A healthy pharmaceutical company is worth more

​Access to medicine contributes to financial returns in the pharmaceutical industry, says Rogier Snijdewind in the Omni magazine.

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Healthy talks with the pharmaceutical sector

MN and PGGM are working together in their campaign for greater corporate social responsibility in the pharmaceutical sector. They are doing this so as to promote health worldwide, but also to make pharmaceutical companies themselves more vital, thus ensuring more stable returns for pension funds.

Whenever you get a box of pills from the pharmacy, there’s a very good chance that pension funds hold shares in the company that manufactured that medication. A large part of the portfolio of most institutional investors is made up of holdings in pharmaceutical companies. And that’s not just because of the returns; developing and distributing medicines fits in well with the pursuit of corporate social responsibility (CSR). But no matter how socially responsible medicines are in themselves, active shareholders such as MN and PGGM believe that they need to keep critical track of the manufacturers. That’s because things can always be improved, and things do sometimes go wrong.

Last year, for example, the British pharmaceutical firm of GlaxoSmithKline (GSK) was fined 380 million euros for fraud. GSK was found to have been bribing Chinese doctors, civil servants, and hospitals for years in order to sell more of its products. This is one of the topics in the engagement campaign pursued by MN in the pharmaceutical sector, in cooperation with PGGM. ‘In the quarter after these practices were revealed’, says Nando van Kleeff, MN’s adviser on Responsible Investment & Governance, ‘GSK’s turnover fell by no less than 60 percent. That shows how important it is for a company to have an effective CSR policy, so that abuses like that can be prevented, and with them turnover losses.’

Favourable effect

It’s a recurring argument put forward by Van Kleeff and Rogier Snijdewind, his counterpart at PGGM: concern with the environment, social policy, and good governance is not only beneficial for people and society – it also prevents financial setbacks such as having to pay fines. So promoting CSR has a favourable effect on a company’s profitability and consequently on investment returns. That goes for all companies, including in the pharmaceutical industry.

Rogier Snijdewind refers to a trend among pharmaceutical companies to reduce the tax burden by means of takeovers. ‘What we talk to the companies about’, he says, ‘is whether the motive of tax avoidance isn’t becoming more important than more strategic considerations.’ As an example, he mentions the US pharmaceutical company AbbVie, which wanted to take over Shire – a British company in the same sector – for tax reasons. After the US government amended the tax rules, however, there would no longer be any tax benefit. AbbVie withdrew its bid, but it then had to pay Shire more than a billion dollars in compensation. ‘Companies need to be aware of that financial risk’, says Snijdewind. ‘Rules can be changed, so you shouldn’t get fixated on things that don’t really fit in with your strategy.’

Pay for Delay

Besides general governance issues such as bribery and tax avoidance, there are also sector-specific topics that are dealt with in the dialogue programme. One example is ‘Pay for Delay’. This involves the owner of a patent making private arrangements with another manufacturer – before the exclusive rights to its drug expire – to delay the launch of a cheaper version. ‘That may be illegal’, says Van Kleeff, ‘but it still happens. It means that the consumer has to pay too much for the drug for a number of years. We do believe in patents, because companies should be rewarded for their efforts and for the risks that they undertake, but there need to be limits.’

Another point dealt with in the MN/PGGM dialogue programme is the risk of rules being contravened when drugs are being tested, particularly in developing countries. ‘There are stringent requirements that testing and the participants have to meet’, says Van Kleeff. ‘Safety and care are paramount. We do of course realise that testing is necessary – it means that a lot of patients can benefit. But it needs to be carried out very carefully.’ There is the same emphasis on complying with the rules when ‘off-label marketing’ is involved. This means that medication is sold for applications for which the regulatory authorities have not yet given their approval. ‘There are particularly strict rules for this in the US’, says Snijdewind, ‘and contravening those rules can lead to both health problems and high fines.’


In order to bring these issues firmly and permanently to the attention of pharmaceutical companies, it is effective to join forces. PGGM and MN found that they were both talking to companies in the pharmaceutical industry, so the two pension scheme administrators decided to act jointly. ‘If you work together’, says Snijdewind, ‘you represent a greater amount of capital, which gives you a more powerful voice.’ He also points out that cooperating leads to more effective dialogue: ‘It means that you don’t both ask all the same questions. That’s more effective as regards actual content, and it’s also better from the point of view of the company: things become more compact and more solution-oriented.’

One special aspect of this cooperation is that MN’s equity investment department is involved. ‘In the past’, says Arnoud Diemers, head of Internal Equity & Commodities at MN, ‘the engagement campaigns primarily assessed the environmental, social, and governance aspects (ESG) of companies. That’s what the Responsible Investment departments know most about. But in my team we have people who are highly familiar with the companies from the commercial angle. By looking at the issues more from the perspective of the company as a whole, you get a more complete discussion and better engagement.’

Van Kleeff adds: ‘That cooperation ensures that we can look at companies in a more balanced way. What we’ve done, for example – something that is not usual at our department – is consult normal brokers. We talked to an analyst with Goldman Sachs, for example. If you do that, you get to hear a different story than if you only listen to the ESG specialists.’ ‘The cooperation between the two departments within MN is valuable for both of them’, says Diemers. ‘ESG factors are an important variable in the investment decision, and within our objective of carrying out a comprehensive analysis this kind of cooperation is very likely to increase.’

Access to Medicine

The fact that attention to ESG offers more commercial advantages than just avoiding penalties can be illustrated with another important CSR topic in the pharmaceutical sector, namely ‘Access to Medicine’. This has to do with the extent to which pharmaceutical companies make their products available to people who cannot afford expensive medication. Apart from the ethical responsibility that drug manufacturers have in this regard, there are also economic arguments for providing medication even if there aren’t any short-term profits in return.

‘We act from the conviction’, says Snijdewind, ‘that Access to Medicine generates opportunities for businesses. A growing number of pharmaceutical companies realise, for example, that by marketing drugs for a somewhat lower price they can ensure a lasting presence for themselves in emerging countries. It also creates a sound basis for the proper functioning of the country concerned, which ultimately pays off because you get a growing middle class. In that way, you create a new sales market.’

As Snijdewind emphasises, those new markets will perhaps become more important than ever in the years ahead: ‘The ‘blockbuster model’ – which meant that pharmaceutical companies could earn well for years from a patented medication – seems to be functioning less and less effectively. Few new drugs are being discovered, meaning that the companies are having to consider how they can respond to the decreasing margins. One answer is by means of bigger volumes, and by tapping into new markets.’
‘It shouldn’t be a matter of philanthropy’, says Van Kleeff, ‘but of investing for the longer term.’ According to Snijdewind, ‘You need to take a strategic approach. That will also make access to medicines in developing countries less dependent on the good will of whoever happens to be the CEO at a particular time.’ As Diemers points out, ‘These are arguments that pension funds need to take extremely seriously because of their long-term focus.’

Access to Medicine Index

One important aid in the dialogue with pharmaceutical companies about access to medication is the Access to Medicine Index. Every two years, the index is produced by evaluating the efforts of the world’s twenty largest pharmaceutical companies to make medication available to the very poorest people in the world. The more a company does in this regard, the higher it is placed in the ranking. ESG adviser Nando van Kleeff explains: ‘Pharmaceutical companies that do well are complimented, and those that do less well are encouraged to improve.’

The top 5 in 2014:

1 GlaxoSmithKline plc
2 Novo Nordisk A/S
3 Johnson & Johnson
4 Novartis AG
5 Gilead Sciences Inc.

Source: Omni magazine

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