Regulatory & Capital Risks Top-of-mind for Life Sciences: BDO Analysis of SEC Filings

CHICAGO--()--It’s not the risks that are unfamiliar to life sciences companies—it’s the regulatory environment around them that’s changed.

Eighty-nine percent of life sciences companies cite changes to healthcare regulations as a major business risk this year, according to a new report from BDO USA, LLP—the highest level cited in the report’s history. Much of this increase has been prompted by the continuing shift to value-based reimbursement in the healthcare industry, along with ongoing uncertainty around the future of the Affordable Care Act. Meanwhile, 98 percent of life sciences entities mention concerns related to FDA regulatory approvals and compliance in their most recent 10-K filings, inspired by changes in leadership under the Food and Drug Administration (FDA), among several other factors.

The 2017 BDO Life Sciences RiskFactor Report examines the risk factors cited in the most recent annual shareholder filings of the 100 largest publicly traded U.S. life sciences companies listed on the NASDAQ Biotechnology Index by revenue. The risk factors were analyzed and ranked in order of frequency cited.

Life sciences companies continue to face new and evolving regulations this year: Nearly all (99 percent) worry about compliance with various federal, state or local regulations. Concerns around anti-fraud regulations are elevated, with nearly three-fourths expressing concerns related to anti-kickback regulations (73 percent) and the False Claims Act (72 percent, up from 43 percent in 2014). Compliance with cybersecurity regulations is also top of mind, as connected healthcare devices receive increased attention from the FDA.

Despite regulatory uncertainty, the FDA’s move to reduce regulatory burdens may prove beneficial to life sciences organizations looking for greater flexibility when it comes to innovation. Efforts to lower the barrier for new products seeking approval, such as components of the 21st Century Cures Act aimed at streamlining drug and medical device approvals, along with the FDA’s recently unveiled Digital Health Innovation Action Plan, seek to boost sector growth and will require organizations to reconsider business strategies and risk frameworks.

“FDA Commissioner Scott Gottlieb has already unveiled proposals to streamline the approval of new drugs and medical devices,” said David Friend, MD, MBA, chief transformation officer and managing director in The BDO Center for Healthcare Excellence & Innovation. “While the changes could require life sciences companies to rethink their compliance frameworks, they present exciting opportunities for growth, and we will likely see advanced waves of both innovation and competition take hold.”

The following chart highlights the top 25 risk factors cited by the 100 largest companies on the NASDAQ Biotechnology Index:

2017 Rank*   Risk Factors (descending in order of frequency)   2017   2016   2015   2014   2013
#1t   Competition in industry and consolidation   100%   100%   100%   97%   100%
#1t   Corporate copyright, IP infringement and/or trade secrets trademarks invalidations, violations or challenges   100%   100%   99%   98%   96%
#1t   Ability to commercialize and market current and future products   100%   98%   99%   97%   96%
#1t   Legal proceedings and litigation   100%   95%   92%   91%   84%
#5   Federal, state or local regulations, including tax rates and uncertainty   99%   100%   100%   98%   100%
#6t   FDA regulatory approvals, obligations and compliance, including limitations on approved products   98%   97%   100%   94%   94%
#6t   Ability to attract/retain/motivate key personnel and management   98%   95%   91%   94%   96%
#8t   Issues with suppliers, manufacturers, vendors, distributors and partners/alliances (product quality, shipping, imports, availability, costs, etc.); compliance with Good Manufacturing Practices   97%   97%   99%   100%   93%
#8t   Various liabilities, including product liability; insurance costs and potential losses due to uninsured liabilities   97%   96%   98%   95%   87%
#8t   Product complications, side effects, delays, recalls, safety issues, etc.   97%   96%   93%   88%   88%
#8t   Revenue, stock price, sales cycle and profitability vary or are volatile; financial results less predictable   97%   94%   90%   97%   92%
#12t   Changes to the availability of, or limitations to, reimbursement from third party payers, including Medicare/Medicaid   95%   97%   96%   85%   87%
#12t   Risks related to collaborations/relationships with other companies, including breach of obligations, failure to perform, etc.   95%   91%   90%   89%   92%
#14   Inadequate liquidity or capital   94%   85%   84%   85%   79%
#15   Failure to properly execute corporate strategy and growth (i.e. R&D not leading to successful drugs; inability to capitalize on product innovation or go further with research; inability to develop new products like biosimilars, gene therapy, etc.)   93%   84%   79%   66%   69%
#16t   Delays or unfavorable results from pre-clinical and clinical trials   90%   91%   92%   87%   80%
#16t   Threats to international operations and sales   90%   92%   88%   71%   79%
#18t   Changes in healthcare laws and regulations, including the Affordable Care Act (ACA)   89%   86%   82%   77%   78%
#18t   Ability to maintain operational infrastructure, including IT and/or implement new systems; breaches of technology security, privacy, theft, etc.   89%   89%   70%   61%   46%
#20   Pressure on pricing and margins and cost cutting**   84%   89%   N/A   N/A   N/A
#21t   Maintaining adequacy/effectiveness of internal controls, financial reporting and SOX; accounting standards/regulations changes and compliance   81%   85%   87%   76%   68%
#21t   Natural disasters, war, conflicts and terrorist attacks   81%   77%   76%   56%   47%
#23   General economic and financial market conditions   79%   83%   91%   67%   84%
#24t   Anti-takeover or change of control provisions   78%   81%   79%   75%   66%
#24t   Labor concerns, including those related to pension, post-retirement costs, benefit plans (including rising healthcare costs), healthcare, union concerns, retention, immigration, outsourcing, managing geographically dispersed workforce, etc.   78%   76%   78%   40%   24%

*t indicates a tie in the risk factor ranking

**Combined with “competition in industry, consolidation” in 2015. Split in 2016.

Additional findings from the report include:

Growing Tax Liabilities Attract Greater Focus

With no immediate path forward for healthcare reform, the Trump administration has brought another hot button issue back into the spotlight: tax reform. Specifically:

  • Nearly three-fourths of life sciences companies (71 percent) mention tax liabilities as a significant business risk.
  • Nearly half (47 percent) worry about complying with differing tax laws in domestic and foreign jurisdictions.
  • More than one-fifth (22 percent) are worried about potential U.S. tax reform and its implications for business.

Pricing Shifts Prompt Financial Reevaluations

Medicare and Medicaid’s costs could be fueling many of the capital risks cited by life sciences companies. In addition, healthcare’s transition to value-based care could affect companies’ revenue flow from these programs.

  • 95 percent of life sciences companies worry about reimbursement from third-party payers, including the availability of and limitations to Medicare and Medicaid.
  • 77 percent express concerns related to indebtedness, changes to credit rating and restrictive debt covenants.

Pricing & Innovation Pressures Require Companies to Rethink Value

The industry continues to face difficult questions about how drugs are priced and paid for. New healthcare reimbursement models, which tie payments to patient outcomes and incentivize cost efficiencies, are forcing new conversations inside pharmaceutical and healthcare board rooms alike. Specifically:

  • 84 percent cite pricing and margin pressures as a risk this year, reflecting a steady increase from 2015 (79 percent), 2014 (68 percent) and 2013 (66 percent).
  • 93 percent worry about their ability to properly execute corporate strategy and growth plans, up from 69 percent in 2013.
  • Patent exclusivity concerns remain high, with more than half of companies (55 percent) worried about demand fading away.

Challenging Funding Environment Threats Future Development

Research and development (R&D) and product commercialization costs haven’t abated, with the Tufts Center for the Study of Drug Development estimating that it requires more than $2.5 billion to develop a new drug. Meanwhile, the challenging funding environment threatens R&D efforts critical to keeping product pipelines active. Specifically:

  • 94 percent of companies worry about having adequate capital and liquidity this year, up 9 percent from 2016. This could be due to a large overall decline in equity raises. From 2015 to 2016, they fell almost 35 percent across all mid-market biotech companies, from $117.2 million to $75.7 million, according to BDO’s 2017 Biotech Briefing. Among large biotechs, just 18 companies secured equity financing, compared to 23 in 2015 and 29 the prior year; among small biotechs, the figure fell to 48 from 57 in 2015 and 61 the year prior.
  • Worries about having to reduce or eliminate product development programs rose 11 percent from 2016 (56 percent) to 2017 (67 percent).
  • As external pressures mount, 97 percent express concerns related to the volatility of revenue, stock price and profitability, making it the eighth most cited risk this year (up from 90 percent in 2015).

About BDO’s Life Sciences Practice

BDO has been a valued business advisor to life sciences companies for over 100 years. The firm works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO USA

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 67,700 people working out of 1,400 offices across 158 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

Contacts

Bliss Integrated Communication
Katie Perkowski, 646-576-4114
katie@blissintegrated.com

Release Summary

An analysis by BDO USA, LLP, of the top risks facing life sciences companies in 2017.

Contacts

Bliss Integrated Communication
Katie Perkowski, 646-576-4114
katie@blissintegrated.com