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Risk and Reward

Outsourcing has always been a significant business activity within the life sciences industry, as innovators seek to take new drugs to market more quickly and at lower costs. The growth in outsourcing – particularly to CROs and contract manufacturing organisations (CMOs) – is currently experiencing a marked swing from Western countries such as the US and those in Western Europe, to places in Eastern Europe, Latin America, the Middle East and Asia. In its 2014-2015 survey of pharmaceutical and biotechnology companies, Nice Insight revealed a 68% increase in global sponsors outsourcing their drug R&D to these emerging regions, accounting for some 15% of the market (1). A recent report published by Research and Markets also noted an expected 66% growth in the global clinical trial service market by 2020 – reaching $64 billion – with 25% expected in emerging countries.

The Downside

Although these are positive predictions for the expansion of the global life sciences outsourcing industry, this progress is accompanied by continuous worldwide regulatory revisions and technology breakthroughs, which are creating an evolving risk and liability landscape for service providers.

Life sciences is a particularly challenging but irresistible industry for risk and insurance professionals – due to the accelerating rate of change, driven by both the demand and desire to address illnesses and disease.

Historically, insurers have been supportive of conventionally outsourced activities within the sector. However, the hazards created by the expected growth are prompting insurance providers to reinterpret the risk profiles of their life sciences portfolios. These risks fall into the following distinct stages.

Research and Development
Nice Insight notes the escalating trend towards obtaining scientific expertise from outsourcers, which then contributes to product development. This may increase the outsourcers’ risk profile as, traditionally, a CMO would seek to limit any potential liability against the value of their work and exclude any from consequential losses. Depending on the work undertaken, it may be difficult to secure this contractual position. If the outsourcer has both created the value and developed the solution, it could be viewed by insurers as a stakeholder in the resultant product, through contributing intellectual capital. This could suggest additional product liability risk, leading to insurers pressing for a greater premium to reflect this.

Raw Material Supply, Manufacture or Service Provision
These risks relate to the financial dependency that exists with the supplier under contract, or the potential liability that the supplier could have towards its client, should the product or service supplied be defective and cause the customer to incur a financial loss. ‘Just-in-time’ manufacturing, and the more recent emergence of personalised medicine, demand a different model to ensure costs are minimised to preserve margin. This can create a range of further risks as outsourcing requirements become more varied, and timeframes are shortened in clinical trial phases or approved drug production – resulting in an increased potential for error or contamination, for instance.

Clinical Trials
Historically, large parts of the clinical study process have been outsourced to specialist service providers. Expansion into emerging markets brings with it not only overarching FDA guidelines, but also additional local regulatory requirements and ethics committee expectations. More recent developments – such as cloud-based data management and mobile applications – are expected to deliver substantial improvements and greater understanding in product development. This is one of the areas where there is likely to be the most significant change to an outsourcer’s risk profile, and the insurance industry is still searching for solutions to respond to the potential hazards brought on by the use of these new technologies.

Distribution, Packaging and Labelling
These are all activities that a product developer will frequently outsource. The area of distribution is of particular interest to the insurance and risk management industry, as regulators such as the European Commission have issued specific guidance on it – for example, Guidelines on Good Distribution Practice of Medicinal Products for Human Use – which cover potential hazards and responsibility.

Developing Solutions

The insurance industry is increasingly devoting time and resources towards identifying and understanding emerging risks that may not fit the scope of contracts it currently provides. For insurers, there is a competitive advantage to be had in providing a solution that responds to an evolving threat, as this will attract new customers. However, the client needs to be aware of what these risks are and how they are protected – or not – by the scope of cover that the insurance industry has traditionally made available.

There is some comfort in the fact that the life sciences insurance market is ever-willing to explore and create solutions – providing the emerging risk can be analysed and assessed, both on an operating basis, and from a contractual or regulatory perspective.


1. Nice Insight, A recap on 2014 outsourcing trends and what to expect in 2015, December 2014. Visit:

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Simon Thompson is leader of Marsh’s Chemicals and Life Sciences Practice, UK and Ireland. He is responsible for ensuring the company delivers its market-leading risk advisory and insurance services to clients across this dynamic segment of the European economy. With 37 years of experience, Simon began his career with Sedgwick (now part of Marsh), and was previously International Director within Aon’s global client unit, as well as leading their Life Sciences and Chemical Practice for the Europe, Middle East and Africa region.
Simon Thompson
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