Measuring Pharma’s Wider Mandate

Sustainability remains business-critical for life sciences organizations—both today and in the future. Even before the onset of the COVID-19 pandemic, consumers were demanding greater responsibility from biopharmaceutical organizations. That responsibility has increased as a result of the pandemic, as a greater spotlight shines on the importance of access to care and the systematic ethnic and socioeconomic disparities that compromise health outcomes.

Investors are becoming more demanding, too. Beyond margin and top-line growth, investors are increasingly evaluating life sciences companies based on intangibles such as how their solutions contribute to overall societal, environmental, and economic outcomes. As the demands of these stakeholders grow, biopharma manufacturers must better articulate their value proposition and how sustainability investments improve financial performance.

Unfortunately, that is difficult to do. Why? For starters, most sustainability frameworks are not specifically designed with life sciences organizations in mind. At best, they only approximate the value biopharma companies create. In addition, there is little consensus on how best to measure sustainability in the life sciences industry.

This article explores how organizations can incorporate sustainability directly into their business strategy and help C-suite executives and boards think more strategically about building a biopharma-specific model to measure long-term, sustainable value.

Meaning of sustainable value creation

In sustainable value creation, social value is the most important parameter, given the goal of drug manufacturers to produce and deliver socially responsible products. For instance, as biopharmas mobilize to develop medical solutions for COVID-19, the societal value of their medicines is more obvious. One result: trust in the pharmaceutical sector rose from 59% of respondents in 2019 to 73% in April 2020, according to the 2020 Edelman Trust Barometer.¹ This means life sciences organizations have a tremendous opportunity to capitalize on this goodwill. One step to consider is the adoption of reporting frameworks that showcase how their products improve social value over the long term.

Biopharmas should also consider how their products and services create environmental and economic value. There is a clear linkage between worsening climate and poor health, as reduced air quality and rising temperatures contribute to diseases such as asthma and diabesity. Biopharma products that treat these chronic conditions, as well as the adoption of cleaner manufacturing and supply chain practices, contribute positively to the environment and overall health. Because their medicines deliver value to patients in the form of improved health outcomes, biopharmas generate economic value in terms of how much money is added to a country’s GDP.

Two metrics that health economists already employ— disability-adjusted life year (DALYs) and quality-adjusted life year (QALYs)—could be used more systematically to measure the productivity gains that result from countries having healthier citizens. DALYs measure years of perfect health lost and QALYs measure the gain in years lived in perfect health. In practice, these metrics can be difficult to track consistently across populations. An acceleration in the use of new reimbursement models that link payment to the health outcomes delivered would help.

However, to accurately reflect the full value of life sciences products and services, these models must move beyond clinical measurements of value to include patient-reported outcomes.

Benchmarking biopharma on sustainable value creation

Given these challenges, EY reviewed existing sustainable value metrics to develop a list of sustainability metrics that reflect the value proposition of life sciences companies. As part of this analysis, EY Global Health Sciences and Wellness professionals reviewed more than a dozen secondary sources, including investor indices, sustainability frameworks from standards setters, and the Embankment Project for Inclusive Capitalism.²

Based on this research, we have prioritized eight metrics for life sciences organizations that reflect two primary areas of sustainability: social value and environmental value (see chart on next page). These eight metrics describe progress in the following four areas:

• Responsible innovation. Companies are developing new biopharma products to help address unmet diseases—from autoimmune disorders and cancers—to more common conditions such Parkinson’s disease or depression. Organizations that scored highly in this area have prioritized therapies that don’t just manage symptoms but are also designed to help modify or cure the disease. In addition, because of their focus on disease areas where treatments don’t yet exist, these companies have often been awarded accelerated approval for their medicines by regulators.
• Access and affordability. Biopharmas are striving to improve public health by making certain life-saving medicines widely available. Scores on the Access to Medicines Index reflect a range of strategies companies employ to link the value of their products to improved health outcomes and enable access to needy patients.
• Trust and quality. Preservation of a medicine’s safety and efficacy is paramount. Life sciences companies address this by maintaining quality throughout the supply chain, rigorously testing the safety and usefulness of products under development and complying with ethical promotional practices. Companies that scored highly here received fewer warning letters or voluntary or official actions than from during inspections.
• The health impact of climate change. The life sciences sector produces 55% more greenhouse gas emissions than the automobile manufacturing sector, according to a 2019 study released by Elsevier.³ This has a negative impact on human health. Rising levels of greenhouse gases lead to global warming and catastrophic weather events, which, in turn, reduce air quality and the nutritional value of foods. One way to score high on this dimension is to use real-time environmental risk assessments to minimize environmental impacts.

These eight metrics form the basis for a preliminary model that allows cross-company comparisons with regard to sustainability. For example, companies can use the scores on individual metrics as a guide to identifying areas of leadership or opportunities for improvement.

The metrics aren’t necessarily perfect measures of sustainability, but they are aligned with changing stakeholder needs and sustainability themes developed by standard setters and investor indices. For example, we’ve identified three metrics that quantify responsible innovation. These metrics represent themes the World Economic Forum (WEF) describes in its prosperity pillar, while our measurement of the health impact of climate change aligns with the WEF’s planet pillar.⁴

There is also close alignment with the Sustainability Accounting Board Standard’s (SASB) recommendations for pharma and biotech companies; four of the eight metrics we prioritize correspond to SASB metrics measuring access, drug safety, or ethical marketing.⁵

Importantly, these metrics represent a subset of possible indicators where data are readily available and reported in standardized ways. As such, they represent as a starting point for further assessments.

Source: EY Global Health Sciences and Wellness These metrics form the basis for a preliminary model that allows cross-company comparisons with regard to sustainability. (click to enlarge)

Establishing correlation between sustainable value and financial value

In a majority of cases, EY found that companies’ sustainability scores weren’t reflected in their financial performance. Using 10-year average multiples, EY calculated the financial performance of leading biopharma companies and mapped the findings to the organizations’ sustainable value scores.

We chose the 10-year average valuation multiple as an indicator of financial value because it better reflects potential cash flow generation and the level of risk associated with strategic business decisions.

Our analysis reveals a weak positive correlation between sustainable value and financial value, indicating that only a few companies have a sustainable value performance that matches their financial value. While more should be done to establish a causality between sustainability and long-term corporate performance, our analysis also suggests that life sciences companies need to do a better job of communicating their sustainability initiatives so that investors give them credit for these efforts.

The path forward

In light of the social and environmental crises we face today, it is more important than ever that life sciences organizations overcome challenges associated with which sustainability framework and metrics they should use to more accurately measure value creation. They must find ways to concretely measure their sustainability journey and efforts and communicate what they are doing in this space. Their ability to create lasting future value rests on harnessing innovation to meet real human needs—and placing sustainability at the heart of their business strategy.

References

1. https://www.edelman.com/trustbarometer
2. https://www.epic-value.com
3. https://www.sciencedirect.com/science/article/abs/pii/S0959652618336084
4. http://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf
5. https://www.sasb.org/wp-content/uploads/2018/11/Biotechnology_Pharmaceuticals_Standard_2018.pdf

Pamela Spence, Global Health Sciences and Wellness Leader, Ernst & Young