As ESG criteria gains greater traction across the pharmaceutical landscape, the push for pricing sustainability is growing more forceful.
To be sure, drug pricing has always been tied to several social considerations of ESG, such as customer relationships, demographic changes, and social awareness, and it has continually been among the main measures of a pharmaceutical company’s reputation and regulatory risk.
However, the COVID-19 pandemic has dramatically sharpened the focus on pricing sustainability. Policymakers around the world are implementing or working to implement new rules to keep healthcare costs in check. Public scrutiny over drug pricing has crescendoed, as the backlash currently facing Biogen following its pricing of Aduhelm has shown.
ESG investors may soon be adding additional pressure by way of value-based pricing (VBP) models, which set drug prices based on the value they provide to patients. In a report that has spurred much commentary, analysts at Bernstein flagged ICER, a non-profit organization that conducts independent drug pricing assessments, as potentially the “ultimate pharma ESG tool” for sustainability-focused investors to weigh investment decisions. It could offer an “alternative way to legislation to pressure the industry to control their prices,” they said.
As an example of how this could work in practice, ICER’s recent guidance on price ranges for new atopic dermatitis treatments highlighted varying outcomes, with some companies’ prices falling within the recommended price range, resulting in higher ESG ratings, while other firms’ pricing would require discounts of up to 63%.
Bernstein’s analysis concluded that of the two main ideas circulating as potential solutions for high drug prices in the US — VBP and an international reference pricing (IRP) framework — VBP was the most feasible. An ICER-related VBP model also is likely the better option for the industry, given that it is transparent, with an opportunity to participate in the process and review decisions in court. While adoption of VBP in the U.S. could lower revenues by 15%, it would resolve a major underlying problem without the need for drug pricing regulations.
Historically, the pharmaceutical sector has scored below par in ESG ratings, in part due to the perceptions and risks associated with pricing practices. This is reflected in pharma’s relative underweight position in dedicated ESG equity fund allocations.
In some ways, the lingering pricing issues undermine the progress that the industry has made on ESG elsewhere. Many players including Merck, AstraZeneca, Novartis, GlaxoSmithKline, and Takeda have set aggressive carbon-neutral targets, while many other pharmaceutical and biotech companies have committed to reducing greenhouse gas emissions through the United Nations-led Science Based Targets initiative. Several companies have committed several hundred million dollars toward increasing diversity and addressing racism, health inequities, and similar issues.
Overall, the pharma industry markedly improved its ESG risk score between 2020 and 2021, according to an analysis by RBC Capital Markets. And thanks in part to rapid and successful vaccine developments, public approval of the industry has jumped 20 points in the past year to its highest level in decades, a survey from Harris Poll showed.
Whether the industry can capitalize on these gains remains to be seen and likely will be heavily dictated by their ability to navigate an evolving ESG landscape that is playing an increasingly larger role in pricing and strategy decisions.
Data shows that ESG’s influence in public pharma tenders and award decisions across Europe has steadily grown in recent years and is set to pick up further. Sweden, meanwhile, is mulling a new environmental price premium for its national reimbursement system, a concept that is likely to be studied by other countries. And in the wake of calls for better environmental and social standards in pharmaceutical production, Germany’s parliament recently passed a new law that aims to curtail human rights and environmental abuses within large company’s global supply chains.
These and numerous other ESG developments mean that the demands on market access and planning professionals will only become more challenging and complex. Pricing decisions will have to factor in the full range of ESG considerations and will require more sophisticated and nuanced strategies that incorporate advanced analysis, in-depth market data, risk assessment scoring, and other elements.
More than ever before, success will rely on an ability to spot these trends faster in order to price products competitively and sustainably.
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