Managing Risk in the Life Sciences and Healthcare Sector

In this article, we consider the emerging and evolving risks in the life sciences and healthcare sector, and how those risks can be effectively managed and mitigated.

Risk management 

Through the decades of work we have performed for our life-sciences and healthcare clients, we have gained an in-depth understanding of how companies seek to manage risk and how their lawyers can help them. Successful companies see the potential opportunities and rewards that accompany the risks they face. Likewise, legal advisers should help companies navigate the increasingly complex risk landscape by helping to maximise positive outcomes, as well as mitigating any negative consequences.

In addition to the usual regulatory and compliance risks that come with being one of the most regulated sectors in the world, life sciences and healthcare companies also need to grapple with and manage new risks that are emerging and evolving at an accelerating pace. Scientific and technological advances in the sector are somewhat expected, but life sciences and healthcare companies also need to account for changing customer expectations and shifts in the focus of lawmakers towards environmental, social and governance or ‘ESG’ issues. For this reason, companies must regularly consider their changing risk environment in order to manage it effectively. 

Environmental, social and governance 

There has been a cultural shift in recent years with the ESG narrative becoming more important. If they are not managed effectively, these issues bring the potential for regulatory enforcement, civil claims and criminal sanctions as well as reputational harm. Customers are taking a greater interest in the environmental impact and sustainability of the products they purchase. For example, in the UK, the National Health Service (NHS) has set out its Net Zero Supplier Roadmap and from 2027 will only purchase products from companies who are aligned with its trajectory towards net zero carbon.   Shareholders too are becoming focused on ESG issues and shareholder activism is increasingly influencing corporate agendas. Successes of shareholder activists in the oil industry are one of many signs of mounting and effective pressure from investors on companies to enhance their performance and disclosures on ESG criteria.

‘Green’ claims 

If the global life sciences sector were a country, it would be the fifth largest emitter in the world, due in part to manufacturing and production processes, as well as the resulting waste. 1 In responding to the increased scrutiny on life sciences companies and their environmental impact, there is the increased risk of misleading sustainability or ‘green’ claims. 

‘Green’ claims can include any communication relating to the environmental attributes of a particular product or organisation. The life sciences and healthcare sector is starting to use them more frequently in relation to claims relating to carbon reduction and neutrality, reduction of water usage, and reduction of hazardous and non-hazardous waste.
Any ‘green’ claim will need to be substantiated and cannot be vague. Otherwise, it may be deemed misleading. For example, it is unlikely to be acceptable simply to state that a company is “green” or “sustainable” or make excessive green promises or unspecific statements.  Instead, any ‘green’ claim must be clear, specific and balanced and may need to be accompanied with clarifying information and/or a disclaimer, so that the full, and not partial, picture is made clear to the audience. 

In anticipation of an increase in claims against companies for ‘greenwashing’ marketing campaigns or misleading environmental impact claims, we are increasingly advising clients in advance on how best to mitigate the associated risks and manage any reputational impact if issues arise. It is best practice to obtain and keep a record of objective evidence to support the substantiation of any ‘green’ claims before making them, as well as using standards that are widely recognised in the industry to substantiate any claims. 

Supply-chain risks

Companies in the life sciences and healthcare sector will also need to examine their own environmental footprint as part of any ESG strategy. “Greening your supply chain” sounds attractive, but in reality can be a costly and time-consuming exercise that may result in a dispute, unless sufficient pre-contract due diligence and post-contract management is performed. 

Risks associated with supply chains currently extend beyond ESG to more immediate concerns around security of supply, transportation and storage, and to the amplified time and price pressures that the market is facing. Leveraging your contractual rights to achieve a resolution may not be enough to give you the assurance you need. As a last resort, terminating your existing agreements in order to negotiate improved arrangements, potentially with alternative suppliers, needs to be implemented carefully and with legal input in order to minimise disruption to your business. 

Technology transformation 

Another area of risk is emerging and transformative technologies. New technologies have the potential to advance almost every aspect of this sector, but they also bring with them new risks, which need to be properly managed, such as data protection, cyber security, and product liability.

Taking artificial intelligence (AI) as an example, this is widely used in transformative medicine, improved diagnostics and analytics. There is, however, increasing sensitivity and concern regarding the legal and other risks, which are still being understood and evaluated.   

Telemedicine and digital health

The COVID-19 pandemic brought the use of remote healthcare and the corresponding need for governance in this area into sharp focus. The need and desire of consumers for remote healthcare is expected to remain due to the ease and convenience it brings. Software in the form of a digital health app may be considered a “medical device” if it is intended to be used for the diagnosis, treatment, and monitoring of a disease, injury or disability. If the app is considered a “medical device”, it will need to meet various regulatory surveillance and reporting obligations, overseen in the UK by the Medicines and Healthcare products Regulatory Agency. Medical device regulatory obligations are enforced via the criminal law in the UK. Civil liability may also arise under the common law tort of negligence and/or by way of breach of contract or for a breach of medical device regulatory provisions.  

Dispute resolution 

New and emerging risks are usually accompanied by increased disputes risk. Taking technology as an example, disputes may be driven by issues arising from IP and trade secrets, the use of AI, smart contracts, cryptocurrencies and cloud services.

As these risks are sometimes difficult to manage, life sciences and healthcare companies may look to international arbitration as a form of alternative dispute resolution to resolve them. This is particularly the case for licensing and joint-venture disputes.   

The advantages for using arbitration to resolve disputes in this sector include:

• It can provide a useful mechanism for parties to resolve multi-jurisdictional disputes under one forum (particularly if faced with different legal regimes);
• It provides parties with more control, including the ability to select specialised arbitrators with life-sciences expertise; and
• It can be an effective way to resolve disputes confidentially, allowing commercially sensitive information to remain protected.  

We are starting to see a slow increase in the use of arbitration for these types of disputes. According to the London Court of International Arbitration (LCIA) Report for 2021, the sector accounted for 3% of the LCIA’s caseload in 2021. 2 This was up from 2% for the years 2017-2022. Parties may therefore consider including dispute resolution clauses in relevant agreements, which require them to submit to a fixed arbitration regime in the event of a dispute.  

Conclusion 

In the life sciences and healthcare sector, companies are accustomed to operating in a fast-paced and ever-changing environment that brings risk as well as opportunity. We touch on some risks in this article, but there are many more, such as the growth of class actions and collective redress. To keep ahead of the competition, companies and their legal advisors should look ahead to manage proactively their risk environment and exposure, both in terms of current risks and emerging risks that arise.