Karen Andersen: The investor community is increasingly interested in incorporating environmental, social, and governance risks into their decision-making. Morningstar is working with ESG research firm Sustainalytics, which is 44 per cent owned by Morningstar, to delve deeper into the issue.

When our healthcare team at Morningstar incorporated ESG factors into our valuation analysis for Big Pharma and biotech firms, we focused on ESG issues in the social realm, including pricing and litigation risk, which we think are the two most material issues.

Pricing remains a major headline risk for branded drug firms, particularly those with larger exposure to the US market. If major US drug pricing reform is signed into law, we assume an average 11 per cent hit to US branded drug sales starting in 2023, when changes could be implemented.

We’re most concerned about companies that sell therapeutics that are not cost-effective - or have major discrepancies in prices between the US and other developed markets - because we think they are most vulnerable to potential drug pricing reform. For example, Biogen and AbbVie have taken large US price increases in immunology and multiple sclerosis. While undervalued, we think these two firms have the highest pricing risk in our coverage.

Looking at the results of our ESG analysis, a few firms do stand out as attractive on both valuation and ESG risk. Roche's oncology portfolio, global pricing strategies, and diversification from diagnostics all lower pricing risk.

BioMarin's global pricing strategy and ultra-orphan disease focus should make it more immune to pricing reforms. Gilead's HIV portfolio has a history of relatively steady US pricing, and Sanofi is diversified enough, with rare-disease exposure, that pricing risk should be more limited.

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