Cost control, regulation and cyber drive risk in 2017

11 October 2017

Life Sciences companies continue to face increased pricing pressure, regulatory changes and the emergence of other risks such as cyber.

Stringent controls

The price of healthcare is of growing concern to governments, society and health insurers, and is particularly prevalent in the US. However, compliance with tightening regulation and developing innovative treatments come at a price.

The regulatory burden for the Life Sciences sector continues to grow year on year, and 2017 is no exception. For example, the US Food & Drug Administration (FDA) is phasing in tougher rules to track and trace products and ingredients in the pharmaceutical supply chain. Similar supply chain rules are being developed in Europe.

Generic drug manufacturers face proposed FDA changes requiring them to be responsible for tracking safety information and updating their own labelling, rather than simply replicating the innovator’s label, this may require more pharmacovigilance and expanded regulatory staff and processes, adding costs to generic drug treatments, which are typically much less expensive than the original ‘innovative’ products.

Medical devices manufacturers are also facing increased risk management and post market surveillance requirements. Earlier this year, the European Union adopted new medical device regulations that are expected to come into effect as early as December 2017. Similarly, the FDA published guidance on managing cyber security for medical devices in December 2016.

Increased controls add cost and potentially hamper innovation. Perhaps related - there was a significant reduction in FDA approvals of new products in 2016, which could reflect this growing burden.

Customized treatments

The dichotomy of cost vs benefit also exists with the continued deployment of technology into healthcare. Consumers want more focused and customized treatments, but these usually come at a cost. The problem is particularly acute when drug companies spend billions of dollars developing a treatment for only a small patient population, and need to recoup cost and earn profits from a small set of customers.

With healthcare demands rising, governments and health insurers may baulk at the cost of some innovative treatments – example: a gene therapy that cost USD 1 million per treatment has been used just once, since it was approved in 2012, due to its price tag.

Supply chain risks

As a result of the growing regulatory burden and pressure to innovate, Life Sciences companies will experience increased pressure to drive efficiency, resulting in increased risk as balance sheets continue to be stretched. Leaner supply and lower stock levels chains are less resilient and more open to disruption, and with greater reliance on technology and digitalization, supply chains could be further disrupted by IT issues or cyber attacks.

Cyber threat

Cyber risk has become a more pressing issue in the Life Sciences sector and is now appreciated in broader terms.

Once seen as a risk for personal data and privacy, the Life Sciences are beginning to identify cyber risks in manufacturing processes and supply chains. Implant devices, like heart pacemakers, and hospital equipment, such as drug-infusion pumps, have also been shown to be vulnerable to hacking.

Life Sciences companies are now beginning to understand their cyber risks and many increasingly investigate the need for appropriate insurance to cover cyber risks. For risk managers, this means they will need to be prepared with answers when their boards start asking questions.

For further information, please contact Suzanne Liberman, Managing Director – Life Sciences and Healthcare at ClientFirst@jltcanada.com.