Big Pharma's face moderate ESG risk exposure but limited materiality to valuation

In Morningstar’s recent ESG Industry Landscape Report: Biopharma, its analysts found that large drug manufacturers face moderate environmental, social and governance (ESG) risk exposure but have limited materiality to valuation. More specifically, access to basic services, product governance, and business ethics are the three most material ESG risks to pharma and biotech companies.

Access to basic services is potentially one of the most prominent ESG risks to biopharma firms, according to Morningstar’s report, where drug pricing complexity creates issues of affordability among end users. Very few people know the exact net prices any buyer pays after rebates and discounts. Determining the fairness of that price is even more complex.

Product governance is also a critical consideration of ESG risk given the very nature of drugs themselves. However, although legal costs are prevalent, the materiality of this ESG risk remains low given firms’ much larger profits.