Over three-quarters of senior executives at Europe’s leading life science companies have identified cash flow as the biggest threat to their long-term success, according to new research commissioned by Marsh, the world’s leading insurance broker and risk adviser.

Marsh’s research reveals that despite being less directly affected by the downturn than some other industries, life science companies are not immune to its effects, as supply chains are tightening up and payment terms are being shortened or made less generous. Just under half (43%) of respondents were concerned about their customers and 34% were concerned about suppliers. In addition, one-third of respondents stated that they were being more careful in credit-checking their customers and analysing suppliers’ financial health (28%).

Commenting on the research, Christopher Bryce, Marsh’s Chemicals and Life Sciences Practice Leader in Europe, the Middle East and Africa, said: “It is unsurprising that cash flow and liquidity have been identified as significant risks over the coming 18 months. Developers are highly susceptible to cash flow issues, as they have to fund new drugs until they become viable products and investors are harder to find. But for the majority of life science companies, the worries about cash flow reflect the current financial squeeze: while suppliers are more demanding and customers are taking longer to pay, companies still need capital to finance their businesses.

Although the downturn is perceived to be having little direct effect on this industry, life science companies recognise that they need to re-examine their risk management procedures and are taking steps to improve it.

This approach is highly prudent as the downturn has increased two of the industry’s long-standing risks: supply chain management and business continuity. Regulation of the supply chain is increasing and the influence of the downturn, to which this industry is not immune, can make these complex supply chains more fragile. This will increase the risk of an interruption, either as a result of economic pressure or of external forces upon the supply chain.

New regulations add to the fragility of complex supply chains, increasing the risk that suppliers will be shut down or compliance will falter. Both suppliers and customers are more likely to go bankrupt, and healthcare providers are trying even harder to reduce costs. It is no surprise that supply chain risk is judged to be significant by 67% of participants, while business continuity is seen as significant by 53%.”

The report also highlights how attitudes towards risk have changed in European life science companies as a result of the downturn: 60% have reviewed their approach to risk, 65% said risk management is now more important at senior levels, and 38% expect their risk management budgets to increase, with the top areas earmarked for extra spending are improved business continuity planning and new training and information management systems.

Stephen Roberts, Leader of Marsh’s UK Strategic Risk Practice, added: “The downturn has been a wake-up call for the life science industry and it has seized the opportunity to improve its risk management procedures in these difficult times. The potential benefits of reviewing risk, aside from being better prepared, include ensuring that capital is allocated to risk in the most efficient way, being able to react to new regulations more quickly, giving regulators good-quality information, and in turn creating more confidence among investors and customers.”

Marsh’s new reports, Attitudes to Risk Management in the Life Science Industry and Chemical and Life Sciences Industry Risk Footprint, follow one of the most comprehensive risk management research studies among European life science firms since the financial crisis began. Senior risk and insurance professionals in 86 firms across Europe were interviewed to examine their attitudes towards risk management in the current economic downturn. Marsh also identified the 24 most common strategic, operational, regulatory, hazard and financial risks that feature in the risk registers of life science firms in the UK, such as inadequate product innovation and development strategies, product over-dependence and market consolidation.

Recommended actions:

• Understand the pressure points in your supply chain: Supply chains are an extremely potent source of risk and they have to be mapped to be fully understood. Doing this allows pressure points to be identified – the points at which the supply chain is most vulnerable to changes in external forces. These pressure points can be financial, operational or regulatory.
• Draw up contingency plans relating to the pressure points: Mapping the supply chain and identifying the pressure points enables companies to calculate the potential financial consequences of various events and draw up business continuity plans to meet them. Once plans are drawn up, training is needed to ensure that everyone knows how to put them into practice, and the whole procedure needs to be tested to make sure that it works. 
• Improve cashflow by understanding the cost of risk: One of the major costs for organisations in this sector is the financing of risk. A robust approach is required to reduce the cost of risk, which begins with identifying and evaluating risks, followed by designing a risk-financing programme that combines risk retention and transfer. A structured approach is imperative for any company dealing with cashflow pressures and needing to ensure that the costs it incurs are consistent with its appetite for risk and its ability to retain or finance risk. Time invested in understanding the cost of risk and the factors that can be controlled could significantly ease the pressure on cashflow.