Voice Over Recording:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Moderator:
Welcome to another episode of the Insight Exchange podcast from L.E.K. focusing on the crucial role of Scope 3 emissions reduction in the pharmaceutical industry, with exclusive insights from L.E.K. Consulting. Coming up, we'll discuss the imperative for pharmaceutical companies to reduce Scope 3 emissions and its strategic significance. To provide insights on these topics, let's welcome our experts. Today, you'll be hearing from Verena Ahnert, partner, and Max Cambras, managing director of L.E.K. Consulting. Would you both please take a moment to introduce yourselves?
Verena Ahnert:
Hello, my name is Verena Ahnert. I'm a partner in the life science practice at L.E.K. Consulting based in London. I provide growth strategy and transaction support to pharma companies and also pharma service providers such as contract manufacturers. And I'm also a member of our Sustainability Center of Excellence, where I focus on ESG topics related to the pharma industry.
Max Cambras:
I'm Max Cambras, a managing director in L.E.K.'s life sciences practice working out of New York City, and I have a number of focus areas around supply chain process development and innovation in commercial supply. I have a lot of clients with significant Scope 3 questions that come up. And I'm also, like Verena, a member of our SCE Center of Excellence at L.E.K., so delighted to share some ideas and thinking with you here today.
Moderator:
All right. To start out, what are Scope 3 emissions in pharma and why do they matter?
Verena Ahnert:
So Scope 3 covers a wide range of emissions which are not directly owned or in control of a pharma company. So this includes upstream emissions from suppliers as well as downstream emissions, for example, from transportation or waste management disposal of pharma company's products.
Why they matter, in the pharma industry, the Scope 3 emissions are about five times greater than Scopes 1 and 2 combined, and they make up about 80 to 90% of total emissions. It's been quite complex to tackle these emissions from Scope 3, and pharma has historically been a bit reluctant to address them, partially because of a lack of visibility and obviously of a lack of direct control because they are not within the pharma company's immediate remit.
But in recent years, Scope 3 has shifted more into focus. We all know that the increasing impact of climate change is having a substantial negative effect on human health. And in line with this and with increasing pressure from many stakeholders such as regulators, investors and customers, the healthcare industry, including pharma, is increasingly seeking to control these and reduce these Scope 3 emissions.
Moderator:
Great, thank you. What is the current state of Scope 3 commitments in pharma?
Max Cambras:
It's a good question, actually. And I think Verena had already mentioned that Scope 3 makes up a majority of pharma emissions. And if we sort of reflect on where we are as an industry, the short answer is that we're lacking, right?
So you can take a look at the data and find that there are only a handful, three, in fact, of the top 20 that have actually not only made commitments to Scope 3 reduction, but are also working with validated scientific based initiatives, in other words, where you've targeted specific hotspots for Scope 3 reduction and you've made a specific commitment around both the near term and the long term reduction and you have a plan in place.
So while Novo was the first in 2018 to get off the ground with this process, and most of the top biopharmas have followed suit to some extent, very few of them have actually laid out all the dimensions of a concrete plan. I think there's been forward momentum and there's been quite a bit of progress by way of partnerships, like SMI, and other issues along those lines that help pharma achieve a level of transparency and commitment with its own suppliers that can actually move us forward.
To understand the dimension of the problem itself, it's useful to just think about what happens along the development and commercialization of a pharmaceutical product and why the burden of transparency into the supply chain would actually be so great and why there's quite a bit of striving for that and also why it drives the lag, right? So you're often dealing with both process development and technical development that are going from a very, very high mix, low volume clinical environment into a much larger scale-up at commercial.
And it's very hard for pharma not only to identify when on that continuum those hotspots are likely to come up, but also to establish the right relationships with their CDMOs and other manufacturing partners to initiate reduction of Scope 3 in a way that doesn't add risk to the development program. So that's why I think you've seen both a lag and what you're seeing is the emergence of more and more sophisticated mechanisms like strategic partnerships to actually reduce Scope 3.
Moderator:
Excellent. Thank you so much. What are the key drivers in Scope 3 emissions in pharma?
Verena Ahnert:
So there are 17 segments where we quantify emissions. There's Scope 1, Scope 2, and then 15 subsegments of Scope 3. For most pharma companies, the largest emissions hotspots are the Scope 3 segments of purchased goods and services, one, and then use of sold products as another.
We looked at the emissions of three big pharma companies by GHG protocol category, and for all of them, purchased goods and services and the use of sold products were the top two contributors to Scope 3. So let's take another look at these in more detail. Purchased goods and services includes all upstream emissions from the manufacturing of these products or services. And for a pharma company, a lot of this comes from the contract manufacturers.
Pharma is increasingly considering environmental performance when they select a contract manufacturer really as a sort of non-negotiable criterion, and as a result, the contract manufacturers are increasingly stepping up their sustainability commitments. And you can see this in the way they're looking at increasing the share of energy that is renewable or trying to improve waste management processes or using green chemistry.
Then there's the second category, which is the use of sold products on the downstream side, and this includes all emissions from the use of goods and services sold by the pharma company. And the emissions here can be direct or indirect. So direct or direct use would be coming from products which consume energy during their use, so this could be infusion pumps or dialysis machines, or which actually themselves emit greenhouse gases, so inhalers.
And then indirect use refers to products which consume energy indirectly, for example, when you refrigerate vaccines or trips made to patients by medical staff. And this category of use of sold products also involves emissions consequences from product design and therefore is actually a focus area or an increasing area of interest for pharma R&D. And as an example, some pharma companies are looking at how they can reduce emissions from their metered dose inhalers used for asthma and other respiratory conditions.
As we know, MDIs are among the largest emissions contributors from the use of sold products. The propellants themselves are significantly more powerful than carbon dioxide. Interestingly, GSK found that about 85% of its emissions from the use of sold products and almost half of its total emissions come from the use of these metered dose inhalers.
So there have been efforts made by pharma to reduce emissions from inhalers and as part of, basically, their product innovation efforts. For example, GSK and AstraZeneca have started R&D programs to redevelop and redesign their MDIs to use lower greenhouse gas propellants with much lower environmental impact, and AstraZeneca expects this evolved MDI to launch by 2025, which would be the first low or near-zero global warming inhaler.
Moderator:
And what are the strategic co-benefits of Scope 3 emissions reduction?
Max Cambras:
I think it's actually useful to maybe divide up the type of benefit into benefits that pharma companies can achieve through external engagement with both their customers as well as in the market access environment, which might translate into pricing and access benefits for end users, and then, on the other hand, operational benefits that they get as both a direct and indirect consequence of adopting Scope 3 reduction initiatives that are both programmatic and validated.
So in terms of customers, external customers, when you broaden the range of customers to include all sorts of institutional buyers... Take, for example, NHS. About 25% of reduction in NHS's overall healthcare reduction in Scope 3 targets and emissions comes from pharma, right? So I forget the exact number of megatons of CO2 equivalents released, but it's a pretty significant number and it's remarkable that, of all the different stakeholders in the NHS universe, about 25% of that reduction is coming from pharma. That can translate into directly better customer buying behavior and potentially better access to the end user, the patient, as well as the HCP within these systems.
What I think you'll also see is, with the consumerization of certain aspects of our industry, there's an opportunity for product differentiation. Verena already talked about, for example, how you can not only reduce the use of certain gases and take advantage of the redesign of combination product such as MDI, DPI, but you can also use this as an opportunity to differentiate. And there are some interesting examples with direct branding and differentiation that coincide with rethinking the product system as a universe of customer experience. And part of the criticality of that experience is more mature thinking around sustainability and environmental citizenship.
So those are the opportunities, I think, in terms of a customer-facing way. There's also pricing and access. And there, we haven't seen a lot of direct correlation emerge yet, but I think it's interesting to reflect on two indicators that are across the spectrum of access. So on the one hand, you have the Nordic countries, which are getting involved in creating direct relationships between emissions reduction net-zero goals and compliance, and market access. The Nordics are extremely progressive and they almost serve as the bellwether for a lot of Europe.
On the other hand, you have CMS, who's finally talking about this for the first time in the past year, represents an enormous amount of the financial component of the pharmaceutical market globally, and is recognizing emissions reduction as an important criteria. So you're getting movement on payers, on the payer front, both at the vanguard and, sorry to call CMS the caboose, but the caboose.
So I think that's a critical area, and then the third and arguably the most near-term and interesting is in process development as well as technical development on the manufacturing and supply chain side. So the ability to interrogate, measure and collaborate with your network of suppliers gives you transparency into what they're doing, and it allows you to adopt a broader set of manufacturing of the future initiatives more effectively.
COVID itself and the global pandemic, if nothing else in terms of pharmaceutical manufacturing, has highlighted the need to continue to pursue harmonization of SKUs, manufacturing of the future, efficient use of redundancy and supply chain resiliency. So the angle here is that drug companies strategically, especially larger ones with complex integration across the manufacturing chain, are now able to use Scope 3 as a dimension wherein they can monitor and collaborate with their network of suppliers and enjoy other benefits, like lead time reductions, 3PL efficiencies. The list goes on and on and on.
And interestingly, some large companies, like Merck, have been rather forthcoming about the correlation between these operational efficiencies and adopting a progressive Scope 3 policy.
Moderator:
Very good. Thank you so much. And finally, what is the path to achieving strategic co-benefits?
Verena Ahnert:
So there are a number of steps that pharma companies can take. First of all, it's really important to have a clear strategic framework, that you understand where the biggest decarbonization impacts can be realized, and that you also understand the sort of balance between the absolute size of a potential reduction and the feasibility and also the timing of achieving that reduction. So prioritization will be important.
The next one is, and Max has hinted at this as well, that decarbonization considerations should really be brought forward early into the product development stage where it's possible. The earlier in the value chain that changes to product design are implemented, the bigger the potential impact, both in terms of decarbonization effect, but also there's the differentiation potential that you have with these more environmentally friendly products.
Another one is that pharma companies should collaborate with each other to drive changes in supplier behavior more effectively. Needless to say, the more pressure there is across the board from pharma, both large and small, the more quickly the CMOs will react. So it's also important that, within the pharma company, governance of the interactions with the supplier, rules are clearly set across the functions within the [inaudible 00:17:25], and that there's clarity on key performance indicators and expectations in terms of collaboration with the suppliers.
And finally, and that's probably the most important one, is it's important to start early. And you can see that many pharma companies have emissions target deadlines that come up in the next 5 to 10 years, and it will take a very long time to achieve these reduction efforts. So it's very crucial that companies initiate the emissions reduction as soon as possible from now.
Moderator:
Very good. Thank you. To close the conversation, we'd like to thank our expert guests, Verena and Max, for their discussion regarding Scope 3 emissions, a strategic imperative for pharma companies. We're happy to provide more detailed discussions on request, and we invite you to connect with us to learn more about L.E.K. Consulting's extensive experience in providing strategic support to businesses and investors who must focus on opportunities in Scope 3 emissions.
Voice Over Recording:
Thank you, our listeners, for joining us today at the Insight Exchange, presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
