2022 Materiality Checklist for Biotech: 4 Topics to Focus on First

June 9, 2022

Written By Delphine Robert, Senior Consultant & Martin Poveda, Director, Climate Risk

Biotech companies and ESG disclosures naturally go hand in hand. After all, biotech companies have a social license to operate; their whole purpose is to find solutions to enhance the health and health care options available to society. But while they can easily tell their “S” stories, the “E” component is often a little more daunting to small- and mid-cap biotech companies. With limited resources and the SEC handing out one mandate after another, companies are feeling the pressure to respond to increasing ESG market demands.

Those that find a way to keep up will have a distinct advantage. With so many diseases to cure, investors face no shortage of socially conscious biotech companies in which to invest. However, those companies that are also reporting on their environmental efforts will stand out, especially as ESG reporting becomes increasingly mainstream. Biotech companies that lead in both “E” and “S” could attract new investors, open up to more licensing and partnership opportunities, and most importantly, become more attractive acquisition targets.

Tell investors what they most want to hear.

To help biotech companies build a more balanced narrative, Clermont Partners identified the top four ESG hot buttons in the biotech space. We looked for the common denominators stemming from the bevy of inquiries and demands coming from various stakeholders. We considered the public Environmental and Social Stewardship statements from the 10 largest investors in the small- and mid-cap biotech space, the Sustainability Accounting Standards Board biotech industry standards, and the various ESG rating agencies’ view on materiality. Here is what emerged:

1. Product Safety and Quality. Biotech is a heavily regulated sector; this alone puts greater scrutiny on companies and increases quality and safety risk exposure. Biotech companies often have strategic partnerships with other entities. Some have manufacturing operations, others work in collaboration with research laboratories and universities to conduct their clinical trials, and some have licensing agreements with other biotech companies. All these moving pieces increase a company’s exposure to quality and safety risks within the supply chain.

To mitigate this risk, start by reviewing your supplier code of conduct and agreements and make sure they address quality and safety processes. Then assign oversight of safety and quality procedures to management.

Investors and stakeholders are starting to ask for quality performance metrics such as product recalls, regulatory warnings, adverse events, product safety, and marketing controversies. While you may not be ready to share all these metrics just yet, you can control your narrative on the topics by having publicly facing descriptions of safety and quality processes, just as Sage Therapeutics has done. You can also enhance your qualitative discussion of management risk oversight and share details on how clinical trials are monitored, how often you audit both your supply chain and your facilities’ work, and any other internal programs that serve to detect and remediate quality and safety risks.

2. Human Capital: COVID did not derail the industry’s employment growth. The industry continues to add to its workforce year over year. However, with increased competition, restructuring and acquisitions happening left and right, and the tight labor market, interest in the programs or diseases in your company’s pipeline are no longer enough to attract and retain interested employees. Employees expect more, and it is your job to convince them to find it at your company, and to stay put once they do. A formal talent development strategy is table stakes for this purpose. Such a program can also position you for more robust human capital disclosure and prevent you from being caught off guard by forthcoming SEC rules.

To get ahead of the game and start collecting and aggregating human capital data now, first assess your employee base’s temperature. Put in place regular employee engagement surveys, ensure employees receive regular performance feedback, and review your workforce’s diversity and inclusion strategy. Next up, put some structure around your talent development strategy. Start at the beginning by reviewing the benefits you provide to attract new employees. Be sure to emphasize community involvement and investments as employees are looking for purpose and, as a biotech company, you are well positioned to deliver. For your current employees, regularly provide managerial training opportunities or cross functional opportunities with a clear path to development and company ascension.

All this information should be easily accessible to your current workforce. Make your policies available to the public as well, as this will help attract new talent and potentially new investors as well. The Biogen Careers page achieves this by publicly posting  hiring process, career development opportunities, DEI strategy, and benefits package details.  The company also discloses workforce data, a step investors will thank you for. Remember, when you take action to improve your talent retention strategy, you will improve your bottom line, too.

3. Accessibility Health Equity. Demonstrate how your company is actively addressing health care inequity. Biotech companies are in a unique position to break down barriers including through the selection of clinical trial candidates and decisions on where to commercialize products. Companies can also independently set prices for the products they offer. Granted, as the biotech industry develops and products become increasingly complex, often requiring significant investment, some higher prices may be justified. However, regulatory scrutiny and pressure to lower rates have been making headlines – remember the EpiPen? Be sure to disclose your pricing strategy (see Vertex‘s view on pricing) and emphasize a patient access priority strategy including access to investigational therapies or work with patient advocacy groups.

Always control what you can. If your company’s pipeline includes priority diseases as defined by the Access to Medicine Index or the WHO List of Prequalified Medicinal Products, make this information easily accessible to your stakeholders. Other ways you can increase accessibility include licensing agreement structures such as royalty-free agreements, equitable pricing models that account for differences in countries’ development levels, and operations to support access to health care expenditures in lower income countries.

4. Climate Risk Disclosure. As climate change and global warming are being addressed through tougher regulations, global investors are increasingly treating climate risks as a key factor in pricing assets and investment allocation. Investors have increased their focus on climate risk, as businesses are likely to be impacted by transition and physical risk challenges. Pharma and biotech industries specifically face scrutiny due to the large footprint produced by their operations. A recent study found that pharmaceutical industry emission intensity is about 55% higher than automotive’s.[1]

Furthermore, industry trends in terms of contract manufacturers and outsourced R&D means biotech and pharma companies would have to disclose scope 3 emissions as part of the SEC climate-related ruling currently under consideration. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain, making reducing them one of the biggest challenges the biotech and pharma industries face. Currently, industry leaders remain focused on gathering supplier data to accurately reflect the full scope of their carbon footprint and supply chain risks.

Share your full ESG story with confidence.

The “S” may already be your strong suit. But biotech and pharma companies that really want to lead on the ESG front must become more intentional about providing the specific disclosures investors are seeking now. Taking the time to build corporate responses for these four key topics will help you gear up for proxy season and be more prepared for your regular calls from investors. In each area, you may already have policies in place that you aren’t yet speaking about publicly. This is a great place to start enhancing your disclosures. You will also want to gauge how much appetite the senior executive team has for taking on the issues. If you already have advocates on your team, leverage their passion and expertise. And remember, any additional disclosure you can provide will not only satisfy investors; it can help boost your ESG ratings, too.

Need help telling your story? Give us a call. We can work with you to unpack the issues so that you are ready to address your stakeholders’ most pressing questions.

[1] Carbon footprint of the global pharmaceutical industry and relative impact of its major players –  Carbon footprint of the global pharmaceutical industry and relative impact of its major players – Journal of Cleaner Production Volume 214, 20 March 2019, Pages 185-194 –  Available at: https://www.sciencedirect.com/science/article/abs/pii/S0959652618336084?via%3Dihub

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