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Potential ESG Risks in the US Health Care Industry

Posted on April 20, 2017

Juliette Goulet
Juliette Goulet
Analyst, Research Products Sustainalytics

The US health care industry is facing some uncertainty under the current administration. Recent news coverage focused primarily on the failed attempt to repeal the Affordable Care Act, but question marks related to deregulation and pricing remain. Investors will need to monitor developments closely to ensure they proactively manage emerging ESG risks.

The Trump administration has been advocating for deregulation in the health care industry. The appointment of Scott Gottlieb as head of the FDA would further this agenda if his nomination were to be approved. Although deregulation would have the benefit of speeding up the drug approval process, the move would not come without potential risks. A faster approval process could affect drug quality and safety, with serious consequences for patients and pharma companies’ reputation alike.

Gottlieb also expressed a willingness to lift regulation related to off-label marketing. Off-label marketing entails the promotion of drugs for applications not approved by the FDA. This move could create added safety concerns and reputation risks. Based on Sustainalytics’ Controversy Research, more than half of the 20 largest U.S. pharma companies have been involved in product quality, safety, pricing and/or marketing incidents in the last three years. These types of incidents can have a significant material impact on a company. In 2013, Johnson & Johnson had to pay USD 2.2 billion to resolve claims related to Risperdal, an anti-psychotic drug. The company, which continues to face thousands of claims, allegedly marketed the drug to non-FDA approved populations (the elderly, children and disabled patients) without fully disclosing the associated risks.

Number of the 20 Largest US Pharma Companies Involved in Product Related Incidents Between 2014 and 2017

Source: Sustainalytics Research 2017

Our Controversy Research tracks the fines, lawsuits, and public criticism facing health care companies. The above graph summarizes the number of related incidents each company has experienced over the past three years with regards to product quality & safety, marketing practices and access to health care (pricing), from level 1 (minor impact) to level 5 (severe impact).

Pharma companies are expected to face increased scrutiny regarding treatment prices due to rising health care costs (see our 10 for 2017 Investment Themes in a Changing World report to learn more about drug pricing scrutiny). In 2015, the US had the highest health care cost per capita in the world at USD 9,900. Costs had increased 67-fold compared to the 1960s (see graph). Initial estimates indicate that costs have surpassed USD 10,000 in 2016 and they are expected to continue to rise.

Health Spending per Capita in 2015 (in USD)

Source: OECD

US Health Care expenditure per Capita between 1960 and 2015 (in USD)

Source: Health System Tracker

Over the past three years, 60% of the 20 largest US pharma companies have been involved in access to health care incidents, which refer to pricing and the availability of treatment. US regulators’ scrutiny of drug prices has heightened following recent incidents, such as the significant price hikes that were implemented by Canada-based Valeant in the US. The company, which relied on a “acquire-and-hike” business model, has seen its share price decrease by over 90% since the beginning of the pricing allegations in September 2015.

Several pharma companies have taken proactive steps to manage potential risks. For example, Allergan and Merck & Co have committed to refrain from increasing their drug prices by more than 10% year-over-year or, alternatively, to disclose pricing actions ahead of regulatory demand. Other companies have engaged with payers and independent third parties to decide drug prices. Despite pricing its eczema drug at USD 37,000 per year, Regeneron has avoided much of the public outcry that affected other pharma companies by employing this strategy.

Tackling these complex issues is important, but challenging. In the absence of a clearly articulated policy position on these issues, investors will need to be extra vigilant in monitoring regulatory developments to anticipate and proactively manage ESG risks.

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