The drug pricing debate continues to plague the life sciences sector, fueled by public criticism of rising costs and calls for regulatory change in the midst of the election season. Nearly nine in ten (89 percent) life sciences organizations identify drug pricing pressures as a considerable risk, according to a new report from BDO USA, LLP, a leading accounting and consulting organization.
The 2016 BDO Life Sciences RiskFactor Report examines the risk factors cited in the most recent annual shareholder filings of the 100 largest publicly traded U.S. life sciences companies listed on the NASDAQ Biotechnology Index by revenue. The risk factors were analyzed and ranked in order of frequency cited.
The rapid growth of the life sciences sector over the last few years has come at the expense of increased scrutiny from regulators. All 100 companies in the analysis cite regulatory concerns, with 86 percent calling out changes in healthcare laws and regulations—up four percentage points from the previous year. The shift from fee-for-service to value-based care, set in motion by the Affordable Care Act, is also forcing life sciences companies to reevaluate how they price their products. Ninety-seven percent cite reimbursement from third-party payers, including payments from Medicare and Medicaid, as a risk factor.
Pricing pressures further complicate a sector already under financial strain, thanks to a lackluster IPO market and market volatility. Ninety-four percent of life sciences companies identify volatile financial results, including stock prices, as a key threat. But while the pace of IPO activity remains well behind the average for the past decade, the 2016 BDO IPO Halftime Report found that two-thirds (66 percent) of capital markets executives predict the healthcare sector, including life sciences, will generate the most offerings during the remainder of this year. Still, concerns around debt also emerged at the forefront of the industry’s risk factors this year, with 71 percent of the 100 largest U.S. life sciences companies citing indebtedness as a risk—up 15 percentage points from 2015. The ability to secure financing may also drive more deal activity this year, particularly among smaller companies whose lower valuations may make them attractive targets.
“Amid market turbulence and a difficult IPO environment, the life sciences sector has also experienced a few bright spots in M&A activity as well as promising research and product developments,” said Ryan Starkes, Assurance Partner and Leader of the Life Sciences Practice at BDO. “While investors appear to be more risk-averse than they were during this time last year, breakthrough innovations almost always reap dividends. But, for the time being, drug pricing remains the elephant in the room.”
The following chart highlights the top 25 risk factors cited by the 100 largest companies on the NASDAQ Biotechnology Index:
|1.||Competition in industry, consolidation||100%||100%||97%||100%|
|1t.||Federal, state and/or local regulations||100%||100%||98%||100%|
|1t.||Corporate copyright, intellectual property infringement||100%||99%||98%||96%|
|4.||Ability to commercialize and market products||98%||99%||97%||96%|
|5.||FDA regulatory approvals, obligations and compliance||97%||100%||94%||94%|
|5t.||Supply chain, supplier/vendor and manufacturing concerns||97%||99%||100%||93%|
|5t.||Reimbursement from third party payers||97%||96%||85%||87%|
|8.||Product liability and insurance costs||96%||98%||95%||87%|
|8t.||Product complications, side effects, delays and recalls||96%||93%||88%||88%|
|10.||Legal proceedings and litigation||95%||92%||91%||84%|
|10t.||Ability to attract and retain key personnel||95%||91%||94%||96%|
|12.||Volatile financial results — revenue, profitability, stock price||94%||90%||97%||92%|
|13.||Threats to international operations and sales||92%||88%||71%||79%|
|14.||Delays or unfavorable results from clinical trials||91%||92%||87%||80%|
|14t.||Collaborations and relationships with other companies||91%||90%||89%||92%|
|16.||Pressure on pricing and cost cutting||89%||N/R||N/R||N/R|
|16t.||Cybersecurity, including data breaches and the ability to maintain operational infrastructure||89%||70%||61%||46%|
|18.||Changes in healthcare laws and regulations||86%||82%||77%||78%|
|19.||Maintaining internal controls, financial reporting, accounting standards||85%||87%||76%||68%|
|19t.||Inadequate liquidity or capital||85%||84%||85%||79%|
|21.||Failure to properly execute corporate strategy and growth||84%||79%||66%||69%|
|22.||General economic and financial market conditions||83%||91%||67%||84%|
|23.||Anti-takeover or change of control provisions||81%||79%||75%||66%|
|24.||Hazardous materials – environmental, health and safety laws||78%||81%||73%||66%|
|25.||Natural disasters, war, conflicts and terrorist attacks||77%||76%||56%||47%|
|*t indicates a tie in the risk factor ranking|
Additional findings from the 2016 BDO Life Sciences RiskFactor Report include:
Cyberattacks and Cyber Concerns on the Rise
Nearly nine in 10 (89 percent) life sciences companies cite cyber risk in their annual filings, up 19 percentage points from 2015 and 43 percentage points from 2013. Life sciences companies have access to extremely valuable data assets that can translate into big payouts for cybercriminals. The biggest cyber threat in the life sciences industry is arguably to its intellectual property, which may fall victim to insider theft or corporate espionage.
“Data—and finding ways to monetize that data—is at the heart of life science organizations’ business,” said Shahryar Shaghaghi, National Leader, Technology Advisory Services and Head of International BDO Cybersecurity. “While they may be a less obvious target than consumer-facing industries, sophisticated hackers are stealing critical business intelligence with larger but less straightforward financial rewards. Life sciences companies must put in place the right controls and detection mechanisms to adequately guard these critical data assets against both internal and external threats.”
One hundred percent of companies analyzed in this year’s report cite risks related to intellectual property — the backbone of industry innovation. Central to this issue is patent exclusivity protection, which comes with an expiration date. Sixty percent of life sciences organizations cite risks related to loss of exclusivity. Potential infringement of competitors’ patents and subsequent litigation also poses significant risk, with 95 percent of life sciences companies citing legal proceedings and litigation in their annual filings.
Getting a drug or device from discovery through clinical trials to approvals presents its own hurdles and can determine a company’s survival. The vast majority of life sciences organizations cite delays or unfavorable results from clinical trials (91 percent) and FDA regulatory approvals (97 percent) as significant risks.
Collaborations Speed Up
Despite a few notable megadeals in the sector, M&A activity in the life sciences sector got off to a slower start in 2016 than in 2015, which was a record-breaking year for deals. In what may be a reaction to stricter inversion guidance and high-profile deal failures, three-quarters of companies cite the inability to manage, complete and integrate current or future transactions as a risk in their annual filings.
Life sciences organizations continue to look to collaborations to bolster their development pipelines. Ninety-one percent of the largest U.S. life sciences companies cite risks related to collaborations in their annual filings.
International Risks Mount, Even Pre-Brexit
The vast majority (92 percent) of life sciences companies cite threats to international operations and sales, up 4 percentage points from 2015, and 42 percent cite the ability to expand abroad in their annual filings. In the aftermath of the U.K.’s Brexit referendum, the international market faces increased uncertainty, heightening risks for life sciences companies abroad. As companies grow their business overseas—particularly in emerging markets—they must grapple with different business conduct rules, regulations and cultural norms, increasing their risk of exposure to bribery and corruption. Sixty-one percent cite risk related to the Foreign Corrupt Practices Act (FCPA) and other anti-bribery regulations.