Reimbursement Uncertainties Trouble Life Sciences Companies – BDO Report

June 2015

Amanda Chun
Bliss Integrated Communication
(212) 584-5482
amanda@blissintegrated.com
 
CHICAGO – June 15, 2015 – For many years, the success of life sciences companies relied primarily on their ability to develop new drugs and overcome regulatory hurdles to increase market share. Today, a key element of profitability of life sciences companies rests in their ability to negotiate pricing with insurance companies and local governments. Recent headlines around Gilead's launch of Solvaldi and Harvoni, specialty drugs to cure the most common type of hepatitis C, shed light on the delicate balance between charging a “fair” price for the value provided by a drug and the ability of healthcare systems to reimburse the costs of “specialty” medications. As new biotechs emerge and global spending for generic medicines rapidly grows, even well-established companies are pressured to prove the “value” that a product brings to third-party payers. This challenge was highlighted in the findings from the third annual BDO USA, LLP analysis of risk factors listed in the most recent 10-K filings of the 100 largest companies on the NASDAQ Biotechnology Index, indicating that companies are on high alert when it comes to drug reimbursement. Ninety-six percent of life sciences companies cite concerns related to reimbursement changes and their availability, including payments from Medicare and Medicaid, up from 85 percent in 2014, according to the 2015 BDO Life Sciences RiskFactor Report. This represents the single largest year-to-year change among the top 10 risk factors cited.  
 
As the question of medicinal safety and effectiveness determines the success of a life sciences product, the ability to commercialize and market products is a growing risk, mentioned by 99 percent of companies, up from 97 percent in 2014 and 96 percent in 2013. Further, as generic drugs become the popular choice among consumers, companies with competing, pricier drugs may be negatively impacted. As such, all 100 companies mention competition and pricing pressure as threats, and 62 percent cite risks related to patent cliffs and generics, up from 46 percent in 2014.   
 
"Life sciences companies, particularly biotechs, are experiencing a profusion of investor attention due to their ability to drive innovation," said Ryan Starkes, partner and Life Sciences practice leader at BDO USA, LLP. "Although the overall outlook remains positive, the challenge remains to demonstrate sustained value in a highly regulated and competitive environment, making it necessary for companies to continuously expand their product offerings through strategic acquisitions, despite high takeover prices."
 
The following chart highlights the top risk factors cited by the 100 largest companies on the NASDAQ Biotechnology Index:
 
2015 Rank Risk Factors 2015 2014 2013
1. Competition, consolidation, pressure on pricing 100% 97% 100%
1t. Federal, state and/or local regulations 100% 98% 100%
1t. FDA approvals and compliance 100% 94% 94%
4. Corporate copyright, intellectual property infringement 99% 98% 96%
4t. Ability to commercialize and market products 99% 97% 96%
4t. Supply chain, supplier/vendor and manufacturing concerns 99% 100% 93%
7. Product liability and insurance costs 98% 95% 87%
8. Reimbursement from third party payers 96% 85% 87%
9. Product complications, delays, recalls and side effects 93% 88% 88%
10. Legal proceedings, litigation 92% 91% 84%
10t. Delays or unfavorable results from clinical trials 92% 87% 80%
12. Ability to attract and retain key personnel 91% 94% 96%
12t. General economic and financial market conditions 91% 67% 84%
14. Collaborations and relationships with other companies 90% 89% 92%
14t. Volatility of revenue and stock price 90% 97% 92%
16. Threats to international operations and sales 88% 71% 79%
17. Maintaining internal controls, financial reporting, accounting standards 87% 76% 68%
18. Inability to acquire capital 84% 85% 79%
19. Inability to manage or complete M&A 83% 69% 79%
20. Changes in healthcare laws and regulations 82% 77% 78%
21. Hazardous materials – environmental, health and safety laws 81% 73% 66%
22. Failure to properly execute corporate strategy 79% 66% 69%
22t. Anti-takeover or change of control provisions 79% 75% 66%
24. Labor Concerns (post-retirement costs, benefit plans), retention, managing geographically dispersed workforce 78% 40% 24%
25. Natural disasters, war, conflicts and terrorist attacks 76% 56% 47%
*t indicates a tie in the risk factor ranking

Additional findings from the 2015 BDO Life Sciences RiskFactor Report include:
 
M&A heats up along with competition.
Recent Thomson Reuters data reveals M&A transactions targeting biotech and pharmaceutical companies in 2015 have reached $59.3 billion, a 94 percent increase over the same period a year ago. Whether or not this uptick in M&A activity is influenced by competition for blockbuster drugs as recent deals may allude to, concerns around the ability to manage and complete an acquisition is increasing among companies. Specifically, over four-in-five companies mention these risks in their filings, up from 69 percent in 2014. Other companies may be better poised for success and growth through a buyout than being the acquirer, and as such, 79 percent note concerns when it comes to their anti-takeover or change of control provisions that could potentially hinder their position as a viable buyout target.
 
“As risk based contracting in the provider space continues and healthcare services are increasingly subjected to pay-for-value analysis, companies that sell products and services that cannot demonstrate value will face increasing pricing and margin constraints and downward pressure on valuations," said Patrick Pilch, CPA, MBA, Managing Director and National Leader, The BDO Center for Healthcare Excellence & Innovation. "The U.S. is only in the early stages of this trend as accurate measurement and verification of clinical outcomes are becoming a growing area of focus for supporting financial results.”

Evolving regulatory landscape drives concerns around product success.
The road to bringing a product to market continues to be challenging and costly for life sciences companies. According to the Tufts Center for the Study of Drug Development, the cost to develop a prescription drug that gains market approval is $2.6 billion, a 145 percent increase over the 2003 estimate. In addition to commercialization and pricing uncertainties, companies also experience complex and arduous compliance requirements. Specifically, every single company analyzed cite risks associated with the Food and Drug Administration (FDA) approvals and compliance, up from 94 percent in 2014. Overall, companies are seeing an upward trend in drug approvals, particularly around orphan drug development, with the FDA approving a record 49 orphan drugs last year. Ninety-two percent of companies are also concerned about unfavorable results from pre-clinical and clinical trials, as they could further delay a company's ability to market a product.  
 
Geographic expansion heighten companies' risk exposure.
Intense competition in the life sciences industry is leading more and more companies to look abroad for growth opportunities, thus increasing their exposure to various risks associated with global expansion. Specifically, our analysis reveals concerns around commercial operations, supply chain, clinical trials, regulatory compliance, attracting talent and managing geographically dispersed employees. As such, threats to international operations and sales are mentioned by 88 percent of companies, up from 71 percent in 2014. As life sciences companies conduct business abroad, their vulnerability to risks related to anti-corruption, anti-bribery laws and regulations, including the Foreign Corrupt Practices Act (FCPA), is growing. Fifty-nine percent of companies report these risks, up from 43 percent in 2014 and 42 percent in 2013, and 78 percent of companies cite labor concerns, including managing geographically dispersed workforce, up from 40 percent in 2014.      
 
Meanwhile, companies also contend with changing government regulations and associated risks—all companies mention federal, state and local regulations as a top concern, up from 98 percent in 2014. Faced with changing accounting standards, specifically the new revenue recognition rule proposed in May 2014, 87 percent of companies report risks associated with maintaining adequate internal controls, financial reporting and complying with accounting standard changes, a jump from 76 percent last year.
 
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 multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
 
About BDO USA
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