SDG 3: Ensure healthy lives and promote wellbeing for all at all ages
The UN Global Compact convened its Leaders Summit in New York last week, with a focus on how to put the Sustainable Development Goals (SDGs) into action. Why should investors pay particular attention to achieving SDG number three: Ensuring healthy lives and promoting wellbeing for all at all ages?
The world relies on big pharmaceutical companies which operate for-profit business models to develop cures for diseases like HIV/AIDS. Meanwhile, we also expect these medicines to be available to the poorest citizens of the world, in countries where healthcare budgets are often constrained. Right now, 55% of people living with HIV/AIDS do not have access to anti-retroviral drugs, and two billion people around the world still do not have access to the most basic vaccines.
This lack of equitable access and affordability of life-saving medicines, especially in emerging markets, is a market failure that leads to unnecessary human suffering and hampers economic growth. To ensure the success of their investments in the long-term, pharmaceutical companies and responsible investors must respond.
Why is access to medicines a material issue for investors?
Pharmaceutical companies in the US are increasingly under pressure from consumers, NGOs and the government over their pricing practices. A recent Credit Suisse report revealed that US price hikes contributed 100% of the industry’s Earnings Per Share growth in 2016, and income of $8.7 billion. This is neither ethical nor sustainable, as demonstrated by the Valeant scandal – where revelations about excessive price hikes on many of its medicines led to company stocks plunging by 90%.
With consumers especially in America increasingly concerned about the affordability of medicines, investors now expect the Boards of pharmaceutical companies to oversee decisions regarding pricing strategies.
Long-term investors can see that a growing slice of profits for pharmaceutical companies will come from the developing world, where there is a mismatch between demand and ability to pay. Emerging markets have already overtaken the EU5 markets (Germany, France, Italy, UK, and Spain) in pharmaceutical spending and are expected to account for $190 billion in sales growth between 2015-2020. In lower-middle income countries, annual health spend per capita is currently US$310 and is growing at a rate of 6.5% per year.
Meanwhile, many middle-income countries such as Mexico or Brazil face healthcare budget constraints, yet are not eligible for support from non-profit organizations such as GAVI, the public–private health partnership which helps poor countries increase access to immunization, or pooled healthcare procurement via UNICEF.
The tools available to fix the market
One of the tools available to encourage the market to correct itself is the Access to Medicines Index (ATMI), which Boston Common has supported since its outset. The Index analyses 20 of the world’s largest research-based pharmaceutical companies on how they make medicines, vaccines and diagnostics more accessible in low- and middle-income countries. The aim is to create a market incentive for big pharmaceuticals to improve access to life-saving medicines for the poorest – as companies want to be seen as leaders not laggards.
Thus far, the Index has proved effective, as evidenced by the examples of GlaxoSmithKline and Astellas, two pharmaceutical companies that have found themselves at opposite ends of the ranking.
For highly ranked companies such as GlaxoSmithKline, the Index creates an internal incentive to ensure continued best practice in order to remain at the top. The company develops pricing strategies based on country-specific circumstances, such as patient affordability, the local healthcare system and other social and economic factors. Since 2010, GlaxoSmithKline has capped the prices of their patented medicines and vaccines in Least Developed Countries (LDCs) at 25% of those in the EU5.
Similarly, for companies who find themselves further down in the ranking, the Index provides a useful tool to help improve disclosure around access strategies. Since 2014, the Japanese pharmaceutical company Astellas has demonstrated a focus on drug discovery research for the treatment of neglected tropical diseases (NTDs). The company is conducting research on new drugs for Chagas disease, which is spread by insects and can cause heart failure if left untreated. Together with the University of Tokyo, Astellas is also developing a rise-based oral vaccine against cholera and E coli. In addition to the ATMI, there is also the Access to Vaccines Index, which provides a benchmark to assess pharmaceutical companies on their efforts to increase access to vaccines in developing markets.
Drugs for high priority diseases which offer low commercial viability can be provided through so-called Product Development Partnerships (PDPs). These are non-profit partnerships between pharmaceutical companies, academics, governments or other donors that coordinate expertise and enable product development aligned with global health priorities, such as HIV or tuberculosis.
The role of investors
Responsible investors should engage with the pharmaceutical companies in their portfolios to encourage the development of robust access strategies. An analysis by McKinsey shows that big pharmaceuticals dedicate between 7-10% of their commercial staff to access in developed markets, while the corresponding figure in emerging markets is only 3-5%. As the US and other developed countries will soon no longer provide the primary driver of growth for pharmaceuticals, it is an area that these companies cannot afford to neglect.
As emerging market populations and health spending grows, pharmaceutical companies have the opportunity to help fulfill the UN Sustainable Development Goals related to public health, while tapping into a large new market. The companies which successfully embed access strategies, promote diversified product lines and differentiated pricing strategies tailored to countries’ ability to pay, will be sustainable and successful in the long-term. This means moving pharmaceutical pricing models towards a model that is needs-based and value-driven, rather than dependent on perpetual price hikes.
Lauren Compere is the Managing Director at Boston Common Asset Management. https://bostoncommonasset.com
The information in this document should not be considered a recommendation to buy or sell any security.