The efforts of Pfizer, AstraZeneca and Moderna, alongside other healthcare companies, are instrumental to the global recovery. These companies are crucial to developing diagnostics, therapeutics and, ultimately, the vaccines which will help get the world back to ‘normal’ – or the closest we can get. 
Yet for investors, especially those with a strong ESG focus, the pandemic has only heightened the scrutiny over the pharmaceutical sector's role in society and how socially responsible investing in the sector can truly be achieved.
There are two aspects to this challenge: firstly, how can, and should, healthcare companies improve access to affordable healthcare while meeting their financial targets? Secondly, for investors with a fiduciary responsibility to their clients, how can, and should, principle be balanced with profit?
The puzzle for investors is not so much what these companies do but how they do it – particularly when it comes to pricing, transparency and government refund models.
Profit at what price?
Whether combatting Covid or cancer, pharmaceutical companies still need to consider profit.
The research and development of new medicines is rightly a costly and highly regulated process, but the returns available on R&D have been dropping in recent years with more capital allocated towards developing medicines.
The response of the industry is often to strive for high margins and large volumes of sales to make up for higher risk initiatives. The question is what level of profit is socially responsible, now and in the future?
Some companies, like AstraZeneca and Johnson & Johnson, have pledged to sell Covid-19 vaccines at a break-even price, but this is still the exception rather than the norm in response to an almost unprecedented healthcare crisis.
Ensuring access to medicine for low-income households is another important issue and we expect companies to make their products accessible to all those who need it, taking into account their purchasing power. This isn’t just a moral imperative, it’s also good business sense. Companies unwilling to provide wider access run the risk of a reduced license to operate from society and therefore might miss out on commercial opportunities, particularly in developing countries.
There are leading companies that do good and do it well. A much-celebrated example is Novo Nordisk, a leading provider of diabetes treatments, which took a proactive stance on antibody testing, has donated large amounts of hand-sanitizer ingredients and lowered the price of their insulin to keep it accessible to people who may have been directly hit by financial hardship in 2020.
However, as the latest report from the Access to Medicine Foundation concludes, the efforts of 20 of the world’s largest pharma companies are still concentrated on too few diseases and too few countries. More work is needed to avoid being caught off-guard should we face another pandemic.
Where’s the transparency in pricing models?
Pharmaceutical companies have a unique pricing model. In the US we see many different payers negotiating prices for the drugs they cover, suggesting a well-functioning market but there is very little transparency. It can be hard to get a clear picture of the supply chain and such a convoluted system raises the risk of incentives being put in place which may not result in the best deal for the patient.
In the US, the difference between the original listed price and the price the manufacturer receives for a drug can be more than 50 per cent and consists of rebates, discounts and other reductions that are negotiated. Many patients taking highly rebated drugs do not directly benefit from these cost reductions, as the patient cost share is frequently still calculated based on a drug’s original list price.
In Europe, the average price of medicines is lower than in the US. Governments and insurers have focused on the transition from branded to generic medicines, after the initial patent period, and therefore higher market share of generic medicine producers has led to more pricing pressure and transparency. However, the unintended consequence of price pressure can be a deterioration in quality and availability.
The search for lower cost has driven the production of generic medicines to regions where regulation is less strict than in Western developed markets. This has ecological consequences as well as issues regarding contamination of ingredients. This quest for the lowest cost manufacturer has also led to supplier concentration. Combined with very low margins and low returns on their investments, the result is financial instability on the manufacturer side which impacts availability of certain medicines.
Investors can help square this cost vs quality circle by using their leverage to engage with pharmaceutical and biotech companies. This can help them meet financial targets and improve their approach to help address both the pandemic and wider healthcare issues. Companies are often responsive and welcome a constructive dialogue on how they can improve their approach.
The pandemic has taught us many things, but as we look to the recovery and beyond, it’s clear that there will be an even greater reliance on healthcare companies. Investors and other stakeholders must call on the pharma sector to collaborate and share solutions and, if needed, put public health ahead of corporate profit.
Richard Klijnstra is head of sustainable equity at Kempen Capital Management. The views expressed above are his own and should not be taken as investment advice.