global pharmaceutical strategic investors: sector …income groups and less developed countries. ......
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New York Mr. Peter Wilkes Managing Director +1 212 421 2000 ext. 216 [email protected]
Toronto Ms. Susan McGeachie Director +1 905 707 0876 ext. 217 [email protected]
San Francisco Mr. Pierre Trevet Managing Director +1 415 332 3506 [email protected]
Innovest Uncovering Hidden Value for Strategic Investors www.innovestgroup.com
Paris Perrine Dutronc Managing Director +33 (0)1 44 54 04 89 [email protected]
London Mr. Andy White Managing Director +44 (0) 20 7073 0469 [email protected]
Sydney Mr. Bill Hartnett Managing Director +61 2 9940 2688 [email protected]
Tokyo Mr. Hiromichi Soma Director +81 3 5976 8337 [email protected]
EXCERPT ONLYTHIS IS NOT A FULL REPORT
KEY ISSUES FOR STRATEGIC INVESTORS:
Product Safety In light of recent drug safety scandals and failures to fully disclose to recipients the true extent of clinical trials, some companies have made proactive attempts to disclose all past and present trial details in an attempt to be more transparent. The adverse reputation impact on other drugs associated with safety fears has fuelled debate over the drug approval regulations in the sector.
Access to Medicines A complex issue that involves intellectual property rights protection, healthcare provision in emerging markets and the extent to which the private sector is responsible for providing treatments to low income groups and less developed countries. The ongoing access debate has seen proactive companies increasing their support for initiatives in low income countries with donations of drugs, equipment, services and cash.
Generic and Branded The sector comprises companies whose focus is on the development and production of new drugs as well as companies who produce off-patent generic drugs. Over the last few years numerous drugs have gone off-patent resulting in increasing competition and in higher pressure on drug companies to maintain a strong pipeline and a profitable business.
Go to page 8 for the full list of Key Issues for Strategic Investors
Global Pharmaceutical Sector Report October 2006
Report prepared by Veronique Menou, Andy White, Adam Savitz, Afshin Mehrpouya.
Innovest has rated 44 companies in the phamaceutical sector on environmental, social and governance (ESG) risk and opportunity factors using its propritary Intangible Value Assessment (IVA™) model. These ratings range from AAA (best) to CCC (worst). This chart shows that in the pharmaceutical sector, companies rated by Innovest had a higher average total investment return on an annual basis (most recent fiscal year) as the companies ratings’ improved. The average total investment return for companies rated CCC was 0% while those rated above BBB was over 20% on average. This implies that Innovest’s ratings can provide an additional signal to investors for generating investment out-performance. Past performance is not a guarantee of future performance. (Source: Total Annual Investment Return: Thomson Financial.)
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AAA AA A BBB BB B CCC
AverageTotal Investment Return - Annual
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Innovest Rating WorseBetter
These bars represent the range of total investment return for companies grouped by their rating, AAA to CCC. The average of each group is represented by the yellow bar.
Innovest Strategic Value Advisors Global Pharmaceutical Sector Report www.innovestgroup.com October 2006
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Table of Contents
Chapters
1 EXECUTIVE SUMMARY 4
KEY ISSUES FOR STRATEGIC INVESTORS: 4
COMPANY RATINGS 5
LEADERS AND LAGGARDS 6
2 RATINGS AND FINANCIALS 7
COMPANY RANKINGS 7
3 NON-TRADITIONAL VALUE DRIVERS 9 ACCESS TO MEDICINES 9
PRODUCT SAFETY 9
CLINICAL TRIALS 10
BIOETHICS 10
SHORTAGE OF SKILLED WORKERS 11
ENVIRONMENTAL BURDEN 12
MALPRACTICE 12
PRICING ISSUE 12
M&A AND INDUSTRY CONSOLIDATION 13
4 COMPANY PERFORMANCE ON INTANGIBLES 15
I. STRATEGIC GOVERNANCE 15
II. PRODUCTS AND SERVICES 23
III. HUMAN CAPITAL 33
IV. ENVIRONMENTAL PERFORMANCE 44
V. STAKEHOLDER CAPITAL 62
VI. EMERGING MARKETS 72
No part of this report may be reproduced in any manner without the written permission of Innovest Strategic Value Advisors, Inc. The information herein has been obtained from sources, which we believe to be reliable, but we do not guarantee its accuracy or completeness. All opinions expressed herein are subject to change without notice. Innovest Strategic Value Advisors, Inc., its affiliated companies, or their respective shareholders, directors, officers and/or employees, may have a position in the securities discussed herein. The securities mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates. © 2006 Innovest Strategic Value Advisors, Inc. All rights reserved.
Innovest Strategic Value Advisors Global Pharmaceutical Sector Report www.innovestgroup.com October 2006
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Figures
FIGURE 1 Innovest Ratings for 44 Companies in the Pharmaceutical Sector 7
FIGURE 2 Sustainable Governance Scores 17
FIGURE 3 Strategic Capability Scores 21
FIGURE 4 Corporate Governance Scores 23
FIGURE 5 R&D Expenses versus Selling & Administrative Expenses 25
FIGURE 6 Intellectual Capital Scores 28
FIGURE 7 Product Safety Scores 32
FIGURE 8 Diversity Performance 36
FIGURE 9 Workplace Practices Scores 38
FIGURE 10 Labor Relations Scores 41
FIGURE 11 Injury Reduction (2003-2004) 42
FIGURE 12 Health & Safety Scores 44
FIGURE 13 Resource Use Reduction (2003-2004) 47
FIGURE 14 Environmental Management Scores 49
FIGURE 15 Process-Related Potential Environmental Impacts 51
FIGURE 16 Toxic Release Inventory Emissions 53
FIGURE 17 PRTR Emissions Type 1 54
FIGURE 18 PRTR Emissions Type 2 54
FIGURE 19 EV21 Indicators 55
FIGURE 20 Eco-efficiency Rating 56
FIGURE 21 Global Warming Potential 57
FIGURE 22 Material Intensity 57
FIGURE 23 Energy Intensity 58
FIGURE 24 Water Intensity 58
FIGURE 25 Stakeholders Relations Scores 65
FIGURE 26 Local Communities Scores 70
FIGURE 27 Supply Chain Scores 72
FIGURE 28 Emerging Market Strategy Scores 77
Innovest Strategic Value Advisors Global Pharmaceutical Sector Report www.innovestgroup.com October 2006
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2 Ratings and Financials
COMPANY RANKINGS
FIGURE 1 Innovest Ratings for 44 Companies in the Pharmaceutical Sector
Source: Innovest’s Rating Model and Databases, 2006 (G) - Generic Drugs Companies
Overall Rating
Overall Rank
Social Rating
Env. Rating
Strategic Governance
Human Capital
Stakeholder Capital Env.
ABT-N Abbott Laboratories Inc AGN-N Allergan Inc ALT-FF Altana AG 4503-TO Astellas Pharma Inc AZN-LN Astrazeneca PLC BRL-N Barr Pharmaceuticals Inc BVF-T Biovail Corp. BMY-N Bristol Myers Squibb Company 4519-TO Chugai Pharmaceutical Company Limited 4568-TO Daiichi Sankyo Company Limited 4506-TO Dainippon Sumitomo Pharma 4523-TO Eisai Company Limited DRX-DB Elan Corporation PLC LLY-N ELI Lilly & Company FRX-N Forest Laboratories GSK-LN Glaxosmithkline PLC HIK-LN Hikma Pharmaceuticals PLC JNJ-N Johnson & Johnson KG-N King Pharmaceuticals Inc 4151-TO Kyowa Hakko Kogyo Company Ltd LUN-KO Lundbeck A/S MYP-AU Mayne Pharma Limited MRK-N Merck & Company Inc MRK-FF Merck Kgaa AG MYL-N Mylan Laboratories Inc NOVN-VX Novartis AG NOVO'B-KO Novo Nordisk A/S ORNAV-HE Orion Corp. PFE-N Pfizer Inc ROG-VX Roche Holdings Limited AAA 1 AAA AAA 7.7 9.0 7.5 8.6 SAN-FR Sanofi-Aventis 4536-TO Santen Pharmaceutical Company Limited SCH-FF Schering AG SGP-N Schering-Plough Corp. SEPR-O Sepracor Inc 4507-TO Shionogi Limited SHP-LN Shire PLC 4535-TO Taisho Pharmaceutical Company Limited 4502-TO Takeda Pharmaceutical Company 4508-TO Tanabe Seiyaku Company Limited TEVA-TV Teva Pharmaceutical Industries Limited UCB-BT UCB SA WPI-N Watson Pharmaceuticals Inc WYE-N Wyeth
REDACTED CHART
High score is 10 Relative, Best-in-class sector benchmark
Top Quartile Bottom Quartile
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London: +44 (0) 20 7073 0470 Toronto: +1 905 707-0876 Paris: +33 (0)1 44 54 04 89
Intangible Value Assessment
Copyright© 1998-2006. All rights reserved. Innovest Strategic Value Advisors, Inc.
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Jun-06
Roche Holding Limited Country: CHE
Ticker Symbol: RHHVF
Industrial Sector: Pharmaceuticals
Combined IVA Rating:
AAA
Sub-Factors:
Strategic Governance: 7.7
Human Capital: 9.0
Environment: 7.5
Stakeholder Capital: 8.6
Analyst: Veronique Menou 1 905 707 0876 [email protected]
Intangible value comprises a growing percentage of companies’ market capi-talization. Innovest’s IVATM ratings ana-lyze relative corporate performance on intangible value drivers related to the strength and sustainability of companies’ competitive advantage. By assessing dif-ferentials typically not identified by tradi-tional securities analysis, IVATM ratings uncover hidden risks and value potential for investors. Ratings range from AAA (best) to CCC (worst). Scores on sub-factors range from 10 (best) to 0 (worst).
PERFORMANCE / ALPHA INTENSITY MATRIX
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Alpha Intensity of Sub-Factor
Perfo
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pany
Strategic Governance EnvironmentHuman Capital Stakeholder Capital
This matrix situates the four key intangi-ble value drivers along 2 dimensions: 1. How well or poorly the company per-forms on each of the 4 key factors. 2. How much impact that particular factor has on financial performance in that in-dustry sector; its “alpha intensity”.
RATING OUTLOOK: Positive
Roche Holding Limited (Roche) clearly emerges as a leader in the sector and dem-onstrates strong capability in mitigating environmental, social and governance (ESG) risks. In Innovest’s view the com-pany is likely to be an outperformer going forward.
AREAS OF POTENTIAL RISK
Among the largest companies in the world: Roche is the one of the largest pharmaceutical company in the world. It is therefore most at risk from targeted adverse publicity and from losing its license to operate in certain states due to potentially negative relations with local authorities.
AREAS OF COMPETITIVE ADVANTAGE
Patent Relaxation Policy: Roche is one of the few companies not to exercise patent protection in the least developed countries. In addition the company is now supporting local producers to manufacture the drugs while sharing its knowledge and expertise (see Emerging Markets section). High Level of Transparency: Roche demonstrates great transparency and dis-closure in terms of policy and management systems to deal with ESG issues. The com-pany refers systematically to internationally recognized standards and works in partner-ship with relevant stakeholders (see Adaptability/Responsiveness section).
STRATEGIC PROFIT OPPORTUNITIES
Bird flu: Strategic profit opportunity for Roche rests in the management of the bird flu pandemic. Since the avian flu has been discovered in Asia and in some European countries, fears have grown over the spread of the disease around the world. WHO is recommending governments to stockpile Tamiflu to reduce mortality and contain the spread of an outbreak. European countries aim to stockpile enough of the drug to cover 20 to 40% of their population. In the meantime Roche states that Tamiflu is manufactured at 12 sites and that the com-pany will be able to produce 400 million treatments annually by the end of 2006. If the company properly manages the crisis, it is likely to emerge as a model of emer-gency management in the pharmaceutical industry. Although the pharmaceutical business of-fers little if any direct market opportunity for environmental premiums or environ-mental branding, corporate reputation can be adversely affected by environmental damage and poor management. Roche be-
lieves that only a financially successful company can be active in environmental and social areas and that financial success only occurs if it acts in an environmentally and socially responsible manner. Roche runs a program called EcoCompetition which encourages employees to create new devices and innovative methods to reduce environmental burden and increase eco-efficiency. This project is likely to enhance employees' morale while generating sav-ings for the company.
COMPANY OVERVIEW
Roche Holding Ltd: Founded in 1896 in Basel, Roche is a global health care com-pany that operates in the following two business segments: pharmaceuticals (77%) and diagnostics (23%). The pharmaceutical segment has three sub-divisions namely Roche Prescription, Genentech Prescription and Chugai Prescription. The diagnostic segment provides products and services in all fields of medical testing. Roche posted CHF35,511 million in revenues in 2005 of which 1% were generated in Switzerland, 38% in the US, 33% in Europe, 11% in Japan, 6% in Latin America, 5% in the rest of Asia, 3% in the rest of Europe and 3% in Australasia and Africa. The 2005 total workforce was 68,218 people. In July 2005, the Group acquired GlycArt Biotechnology Ltd.
INDUSTRY DRIVING FORCES
Patent Expiry: The pharmaceutical indus-try is driven by the monopolizing of drug patents. Companies strategically use pat-ents in order to restrict competition and pay their expensive R&D costs. The ability to extend a profitable drug patent beyond its twenty year duration is critical to earnings stability and growth, particularly when estimates from organizations such as the Office of Generic Drugs suggest drugs with annual sales of some US$20 billion will go off-patent by 2010. Sales of a blockbuster drug can plunge 80% or more in the first year after a generic enters the market. Ad-ditionally, by the time a new drug reaches the market the patent may well have less than half of its twenty year term remaining. As a result new drugs must be sold world-wide, since no company can fully exploit a patent product, recouping its R&D costs, solely in its home market. Industry Consolidation: Increasing con-solidation within the industry is a response to the combination of rising cost pressures (especially in R&D), competition from generic brands and the difficulties of rais-ing drug prices to maintain margins. In the