PLS companies need to consider the impact of their ESG activities on its accounting and financial reporting. Although the effects will vary, at a minimum, companies should consider qualitative disclosures about risks and uncertainties related to ESG that could directly or indirectly have a material effect on the financial statements, information about changes in the nature of the company’s operations arising from ESG initiatives, and aspects of ESG accounting that require management judgment and estimation. For example, in an effort to become more energy efficient, companies may make changes to pharmaceutical production processes by updating or replacing inefficient equipment. This may impact the estimated useful life of equipment or result in additional future cash outflows that may impact impairment assessments for both finite and indefinite-lived assets. Additionally, adjustments made to the supply chain to incorporate diversity or sustainability efforts, such as managing the environmental impact of transportation, may result in higher costs of inventories. Companies should consider how ESG risks are considered under existing rules and regulations and how they may impact their business and related disclosures.
Determining the financial reporting impacts of companies' ESG efforts begins with identifying the ESG strategy and the steps being taken to those ends. PwC’s Health Research Institute (HRI) analyzed the ESG efforts of 32 PLS companies and found that companies are embedding more environmental and governance focus into their overall strategy.
Environmental. HRI’s analysis of corporate sustainability and responsibility reports of PLS companies found that most are reporting CO2 emissions and setting targets for when they expect to be carbon neutral. Additionally, pharmaceutical production is a water-intensive process, creating an opportunity for companies to consider innovations aimed at reducing water usage and waste to shrink their carbon footprint. For distributors, HRI’s analysis found that many environmental efforts are focused on fuel efficiency and route optimization to mitigate the environmental impact of transportation.
Social. A logical target in the social pillar is increasing diversity among clinical trial participants. When drugmakers developing new treatments design clinical trials and decide where to launch them, the companies in effect create the universe of patients who could benefit from the therapies. HRI’s analysis of press releases and corporate sustainability reports from life sciences companies revealed that some are making headway in improving clinical trial diversity. Other social initiatives include:
Significant financial contributions toward making medicines and therapies more accessible to underserved communities
Increasing supplier diversity and risk assessment to enhance supply chain resiliency
Improvements to product safety
Initiating diversity and inclusion programs, such as recruitment and mentorship programs
Governance and reporting. After a PLS company commits to enhancing disclosure, they still need to choose a reporting framework. A single reporting framework may not meet their specific needs. HRI’s analysis found that the most commonly used framework is the one created by the Global Reporting Initiative (GRI); however 25% use a combination of two frameworks—GRI and the Sustainability Accounting Standards Board (SASB) standards. In selecting a framework, companies should consider which factors are the most material to their business and what types of organizations are most interested in the results (e.g., investors or regulators). The GRI standards offer practices for reporting publicly on a range of economic, environmental, and social impacts. SASB standards identify the subset of environmental, social, and governance issues most relevant to financial performance in various industries, including healthcare subsectors.
As companies look ahead, they should expect their disclosures and initiatives to change in response to company development and evolving investor and societal interest. To align the elements of ESG into consolidated reporting, companies should continue to identify the ESG topics and metrics that are material to the company’s core strategy and long-term value creation. Companies should also consider the policies, controls, and processes needed to support accurate and reliable disclosures. Refer to PwC’s micro site, ESG reporting, for further resources.
Additional Resource: Tune into this episode of PwC's Next in Health, The Intersection of ESG and Deals, to hear PwC HRI's Trine Tsouderos, and Strategy& Principal, Igor Belokrinitsky, in discussion with PwC’s Health Industries Trust Solutions Leader, Laura Robinette, on the role of ESG in deals for the health industry.
Our analysis of SEC comment letters has been updated for letters made public through June 30, 2021. It identifies the top 10 Health Industries comment letter trends, including comment examples. The treemap below depicts the approximate portion of comments for each trend relative to the total comments issued.
Observations from the data:
Comment letter trends within the Health Industries sector have remained relatively consistent overall; however, there continues to be some movement within the top 10. Disclosure controls and ICFR remains as the area of greatest frequency, with a continued focus on management’s identification and documentation of material weaknesses and changes in ICFR that have materially affected, or are reasonably likely to materially affect the registrant’s ICFR.
There continues to be an increase in SEC staff comments on MD&A. The SEC staff’s comments focus on critical accounting estimates and the judgments made in the application of significant accounting policies, sensitivity to changes in assumptions, and the likelihood of materially different reported results if different assumptions or conditions were to prevail.
While the number of non-GAAP related comments has decreased for Health Industries relative to total comments for the industry, non-GAAP has moved up to sixth on the list of top 10 trends.
The use of non-GAAP financial measures can result in comments from the SEC staff, and may culminate in requests to remove or substantially modify non-GAAP metrics. We have seen a recent focus by the SEC staff on non-GAAP adjustments for significant payments associated with collaboration and licensing agreements and whether these adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading.
In our Full disclosure podcast series, we’re bringing you back to the basics on all things related to financial statement presentation and disclosure, from the top of the financial statements through the footnotes. PLS companies can use this multi-episode series to begin preparing for year-end reporting, including identifying areas where enhancements to existing disclosures may be necessary.
For a full list of standards effective in 2021 and beyond, refer to our Guidance effective for calendar year-end public companies page.
As a reminder, PLS companies should consider SAB 74 disclosure requirements for their third quarter Form 10-Q, which may include quantitative and qualitative information about the expected impact for final standards not yet adopted (e.g., the FASB’s most recent guidance on liabilities and equity). In addition, in speeches, the SEC staff has requested that companies indicate the status of implementation, including any matters yet to be addressed. These disclosures are generally expected to become more detailed in reporting periods closer to a standard’s adoption date.
Recently, the House Ways and Means Committee approved tax increase and tax relief proposals that are to be acted on by the House of Representatives as part of “Build Back Better” reconciliation legislation.
House and Senate tax proposals are being considered under a fiscal year 2022 budget resolution that provides reconciliation instructions for a package that currently adds up to about $3.5 trillion of spending and tax relief provisions, offset in part by corporate and individual tax increases.
Why does it matter?
If final reconciliation legislation is passed by Congress, the impacts of the changes discussed below, along with an overall focus on decreasing healthcare costs, may impact PLS companies’ evaluation of their gross-to-net rebates, calculation of deferred tax assets and liabilities, and forecasted cash flow estimates.
What is being discussed?
Proposals include (a) increasing the top US corporate tax rate to 26.5%, up from the current rate of 21%; (b) making significant changes to international tax provisions, including changes to provisions related to global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), the base erosion and anti-abuse tax (BEAT), and subpart F in general; (c) increasing the top individual ordinary income tax rate; (d) changing the taxation of investment income; and (e) limiting the credit for clinical testing of orphan drugs.
Beyond the revenue-raising proposals, as a result of tax rate and international tax changes, several potential spending increases being considered include:
Affordable Care Act (ACA) expansion extension and filling the Medicaid Coverage Gap
Expanding Medicare to include dental, vision, hearing benefits and lowering the eligibility age
Health equity (maternal, behavioral, and racial justice health investments)
Although a reconciliation bill is not yet final, given the nature of these changes, which may include a change to the Medicare prescription drug reimbursement rate, and could result in additional pressure on PLS companies to change drug pricing or provide additional rebates, companies should monitor future changes and begin to evaluate impacts on the relevant estimates and disclosures.
For more information, see our Tax research and insights