Cost control, regulation and cyber drive risk in 2017

24 January 2017

Life Sciences companies will face a growing dichotomy in 2017, balancing increased pricing pressure with increasing regulatory burden 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 unlikely to be an 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 manufactures 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. In Europe, the EU is expected to adopt new medical device regulations in 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. 

Customised treatments 

The dichotomy of cost vs benefit also exists with the continued deployment of technology into healthcare. Consumers want more focussed and customised 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

With the growing regulatory burden and pressure to innovate, Life Sciences companies will be under increased pressure to drive efficiency which will result 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 digitalisation, supply chains could be further disrupted by IT issues or cyber attacks.

Cyber threat

Cyber risk is likely to become a more pressing issue as the Life Sciences sector begins to appreciate cyber risk in broader terms. 

Once seen as a risk for personal data and privacy, 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 more information, please contact ClientFirst@jltcanada.com.

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