July 03, 2002
Eco-Efficient Pharmaceutical Companies Have Higher Share Value
by William Baue
Innovest's recent report on the global pharmaceutical sector notes a correlation between strong
environmental performance and better stock performance, with some exceptions.
The body of statistical evidence correlating higher corporate environmental performance with higher
stock performance has just grown. Late last month, Innovest Strategic Value Advisors released a report that
compares the eco-efficiency of 29 pharmaceutical companies in U.S., Europe, and Japan to the
companies' stock performance. The study covers the period between May 1, 2001 and April 30, 2002.
Innovest found that companies with superior eco-efficiency had a higher share value than that of
companies that lagged behind in environmental performance. However, the statistical significance
of these findings is only applicable at the sector level and does not extend reliably to a
company-level analysis. Several companies that received excellent environmental ratings from
Innovest performed very poorly in the stock market over the past year.
City-based Innovest, a leader in intangible value analysis, developed the EcoValue'21 environmental
performance rating tool to quantify corporate eco-efficiency. The tool employs 60 criteria for
analyzing a company's environmental risk exposure, environmental management strategies, and
strategic profit opportunities. Companies earn ratings ranging from "AAA" for superior
eco-efficiency to "CCC" for poor environmental performance. These ratings allow Innovest to
distinguish the top eco-efficient companies from the poor environmental performers in any given
"Our theory is that the companies obtaining superior Eco Value'21 ratings will
tend to outperform the market going forward," said report author Pierre Trevet, a senior analyst at
Innovest. "However, we don't look at the stock performance prior to doing the environmental
rating; we do it after, so as not to be influenced by it."
The pharmaceutical sector in
particular has performed poorly in over the past year. The Innovest report, entitled The Global
Pharmaceutical Industry: Uncovering Hidden Value Potential for Strategic Investors, attributed
this poor performance to the expiration of existing patents as well as to the low rate of approval
for new drugs. Despite these sector-wide declines, the top half of eco-efficient companies
researched by Innovest still outperformed the poor environmental performers by 17 percent. Since
May 2001, the aggregate stock price of the top half fell by 8 percent, while stock prices for the
bottom half plummeted 25 percent.
Bristol-Myers Squibb (ticker: BMY)
earned an "AAA," the pharmaceutical sector's highest EcoValue'21 rating. If EcoValue'21 ratings
correlated directly with stock performance on a company level, Bristol-Myers stock should have
outperformed its peers. In actuality, Bristol-Myers stock value plummeted more than 60 percent
over the study period.
"We would never say that an EcoValue'21 rating replaces the need
for financial analysis," said Mr. Trevet. "If you take one stock individually, chances are it
won't work all the time. It's impossible--especially in the pharmaceutical sector, which is firmly
driven by the drug approval of the FDA [U.S. Food and Drug Administration] and patent expiry."
Innovest attributed Bristol-Myers' decline in part to the FDA's December 2001 decision not
to approve a colon cancer drug in which the company had invested $2 billion. However,
Bristol-Myers' poor market performance helps illustrate the stock performance of the remaining
companies in the top half.
"As the stock of Bristol-Myers declined by 60 percent, it means
that the others in the top half have had to really outperform," said Mr. Trevet.
predicts an imminent rebound for Bristol-Myers, for several reasons. One reason is that the
company's environmental management system covers its entire value chain. Another reason is that it
has achieved ISO 14001 certification at 22 sites, and more sites are working toward certification.
Innovest also points out rising stock prices of other companies with high EcoValue'21 ratings. Johnson & Johnson (JNJ--"AAA"), Novartis (NVS--"AA"), and Roche
(HLRZG--"AA") have all rebounded since the beginning of the year.
Innovest ranked Elan
Corporation (ELN) as the worst environmental performer with a "CCC" rating. The company has no
corporate environmental officer and no environmental policy, although shareowners are increasingly
demanding that these deficiencies be redressed. The company's stock price plummeted more than 76
percent over the past year.