Third-party Threats and Regulatory Uncertainty Push Operational Risks Higher

October 2017

External risks—from cyber threats to regulatory uncertainty—are burdening life sciences companies this year, especially when it comes to operations. Healthcare and tax reform, as well as proposed changes to FDA approval processes and new third-party reimbursement risks, stand as real challenges to companies’ financial, compliance and information systems.


Pricing Shifts Prompt Financial Reevaluations

This year, reorganization, restructuring and bankruptcy risk continued to ascend life sciences companies’ noted financial concerns. Fifty-nine percent cited the risk in their latest financial filings, compared to 15 percent in 2016, 30 percent in 2014 and 5 percent in 2013. 

Worries around indebtedness, credit rating and restrictive debt covenants increased 6 percentage points, meanwhile, with 77 percent of life sciences organizations citing them as a risk. 

Medicare and Medicaid’s Debt and insecure future could be fueling many of these capital risks. A majority (95 percent) of life sciences companies are worried about reimbursement from third-party payers, including the availability of and limitations to Medicare and Medicaid. Healthcare’s transition to value-based care is also adding stress to life sciences companies’ revenue flow from these programs.

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Global Threats Maintain Force 

On a macro level, threats to international operations and sales continue to be frequently cited (90 percent), as well as risks related to natural disasters, war, conflicts and terrorist attacks (81 percent). As life sciences companies continue to expand their businesses around the world, their challenges expand accordingly. Risks related to trade restrictions or relationships were tracked for the first time this year, with 60 percent of companies mentioning them. The figure could underline uncertainty around the current administration’s proposed tax reforms—which could have cross-border business implications. 

At the same time, 34 percent mentioned challenges to their ability to expand abroad, potentially indicating that while the administration’s proposed tax reform and trade policies might be cause for uneasiness now, concrete reactions have yet to occur. 

2017-Life-Sciences-RFR-graphic_7.png“If data is the new oil, life sciences’ business and research intelligence units are high value targets for all types of cyber adversaries and should be considered high risk operations for the enterprise. Hackers continue to find new ways to exploit scientific information for financial rewards. Protecting valuable corporate and patient data from internal and external threats should be a top priority for life sciences companies.”   
 

2017-Manufacturing-RFR-headshot_Schreiber.jpgJohn Riggi
Head of BDO’s Cybersecurity and Financial Crimes Practice
 



Cyber Concerns Continue to Ascend

For the second year in a row, nearly nine in 10 (89 percent) of life sciences companies cited risks relating to their ability to maintain operational infrastructure, including breaches of technology security or theft of data. 

Life sciences companies are tasked with protecting highly sensitive information, and remain uniquely at risk to cyber incidents, namely because of a lack of resources devoted to cybersecurity, their complexity of networks and a vast array of internet-connected devices. The WannaCry ransomware attacks on hospitals’ information systems show that hackers understand the value of biomedical information, as well as patient records. 


Product Hurdles Materialize

Life sciences companies depend heavily on research and development to create new products and keep up with competitors. They are highly reliant on the integrity of their raw materials as well as the efficiency of their operations. Underlining this, 67 percent cited the price and availability of raw materials as a challenge, marking an increase of 15 percentage points from last year. A weak U.S. dollar, international currency fluctuations and an uneasy energy market might be some of the reasons behind this heightened worry over raw materials. 

The industry also relies heavily on third-parties to manufacture its products. Problems with the way products are made across the supply chain could leave companies vulnerable to product recalls or even enforcement action. Companies’ financial filings reflected this concern, with the majority (97 percent) noting problems with their suppliers, manufacturers, vendors and distributors, and other partners as a risk. 

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