The Covid pandemic has cast a spotlight on the pharmaceutical industry’s ability to respond to the challenge of not only delivering a vaccine, but also the wider value chain from diagnostics, manufacturing and distribution.

The industry has excelled on the innovation front and this has very much been driven by the early adoption of technology, especially in research and development (R&D). But it is no stranger to controversy.

When it comes to research, as well as the development of Covid vaccines, the vaccine for malaria developed by GlaxoSmithKline will help to save the lives of many thousands of children, especially in Sub-Saharan Africa where malaria is the primary cause of childhood illness and death.

GlaxoSmithKline recently announced £1bn of R&D investment over 10 years into infectious diseases that disproportionately impact lower-income countries. The focus will be on delivering new vaccines to treat malaria, tuberculosis, HIV and neglected tropical diseases, which together account for more than 60% of the disease burden in many lower-income countries.

Bad practice

However, poor practices such as animal testing, and legal and reputation risk, persist.

Animal testing continues to be performed for a variety of regulatory and safety reasons. The industry has made great strides to lower testing via the ‘three Rs alternatives’: reduction, refinement, and replacement of animals.

The UK has among the most rigorous animal research regulatory regimes in the world, being the first to ban the use of tests on Great Apes in 1986 and for cosmetic and beauty products in 1998. It is illegal in the UK to perform a test using an animal where alternatives are available and the benefits must outweigh any suffering.

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The industry does have a long record of behaving poorly leading to extensive litigation, which has resulted in tens of billions of dollars in fines and settlements. The violations include questionable sales and marketing practices, Medicare fraud, poor manufacturing practices, bribery and failure to disclose safety data.

The industry’s poor reputation will be difficult to reverse, but the pandemic has provided an opportunity to do just that. The rapid response on a vaccine for Covid by Pfizer and AstraZeneca, with the latter opting to sell at a cost price, has led to millions of lives saved.

The behaviour by companies in the sector has moved in the right direction with a new generation of CEOs being more cognisant of delivering on reputation and avoiding litigation.

Good news for ESG investors

Overall, the pharmaceutical industry remains uniquely placed to delivering on Access to Medicine (an index that ranks the 20 largest pharmaceutical companies across seven ESG metrics) and the UN Sustainable Development Goals (SGDs).

For example, GlaxoSmithKline is well represented across 13 of the 17 goals. On the third goal, which covers good health and wellbeing, the company contributes strongly on maternal and child health, TB, malaria, HIV and environmental health.

The pharmaceutical industry remains a standout for all types of investors: quality, defensive and growth. The large-cap pharma R&D names such as AstraZeneca, GlaxoSmithKline, Sanofi, Roche, Novartis, Merck Inc., Pfizer and Abbvie have defensive business models with low leverage, high margins, strong cash flow generation and sustainable income.

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It has been no surprise that this sector has stood up well during the pandemic. In addition, there hasn’t been a dividend cut in this part of the market for more than 20 years, excluding M&A. This remains a big draw at a time when the global dividend landscape has been fractured by cuts, suspensions, cancellations and deferrals. The industry is entering an exciting phase with the increased adoption of technology, which will act as a disruptor leading to greater innovation and wider societal benefits.