Industry Views

Life Sciences

Key Issues for the Industry Currently Reflected in the Risk Selection

Life sciences organizations are focused on continuing to innovate quickly and stay ahead of competitors in an uncertain business environment. Commercial pressures to innovate to avoid being left behind in a highly competitive space can expose risks. This is reflected in the high rankings of business interruption, regulatory or legislative changes, product liability or recall, supply chain or distribution failure, failure to innovate and intellectual property risks. Digitalization provides huge opportunities for innovation and improved process efficiencies for life sciences companies; however, it can also increase cyber risk, as reflected in the high ranking for cyber attacks.

Unsurprisingly, pandemic risk and health crisis moved into the top 10 risks this year. Although the life sciences industry has demonstrated more resilience during the COVID-19 pandemic than many other industries, it also suffered business interruptions (risk number one) in areas such as clinical trials and supply chain or distribution failures (number six). The pandemic has also brought into sharp focus life sciences companies’ brands and products such as vaccines, drugs to treat COVID-19 patients, and ventilators and personal protective equipment. But when things go wrong — such as the emergence of unexpected side effects, the accumulation of side effects, public discussion of a product’s effectiveness, process failures and delivery shortages — people can lose trust in the products and the company, as demonstrated in the fourth-place ranking of product liability or recall.

It is also important to note the increasing importance of emerging markets for life sciences organizations, particularly in Asia, and new regulatory environments in established markets such as the U.S. Adapting to challenging new payer environments will be key in establishing market share and sustaining market position for established organizations, while new, local and more digital organizations are on the rise. This change in key markets adds to the increasing competition.

Surprises in the Top 10 Risks Selected

It is surprising to see supply chain or distribution failure drop from number three in 2019 to number six in 2021 and number eight in the next three years. The life sciences industry, especially the medical devices sector, is facing increased supply chain challenges. Although the COVID-19 pandemic brought industry supply shortages and interruptions to the forefront, these risks were already present.

Product liability or recalls may be associated with damage to reputation and brand risk, which ranked at number five in 2021. Surprisingly, given that damage to reputation is a perennial concern for the industry, it did not rise to the top 10 in 2019.

In 2019, life sciences respondents ranked accelerated rates of change in market factors at number two. Given the increasing rate of change in the industry brought on by M&A activity, new start-ups, new treatment options and the ongoing impact of the pandemic, it is surprising to see this risk drop out of the top 10 in 2021. However, it may be captured in the regulatory change and increasing competition.

Most Underrated Risks

A failure to attract and retain staff is a major concern in the life sciences industry, where competition for talent is stiff and turnover rates are high. This appears to be an underrated risk since it dropped out of the top 10 risks this year.

Additionally, intellectual property risk ranks at number 10 but doesn’t appear in the top 10 anticipated risks in three years. This could be an underrated risk given that the industry relies heavily on intangible (versus tangible) assets, and that the loss of intellectual property rights can be volatile and costly.

Finally, the risk of supply chain or distribution failure may be underrated compared with business interruption, given the industry’s heavy reliance on third parties and its dependence on certain production plants and raw materials.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

Navigating the pandemic has been an all-encompassing challenge. Globally, the life sciences sector responded with great leadership, and it continues to grow stronger and embrace better collaboration to increase efficiencies. Digitalization and technological advancements will increase new possibilities around biopharma and medtech.

Digitalization is likely to remain a strategic opportunity and challenge for life sciences organizations in the next three years. As an enabler, it allows innovative life sciences companies to adapt at pace to the changing macro environment — for example, by developing new patient-centric solutions, supporting physicians and optimizing their R&D processes. However, risk management and risk financing need to catch up with the changing risk profile of life sciences organizations and provide adequate solutions.

The life sciences industry’s role in the global response to the pandemic has demonstrated the vital need for ongoing R&D and innovation. If proposed controls over pharmaceutical product pricing gain traction, or if IP protections are eroded by international pressures, the impact on future capital investment could be adverse. It is critical, therefore, that the industry continues to articulate and demonstrate the life-saving value of its products and therapies.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

The life sciences industry is moving toward a more holistic approach to risk management and mitigation that may also incorporate environmental, social and governance priorities. Managing total cost of risk will only increase in importance as expense controls become even more vital in preserving funds for vital R&D. We expect that unmet risk transfer needs will continue to grow in key areas such as IP, cyber and supply chain. Organizations will need to evolve their approaches to assessing, mitigating and managing these and other emerging risks.

A new challenge on the horizon is associated with new, complex life sciences products such as gene therapies and smart devices. For example, gene-therapy solutions are typically associated with new partnerships, R&D approaches, novel reimbursement models, small-batch production and logistical challenges.

Current Top 10 Risks

Predicted Future Risks

By 2024

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