human capital is also a social risk: according to the research
institute Vigeo Eiris, GSK, Sanofi, Merck and Novartis are leaders in human rights, community
involvement and human resources. R&D spend remains a key driver in innovation, often
generating a public health improvement. AstraZeneca, Roche and Novartis have the highest
R&D/sales ratios of the large European pharma companies.
Access to medicine
WHO: Nearly 2bn people have According to World Health Organization (WHO), nearly two billion people have no
no access to medicine
access to basic medicines and healthcare 8, while 100 million people are impoverished
by medical expenses each year 9. Global trends, including progress in treatments, increased
vaccination coverage, and unhealthy lifestyles have led to worldwide epidemiological shift
from infectious to chronic non-communicable diseases (NCDs). Together with the growth and
aging of their populations, emerging countries such as Brazil, China and India and developing
countries are confronted with both old and new public health challenges. Most are still
managing unfinished infectious disease agendas while also dealing with the rise of NCDs. Life
expectancy has improved since 2000 but remains heavily influenced by income.
Public health challenges To “ensure healthy lives and promote well-being for all at all ages” is one of the 17
SDGs established by the UN in 2015. AIDS, tuberculosis, malaria and neglected tropical
diseases, communicable and non-communicable diseases are all targeted in the objectives
set in this goal. However, affordability, drug shortages, high prices and the inability to obtain
medicines due to logistics are some of obstacles that hinder access to medicines.
Access to medicine Pharma companies have the responsibility to provide safe drugs at a reasonable price
to patients. Many large pharma companies have integrated access to medicines as a
core part of their business strategy and we assume that more companies will follow.
Access to medicines is a critical issue in health care because of widespread disparities in the
reach of essential care and treatment to those most in need, regardless of their location and
ability to pay. The Access to Medicine Foundation stimulates and guides pharmaceutical
companies in doing more for the people living in low-and-middle-income countries without
access to medicine. The Access to Medicines Index 10 focuses on developing markets and a
variety of factors that facilitate access in those regions. The WHO has identified specific
medicines, vaccines, diagnostic tests and other products that are needed as a priority by
people living in low-and-middle-income countries.
8
https://www.who.int/publications/10-year-review/medicines/en/
9
https://www.who.int/healthinfo/universal_health_coverage/report/2017/en/
10
Access to Medicine Index 2018: https://accesstomedicinefoundation.org/access-to-medicine-index
NUMBER OF MOST IMPORTANT R&D PROJECTS ACCESS TO MEDICINE INDEX FINAL RANKING (2018)
Eli Lilly
Bristol-Myers Squibb Bayer
Roche Bristol_Myers Squibb
Bayer Communicable diseases Boehringer Ingelheim
Astella Gilead Science
Gilead Neglected tropical diseases Merck & Co.
AstraZeneca Pfizer
Daiichi Sankyo Roche Holding
Maternal & neonatal health conditions
Merck & Co AstraZeneca
AbbVie
Eisai Co. LTD
Takeda
Sanofi
Eisao
Pfizer Novo Nordisk AS
Novartis Takeda Pharmaceutical Co. Ltd.
Merck KGaA Merck KGaA
Sanofi Johnson&Johnson
Johnson & Johnson Novartis
GSK GlaxoSmithKline
0 10 20 30 40 50 60 70 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Novartis sustainability-linked In this respect, Novartis’s first sustainability-linked bond issuance includes an access-
bond
to-medicine component. The bond is linked to 2025 Patient Access Targets to increase the
number of patients reached in low-and-middle-income countries (LMICs) with strategic
innovative therapies by 200% and the Novartis Flagship Programs in leprosy, malaria, Chagas
disease and sickle cell disease by at least 50% over the same period of time. Novartis
estimates that achievement of these targets will result in a potential reach of over 23mn
patients across therapy areas. Novartis will report on its performance each year against the
key performance indicators underlying the targets.
INCREASE INNOVATIVE THERAPIES REACHED BY 200% BY 2025 INCREASE PATIENT REACH IN FOUR FLAGSHIP PROGRAMS
The USD 750m agreement with CEPI and Gavi covers the manufacturing and distribution of
300mn vaccine doses, with delivery planned to start by year-end. On 23 November,
AstraZeneca reported a vaccine efficiency rate ranging between 62% and 90%, depending on
the dosing regimen. Moody’s highlighted that additional societal benefits may also include
reduced mortality, lower burdens on hospitals and an easing of social distancing measures. In
contrast, Moderna has sought to pitch its vaccine at about USD 50-60 for two injections.
Pressure from civil society and media reports have pushed some companies to disclose
projected list prices, with Moderna publishing a reduced maximum price tag of USD 37 a
dose, according to CBC News (9 October). More recently, Gilead Science, Inc.’s pricing of
Remsedivir (approved for emergency COVID-19 treatment) has been met with both
acceptance and criticism. A five-day treatment (consisting of six doses) is priced at USD 2,340
for governments and USD 3,120 for commercially-insured patients in the US. The Institute for
Clinical and Economic Review, a nonprofit organization that bills itself as an independent
watchdog on drug pricing, called the price “responsible”. But other groups, including those
involved in patient advocacy and some members of US Congress, criticized the price.
Drug company Start of phase-3 trial (final approval) Number of test Potential manufacturing capacity
persons
Sinovac (China) 21 July >20,000 Hundreds of millions annually
BioNTech/Pfizer (Germany/US) start phase III 27 July around 44,000 Up to 100mn doses by end of 2020
received emergency approval by FDA potentially >1.3bn doses by end of 2021
Moderna (US) Start phase III 27 July 30,000 500mn to 1bn annually
received emergency approval FDA
Sinopharm (China) 10 August >15,000 200mn annually
Astra Zeneca/Oxford University (UK) Start phase III 17 August 30,000 2bn doses*
met its primary efficacy endpoint
will apply for early or conditional approval of the
vaccine in jurisdiction, which includes the US, EU
and UK
*The Serum Institute of India has agreed to produce one billion of doses for low and middle-income countries, starting with 400 million doses.
**Pfizer/BioNTech filed for fast-track approval in the US.
Source: Financial Times, CBC news, Handelsblatt, UniCredit Credit Research
11
DCB contribution (27 November 2020) on AstraZeneca: Questions have risen regarding how robust AstraZeneca’s COVID-19 vaccine trail results are
https://www.research.unicredit.eu/DocsKey/credit_docs_9999_178613.ashx?M=D&R=84734675
Novartis Novartis: As part of the company’s ambition to expand access to innovative medicines in low-
Precise goal and-middle-income countries Novartis is committing to increase patient reach with its strategic
innovative medicines by at least 200% by 2025. In addition, Novartis plans to increase patient
Number 2 in Access to
Medicine Index
reach of its global health flagship programs in leprosy, malaria, Chagas disease and sickle-cell
disease (SCD) by at least 50% over the same time period. Novartis estimates achievement of
these targets will result in a potential reach of over 23mn patients across both initiatives.
Bayer Bayer: The company aims to provide access to 100mn women in low-and-middle-income
Precise goal countries to modern contraception. Bayer reached roughly 38mn and its goal is to use a
combination of additional products and partnering on social innovation to reach the target. The
global gap is roughly 200 to 230mn women.
AstraZeneca AstraZeneca: Initiatives to promote access to medicine (including programs for African and
Asian countries) are mainly focused on the treatment of hypertension and chronic respiratory
diseases. In the course of its business restructuring in recent years, the company has ceased
the vast majority of its R&D activities in the area of neglected tropical diseases, tuberculosis
and malaria as well as antibiotics. AstraZeneca is active in COVID-19 vaccine development
together with the University of Oxford.
Glaxo SmithKline Glaxo SmithKline: The company’s R&D activities respond to rising and persisting health
Number 1 in Access to challenges of low-income and industrialized countries such as Malaria and antibiotic-resistant
Medicine index bacteria. About one third of GSK’s new candidate vaccines in development target diseases
particularly prevalent in the developing world. As such, it can be estimated that the share of
R&D expenditure related to the latter is much higher than the average in the sector. In
addition, the company has established a sound overall strategy to increase access to its
medicines. Glaxo SmithKline is the number one in the Access to Medicine index.
Merck KGaA Merck KGaA has implemented a clear strategy to enhance access to its medicines in
Precise goal underserved regions. For example, the company is working on new formulations of praziquantel
against the tropical disease schistosomiasis and regularly donates the medicine (around 233mn
Number 4 in Access to tablets in 2019). More than 1bn tablets have been donated to treat schistosomiasis since 2007.
Medicine index
Pfizer Pfizer produces vaccines as part of its access to medicine program. In particular, it has
committed to providing its pneumococcal vaccine until 2025. Pfizer also participates in
research collaborations (e.g. data sharing) that target neglected diseases affecting mainly
developing countries (e.g. malaria).
Roche Roche is successful in cancer research with highly innovative therapies, but the company
ranks tenth in the Access to Medicine index.
Sanofi Sanofi is among the sector leaders when it comes to research into diseases affecting mainly
Number 7 in Access to developing countries (e.g. tuberculosis vaccines, leishmaniasis, sleeping sickness and malaria).
Medicine index
Increases in drug prices paid by patients, governments and insurance companies have also
been attributed to a lack of generic competition, as some pharmaceutical companies deploy
strategies to discourage or delay generic competitors. Prices for some brand-name drugs that
Novartis and Sanofi report on
anti-competitive practices
face no competition have also increased as a result of drug shortages, which have led to rises
in the prices of old drugs. It is worth mentioning that Novartis and Sanofi are the only
pharmaceutical companies that have reported that they are conducting risk assessments of
vulnerability areas pertaining to anti-competitive practices (source: Vigeo Eiris)
Huge price difference of drugs There are striking differences in the cost of medicine across major healthcare systems
around the word
around the world. It seems more attractive for pharma companies to deliver limited
drugs to the US instead of to poor countries. Data compiled by digital healthcare provider
Medbelle (2019) show that, in the country where medicine is the most expensive, the US,
consumers pay three times the median price for medicine. In the country where medicine is
least expensive, Thailand, customers pay around 90% less than the median price. These
figures include both brand-name and generic products and refer to 13 of the most common
pharmaceutical products. Applications for these medications span a variety of common
conditions, from heart disease and asthma to anxiety disorders and erectile dysfunction 12.
MEDIAN DRUG PRICE DEVIATION (%) COSTS CITED AS REASON FOR NOT FILLING PRESCRIPTIONS (%)
350
16
300 14
14
250 12
10
200 10 9
150 8
6 6
100 6
4 4
4 3 3
50 2
2
0
0
-50
Germany
Norway
Netherlands
UK
France
Sweden
Australia
Switzerland
Canada
continously in past
-100
US insured
-150
year
Turkey
Germany
Spain
Netherlands
Israel
Russia
South Africa
India
Iceland
Indonesia
Maylaysia
Kenya
Thailand
Egypt
US
Qatar
UAE
Italy
Denmak
South Korea
Source: Medbelle, 2016 Commonwealth Fund International Health Policy Survey of Adults, UniCredit Research
Different out-of-pocket Patients’ exposure to pharmaceutical spending differs across countries, and the degree
payments
to which patients are exposed to out-of-pocket costs varies. Cost exposure is determined
by the extent of insurance coverage among a country’s population, by national standards
applied to insurance-benefit design and by protections aimed at preventing poor and sick
patients from having to pay high out-of-pocket costs. In Norway, for example, copayments for
pharmaceuticals can amount to more than USD 50 per prescription, although these charges
are capped at approximately USD 260 annually. In contrast, the UK’s National Health Service
requires little or no patient cost-sharing. While insured US patients often pay little or nothing
for generic prescriptions, they can be billed high amounts for certain high-priced medicines.
Even Medicare’s Part D prescription drug benefit has no out-of-pocket cap for beneficiaries.
Some US states have passed legislation to limit out-of-pocket spending associated with
insurance plans sold within their borders. 13
In a 2016 international survey of adults, 14% of insured Americans reported not filling a
prescription or skipping doses of medicine in the past year because of costs, compared with
2% in the UK and 10% in Canada, which showed the highest rate after the US.
12
source: The pharmaletter, November 2019;. European Pharmaceutical Review, May 2019
13
The Commonwealth Fund: Paying for prescription drugs around the world: Why is the U.S. the outlier?, October 2017
Among Americans without continuous insurance coverage over the past year, this rate was
twice as high – one-third reported not filling a prescription for medicine or skipping doses of
medicine because of costs. The Affordable Care Act, however, implemented significant
reforms aimed at improving the affordability of health care in the US, including the affordability
of prescription drugs. Most notable were the act’s insurance-coverage expansions, through
which more than 20 million low- and middle-income Americans gained coverage.
Cancer drugs are the most Cancer drugs bring the most pharma revenue and are highly profitable. Therefore, it is
profitable
important from an ESG perspective that drug companies focus on other diseases (orphan
drugs) with limited revenue-upside potential. Evaluate Pharma (3 February 2020) reported that
worldwide cancer drug sales are already way ahead of those of other drugs and that revenue
generated by them is expected to grow even more by 2024. According to Evaluate Pharma, sales
of oncology drugs amounted to USD 123.8bn in 2018, more than double that of the next item on
the list, drugs treating diabetes, which accounted for USD 48.5bn of sales. By 2024, sales of
cancer drugs are expected to almost double, to USD 236.6bn. Costs associated with cancer
treatments are above USD 100,000 per patient.
250 236.6
2018 2014
200
150
USD bn
123.8
100
48.5 57.6 58.1 54.6
44.8 38.9 42.2 36.1
50 30.5 32.1 28 30.7
14.2 15.8
0
Oncology
Anti-rheumatics
Vaccines
Anti-virals
Dermatologicals
Bronchodilators
Anti-diabetics
Immunosupressants
Gene therapy: huge price level for From an ESG perspective, prices for gene therapies are critical. A growing list of life-long
treatments
and debilitating diseases can now be cured thanks to gene therapy, which deactivates or
blocks defective genes and replaces them with healthy versions. As these treatments come
onto the market, their high prices have sparked controversy and forced a discussion about
how innovative therapies should be financed. Luxturna, a one-time therapy used to treat
inherited retinal eye disease, costs USD 850,000 in the US; Zolgensma, used to treat spinal
muscular atrophy, is priced at USD 2.1mn in the US; and Zynteglo, which targets a rare
genetic blood disorder, costs USD 1.78mn.
Human capital
Human rights, community According to research provider Vigeo Eiris, GSK, Sanofi, Merck and Novartis are the
involvement, human resources
leaders in terms of human rights, community involvement and human resources.
Human capital is important in the pharma sector due to the necessary innovation underpinning
R&D efforts. According to Bloomberg, Astra Zeneca and Glaxo SmithKline have the highest
personnel expenses as a percentage of sales. For further information on gender equality, see
the homepage of Equileap, a leading provider of data and insight on gender equality.
R&D
R&D spending R&D spending remains a key driver of innovation; it often generates a public-health
improvement. In terms of R&D, AstraZeneca, Roche and Novartis have the highest ratios of
R&D to sales (%) among the large European pharma companies. Most R&D projects (63%)
associated with diseases and listed as global priorities are being conducted by five
companies: GSK, Johnson & Johnson, Merck KGaA, Novartis and Sanofi. However, high
R&D costs and funding could slow the pace of development of innovative and more-effective drugs
and delay increases in access to medicines. According to estimates from the Tufts Center for the
Study of Drug Development, the cost of bringing a medicine from invention to pharmacy shelves is
USD 2.7bn. The amount spent to develop a drug depends mostly on what it costs to conduct
studies to prove it is safe and effective and to secure regulatory approval. That can range from
USD 10mn to USD 2bn, depending on what the drug is for. However, what drives up costs is the
90% of medicines on which human testing is started but which do not reach the market because
they are proven unsafe or ineffective.14
R&D/SALES: ASTRAZENECA, ROCHE, NOVARITIS HIGH VACCINE R&D PIPELINE: NUMBER OF PROJECTS
26% Pifzer
Existing R&D projects According to the Access to Vaccines Index (2017), half of all vaccine R&D projects are
associated with adaptions being made to existing vaccines. Meanwhile, 28% of adaptive
R&D projects are focused on either characterizing or improving the temperature stability of a
vaccine, and 44% target a range of other improvements. 15
Data protection
Data protection Data protection has become a notable social risk in light of emerging data privacy and
protection laws. This risk is more near-term and more quantifiable in terms of mitigation than
other social risks in the sector. This means that it is likely to already be priced into health care
companies' cost structures. With several initiatives, Roche is a leader in digital healthcare.
14
"The cost of developing drugs is insane", Forbes, October 2017.
15
For further details, see the homepage Access to Vaccines Index.
Environmental risk
Not so exposed to GHG The pharmaceutical industry is not particularly exposed to risk related to GHG
emissions
emissions. Nevertheless, reductions in emissions and energy consumption remain a topic for
the pharma industry. According to Vigeo Eiris, 66% of companies in the pharmaceutical and
biotechnology sectors (2019) are associated with moderate GHG emissions – of below the
equivalent of 100,000 tons of CO2 However, given the size of their global workforces, and
given that R&D and biotech activities can result in high energy consumption, such emissions
could reach relevant levels. Depending on the size of their global sales force and the volumes
of products transported by pharmaceutical and biotechnology companies, the impacts of
transportation-related emissions is not negligible.
On 3 November 2020, GSK announced new environmental goals pertaining to both climate
and nature. It aims to have a zero impact on climate and a net-positive impact on nature by
2030. Underpinning these goals, GSK has set new targets across its different businesses,
including 100% renewable electricity usage and good water stewardship at all GSK sites;
100% of materials sustainably sourced and deforestation-free and transitioning to 100%
usage of electric vehicles by GSK sales representatives worldwide. AstraZeneca’s
commitment is to zero carbon emissions for Scope 1 and Scope 2 by 2025 and a carbon-
negative value chain by 2030. In 2019, it showed 11% reduction in Scope 1 emissions from a
2015 comparison base and a 60% reduction in Scope 2 emissions. Of electricity imports
sourced, 62%are to be generated from renewable sources. Of its vehicle fleets in Europe,
North America and Japan, 25% are to be hybrid or electric, up from 7% in 2018.
“Scope 1” refers emissions a company produces itself, for instance, by burning fossil fuels to generate power, while
“Scope 2” refers to emissions from the consumption of purchased energy, such as electricity or district heating.
TARGETS AND TIMELINES OF PHARMA COMPANIES DIFFER
GHG
emissions
Company 2015* GHG emissions 2019 Change in % Target 2025/2030/2050
Sanofi 1,062 930 -12% 1. 50% reduction in GHG emissions (CO2 equivalent) by 2025
(Scope 1: direct emissions, 460) (relative to 2015)
direct emissions from 2. Achieve carbon neutrality in 2050 for emissions from
medical rep. vehicle fleet 99 operations
Scope 2: indirect emissions: 370)
Roche 706 490 -31% GHG zero by middle of the century
Novartis 1,308 895 -32% 1. Full carbon neutrality across supply chain (Scope 1, 2, 3) by
2030
2. In addition to its stated target to achieve carbon neutrality in
its own operations by 2025
Glaxo 1,573 1,322 -16% 1. reduce its operational carbon emissions (Scope 1 and 2) by
SmithKline 15% in 2025 and by 20% in 2030
2. reduce its value-chain carbon emissions (Scope 3) per GBP
bn revenue by 25% in 2030
3. source electricity from renewable sources by 45% in 2025
and by 60% in 2030
4. reduce total water use at each high-risk site by 20% in 2025
and 30% in 2030
5. waste repurposed for beneficial use by 80% in 2025 and
100% in 2030
AstraZeneca 657 420 -36% reduction 1. zero carbon emissions for Scope 1 and Scope 2 by 2025
from its own 2. a carbon-negative value chain by 2030, reduce energy
operations consumption by 10% relative to 2015’s levels
(11% reduction in
Scope 1 and 60%
reduction in) Scope
2 GHG emissions
since 2015
Pfizer 1,560 n.a. n.a. Pfizer is committed to reducing GHG emissions from operations
by 20% by 2020 from a 2012 base. This 2020 goal will keep
Pfizer on track to achieve a 60- 80% reduction by 2050 (from
2000 base year)
GHG emission reduction Large pharma companies are working to reduce their GHG emissions, and some are
in detail
doing better than others. According to our calculation, Roche, Sanofi and Astra Zeneca have
been the most successful.
70
2000 60
50
of CO2 equivalent
1500
40
1000 30
20
500
10
0 0
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
*GHG intensity is calculated as metric tons of GHGs in carbon-dioxide equivalent (COEe) emitted per million dollars of sales revenue.
Source: Bloomberg, company reports, UniCredit Research
Bayer: GHG emission As a life science company and not a pure pharma company, Bayer is not directly
comparable to the above-mentioned pharma companies. The bulk of its emission
reductions will be in the crop science business because the crop science business is also – at
least when it comes to its Scope 1 and 2 emissions – the main area where decarbonization is
happening. At Bayer, air emissions are primarily caused by the combustion of primary energy
sources, such as gas and oil. These are used to generate electricity, steam and auxiliary
energy (such as for heating and cooling) for the production of its products. Emissions are also
generated through its vehicle fleet and in the extraction and processing of raw materials.
Portfolio changes (mainly related to Bayer’s being acquired by Monsanto) resulted in weaker
metrics in 2019 versus 2018. Total energy consumption increased by 34%, water
consumption rose by 40% and total GHG emissions increased by 29%.
*the equivalent to thousands of metric tons of CO2 Source: Bayer, UniCredit Research
Bayer Bayer aims to make its own production sites carbon-neutral by 2030. It is therefore
GHG-emission targets
implementing energy-efficiency measures at its sites and increasing the procurement of
electricity from renewable resources. Its target will be a 42% absolute reduction in carbon
emissions with regard to its Scope 1 and 2 emissions and an additional reduction of 12.3% in the
area of Scope 3. Bayer intends to reduce carbon emissions to the zero carbon target in 2050.
Merck KGaA: GHG emission Merck KGaA’s goal for 2020 is to reduce its direct GHG emissions (Scope 1) and indirect
emissions (Scope 2) by 20% relative to a 2006 baseline, an objective set by its executive
board in 2009. Worldwide, 38 of its sites account for roughly 80% of its GHG emissions, which
is why Merck is focusing its actions here. In 2019, the company started developing a new
climate target for the period leading up to 2030. In past years, Merck KGaA focused efforts on
curbing GHG emissions through energy-efficiency initiatives. By adapting and updating its
systems and facilities, it is continually improving the energy efficiency of its research,
production and buildings.
Merck is also working to reduce process-related GHG emissions as well as emissions from
power generation. Where it is financially viable, it uses renewable sources to generate its own
power. Since 2019, Merck has been increasingly sourcing electricity from renewable sources.
Merck KGaA goals On 12 November 2020, Merck presented its new sustainability strategy: Goal 1: In 2030,
Merck will achieve human progress for more than one billion people through sustainable science
and technology. Goal 2: By 2030, the company will integrate sustainability into all its value chains.
Goal 3: By 2040, Merck will achieve climate neutrality and reduce its resource consumption.
Energy consumption
Energy consumption: limited Management of energy consumption is one additional core environmental issue, and it
reduction in 2019 yoy
could result in operational risks, increasing costs, legal risks and reputational risks.
According to our calculations, pharma companies showed limited energy reduction
yoy. Roche highlighted that it intends to reduce its energy consumption by 15% between 2015
and 2025 (GJ [FFE]/employee, FFE: fossil fuel equivalent, GJ gigajoule). Sanofi reduced its
energy consumption by 1% in 2015-19. Novartis highlighted a 2.5% in reduction in total
energy in 2019 (versus 2018) and by 6% in comparison to 2016. Bayer’s total energy
consumption rose by 34%, to 38.7 petajoules, in 2019 (1 petajoule is roughly equivalent to
278 gigawatt, GW) mainly due to the first full-year inclusion of energy consumption at the sites
of its acquired agriculture business. Merck KGaA used 2,240 gigawatt hours of energy in
2019, versus 2,227 gigawatt hours in 2018
300 6000
250 5000
200 4000
150 3000
100 2000
50 1000
0 0
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Production of waste is low Compared to other major environmental impacts generated by the production of drugs,
its production of waste is relatively low. However, researchers at the IHE Delft Institute for
Water Education in the Netherlands have found that river systems around the world contain
over-the-counter and prescription-drug waste, which harms the environment. A larger number
of drugs – analgesics, antibiotics, hormones, psychiatric drugs, antihistamines – have been
found at levels dangerous to wildlife 16. As such, pollution from the disposal of products
remains a concern with regard to potential environmental risks posed by pharmaceutical
residues. GSK reports results of assessments of environmental impacts from individual active
pharmaceutical ingredients in what it refers to as safety data sheets, which it publishes online.
16
” Drug waste clogs rivers around the world, scientists say”, The Guardian, April 2018
Energy transformation process According to Vigeo Eiris, Roche, Sanofi and GSK are the top performers in the energy
transition process. Energy transition strategy is defined as the shift from a carbon-based
economic model to a green and sustainable one.
Governance
Governance is company Governance is company-specific and is often influenced by a company's culture and
specific
ownership structure. At the sector level, the health care industry is highly regulated. The
government plays an important role in the distribution of health care services and products.
Regulations are also applied to the safeguarding of patient information, safety testing, monitoring,
manufacturing quality and marketing compliance. Noncompliance with these regulations, improper
billing for services and products, aggressive marketing tactics, pricing manipulation and failure to
protect patient privacy have surfaced within the sector and can affect ratings. (source: S&P).
Sustainable Development Goal: In September 2015, the UN’s SDGs were launched. These urge an overall commitment
fight against corruption
by governments to fight corruption (target 16). For the pharmaceutical sector, this primarily
refers to the integration of good governance in policymaking to reduce the risk of corruption in
value chains. To monitor and evaluate the pharmaceutical industry, governments are required
to establish internal control mechanisms, new regulatory frameworks and the necessary
infrastructure to follow all activities and generate performance data. The marketing phase in
the pharmaceutical industry includes two main players: companies and doctors. Bribery and
the dissemination of misleading information are the most recurrent corruption practices in
such marketing.
Litigations Current litigation pertains to glyphosate, opioids and generic price fixing. In June 2020,
Bayer, after more than a year of talks, agreed to pay as much as USD 10.9bn to settle close to
100,000 US lawsuits involving claims that its widely used weed killer, Roundup, causes cancer.
As the number of Americans using opioids increased, drug overdoses killed about 67,000
Americans in 2018. More than 130 people died every day from opioid-related drug overdoses
in 2016 and 2017, according to estimates from the US Department of Health & Human
Services. US states, cities, counties, opioid victims or their families have filed lawsuits seeking
financial compensation and punitive damages from opioid manufacturers and distributors in an
effort to hold them accountable for their role in the opioid crisis. Johnson & Johnson, Teva
Pharmaceuticals, Purdue Pharma, Endo International, Allergan, Mallinckrodt, Insys
Therapeutics and McKesson are among the companies accused of over-distributing and over-
promoting opioid painkillers.
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