Intellectual Property Infringements and Supply Chain Vulnerabilities Among Top Risks for Life Sciences Companies – BDO USA Report

June 2014

Melissa Kvitko
Bliss Integrated
[email protected]

CHICAGO - June 17, 2014 – Amid uncertainties around patent protection and lawmakers putting an indefinite hold on patent reform legislation, life sciences companies are increasingly pointing to intellectual property (IP) infringement as a threat. According to BDO USA, LLP’s second annual analysis of risk factors noted in the most recent 10-K filings of the 100 largest companies on the NASDAQ Biotechnology Index by revenue, 98 percent of companies cite the protection of their intellectual property as a risk. Research and development (R&D) is crucial to the success of life sciences companies and any infringement of their IP can be financially detrimental and give competitors an advantage. Various requirements relating to the U.S. Physician Payments Sunshine Act (Sunshine Act) and the Health Information Technology for Economic and Clinical Health (HITECH) Act force companies to report, maintain and protect various types of customer and patient data. Therefore the potential for any form of electronic data breach, along with recent headlines around data security issues, have companies more focused on these risks. In fact, data security and privacy breaches reached the top 25 risk factors overall for the first time this year, with 61 percent of companies citing it as a risk. With these concerns on the rise, companies are subject to more time-consuming regulatory compliance as well as reputational risks in the event such information is corrupted.

The 2014 BDO Life Sciences RiskFactor Report also found that supply chain management and concerns over suppliers and vendors was the number one cited risk for life sciences companies in 2014, with every company in the sample (100 percent) noting this concern. With many life sciences companies relying on third-parties to bring their products to market and to produce critical materials, they depend on these suppliers to comply with numerous standards and regulations, and any compliance setback can lead to disruption in production as well as exposure to product liability issues and recalls. As a result, 95 percent of companies cite significant risks related to product liability and insurance costs, while 88 percent cite product recall and complication concerns.

"Despite recent market volatility, the biotech industry is seeing positive growth and robust M&A activity," said Ryan Starkes, partner and Life Sciences practice leader at BDO USA, LLP. "As life sciences companies work to deliver positive shareholder return, our analysis shows they are intensely focused on protecting their IP, product integrity, and their competitive position by carefully evaluating vendor, collaboration and acquisition opportunities."

The following chart highlights the top risk factors cited by the 100 largest companies on the NASDAQ Biotechnology Index:


2014 Rank   2014 2013
1. Supply Chain & Supplier/Vendor Concerns 100% 93%
2. Federal, State and/or Local Regulations 98% 100%
2t. Intellectual Property Infringement 98% 96%
4. Competition & Consolidation 97% 100%
4t. Ability to Commercialize & Market Products 97% 96%
4t. Volatility of Revenue/Stock Price 97% 92%
7. Product Liability & Insurance Costs 95% 87%
8. Ability to Attract and Retain Key Personnel 94% 96%
8t. FDA Approvals & Compliance 94% 94%
10. Legal Proceedings 91% 84%
11. Collaborations & Relationships with Other Companies 89% 92%
12. Product Complications, Recalls & Side Effects 88% 88%
13. Delays or Unfavorable Results from Clinical Trials 87% 80%
14. Reimbursement from Third-Party Payers 85% 87%
14t. Inability to Acquire Capital 85% 79%
16. Changes to Healthcare Laws & Regulations 77% 78%
17. Changes to Accounting Standards and Regulations 76% 68%
18. Anti-Takeover & Change-in-Control Provisions 75% 66%
19. Environmental, Health & Safety Laws 73% 66%
20. Threats to International Operations 71% 79%
21. Inability to Manage or Complete M&A 69% 79%
22. General Economic Conditions 67% 84%
22t. History of Operating Losses 67% 68%
24. Failure to Properly Execute Strategy 66% 69%
25. Breaches of Technology Security, Privacy & Theft 61% 46%
*t indicates a tie in the risk factor ranking

Further findings in the 2014 BDO Life Sciences RiskFactor Report:

Changing Regulatory Environment Continues to Challenge Life Sciences Companies
Changes in the regulatory environment are a constant area of focus for life sciences companies. Nearly all companies (98 percent) cite federal, state and local regulations as a concern, and the Affordable Care Act was cited by more than three-in-four companies (77 percent). Healthcare reform has greatly impacted the life sciences industry overall, by not only bringing on additional compliance concerns and penalties but also uncertainty regarding revenues due to potential impact on reimbursements and coverage driven by increased competition. Companies mentioned challenges specific to compliance with the Affordable Care Act including the amended False Claims Act, which makes companies liable for defrauding governmental programs and the Sunshine Act, which requires manufacturers of drugs, medical devices and biologicals that participate in U.S. federal healthcare programs to report certain types of payments given to physicians and hospitals. Moreover, 85 percent of companies note the availability of product reimbursements by government authorities or other third-party payers as a risk to their businesses, especially as they contend with government authorities and healthcare providers increasingly favoring generic products to keep the cost of medicine affordable.

This year 76 percent of companies noted risks associated with changes to accounting standards and regulations, up from 68 percent in 2013. Concern over new revenue recognition standard, which were released by the Financial Accounting Standards Board and International Accounting Standards Board in May, was likely contributing to the increase, as implementation will be a key area of focus for life sciences companies in the coming years.

In addition to new accounting standard challenges, 73 percent of companies cite concerns related to environmental, health and safety laws, up from 66 percent in 2013. As life science companies partner with suppliers and manufacturers to develop their products, both parties must comply with the proper use and disposal of hazardous materials, which can be costly, timely and may interrupt normal business operations.

Ability to Attract M&A Deals and Strategic Investment Remains an Obstacle
According to Bloomberg, more large healthcare companies are looking to biotechs for acquisitions in 2014, and deal activity has already been robust. With many biotechs depending on strategic investments from pharmaceutical companies to grow their business, 69 percent cite risks related to successfully managing or completing mergers and acquisitions. In addition, 75 percent of companies note concerns over anti-takeover or change of control provisions that could hinder buyout opportunities, up nine percentage points from last year.

Barriers to Bringing Products to Market
Life sciences companies also contend with challenging regulations when it comes to bringing products to market. Nearly all companies (94 percent) specifically point to risks associated with the arduous FDA approval process and compliance requirements. The FDA recently announced a $37.5 million grant to support the Clinical Trials and Transformation Initiative (CTTI) to improve both the quality and efficiency of clinical trials, a critical component of the approval process, which is good news for the 87 percent of companies who cite delays or unfavorable results from clinical trials as a risk. Risks also continue after approvals. Ninety-seven percent of companies cite their ability to effectively commercialize and market approved products as a top concern, and another 89 percent note risks related to collaborations, which often provide critical resources for life sciences companies to bring products to market.

About the Technology & Life Sciences practice at BDO USA, LLP

BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multination Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 52 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,264 offices in 144 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: