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What Litigation Risk Means for Big Pharma and Biotech Valuations

As we incorporate ESG factors into our analysis, we see a manageable headwind.

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When Morningstar incorporated environmental, social, and governance factors into our valuation analysis of Big Pharma and Big Biotech, we focused on material ESG issues in the social realm, where we think these companies are exposed to the most ESG risk. Sustainalytics offers a comprehensive, industry-based approach to ESG risk, the starting point of our analysis. Morningstar has concluded that valuation-affecting ESG risk for branded drug companies centers on pricing risk (largely in the United States) and litigation risk (largely product safety-related). This article takes a closer look at litigation risk.

We combine our analysis of potential future legal charges related to product governance and business ethics into a single measure of litigation risk. Within product governance, the pharma and biotech subindustries hold Sustainalytics’ highest exposure scores due to their highly regulated nature and record of costly events related to unintended side effects, manufacturing issues, and false and deceptive marketing. Here we focus on company exposure to litigation risk from unintended consequences of drug use. Drugs can create side effects leading to increased warnings on labels, product recalls, and major litigation, especially in the U.S.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.