Risk management

Lundbeck’s risk management systems are consistently updated and adapted to external and intra-Group requirements and needs. Such revisions help provide the Group management with a solid foundation from which to decide on Lundbeck’s overall risk exposure and an overview of the activities and resources available to handle specific risks.

The pharmaceutical industry is characterised by a high number of risks which a group such as Lundbeck must handle. The general risks found in a pharmaceutical business are illustrated in the figure below.

 

Lundbeck pursues decentralised management of specific risks in those parts of the organisation that have the most extensive knowledge of such risks and the best possibility of minimising such exposure. The individual business units take a systematic approach to monitoring, identifying, quantifying and responding to risks relative to their activities. Furthermore, Lundbeck has defined reporting, decision-making and follow-up procedures and routines.

Particularly critical risks
Based on reports received from its business entities, every six months Lundbeck management identifies the risks that are particularly critical for Lundbeck’s ability to achieve the Group’s business targets. These risks are monitored and evaluated in an ongoing process and, where possible, risk-reducing initiatives are made.

The risks identified by management as particularly critical relative to the Group’s present risk exposure are described below. The risk factorsare not listed in any order of priority.

Risks associated with the Group’s research and development portfolio
Lundbeck’s future success depends on its ability to develop new innovative pharmaceuticals. Prior to obtaining regulatory approval for the sale of a product, Lundbeck must demonstrate for each specific indication the safety and efficacy of the drug candidate for the treatment of humans by conducting preclinical studies and clinical trials. Throughout the development stage, there is a risk of a development project suffering delays or being discontinued altogether. For example, in 2007 Lundbeck was compelled to discontinue the development of gaboxadol for the treatment of sleep disorders, although the pharmaceutical candidate had reached the late development stage.

To minimise the business risks associated with the development of pharmaceuticals, Lundbeck consistently seeks, through in-house research and in-licensing of pharmaceuticals, to ensure a sufficiently broad portfolio of pharmaceutical candidates. In 2007, Lundbeck initiated phase I trials with three new pharmaceutical candidates and in-licensed Circadin® for the treatment of primary insomnia.

Risks associated with intellectual property rights and generic competition
Lundbeck’s continued success hinges on its ability to protect intellectual rights for new pharmaceuticals and to operate its business without infringing on other’s rights. However, patents and the patent application process in pharmaceutical companies such as Lundbeck are legally and scientifically complicated processes and may be subject to uncertainty.

To minimise the business risks associated with intellectual property rights and generic competition, Lundbeck thoroughly monitors and analyses the generic market and actively protects the company’s portfolio of intellectual property rights. In 2007, Lundbeck was involved in pending patent trials in the USA, the UK, Australia, Canada, France and Germany. It is Lundbeck’s policy to defend the company’s intellectual property rights energetically, wherever they may be violated.

Financial risks
The bulk of the Group’s commercial transactions are settled in foreign currency. The foreign currency exposure is reduced by hedging positions in the most important foreign currencies through forward and option contracts and, to a minor extent, by raising foreign currency loans. The interest rate risk related to the Group’s bond portfolio, debt portfolio and cash holdings is reduced by seeking short duration on both the asset side and the liabilities side. The credit risk that arises in connection with the sale of goods, the Group’s bond portfolio and cash holdings is reduced by avoiding credit risk concentration and by diversifying receivables on a large number of creditworthy trading partners. In addition, the Group exclusively deals with banks that have a high credit rating.

At the present time, the currency risk associated with the depreciating US dollar (USD) is the most critical financial risk to Lundbeck’s operations. At the end of 2007, Lundbeck has hedged income in US dollars for the entire 2008. Accordingly, if the US dollar depreciates further in 2008, this will not have any impact on Lundbeck’s financial results for 2008, but it may affect the company’s financial performance from 2009 onwards.

Risks associated with price pressure and restricted market access
The pharmaceutical market is characterised by the aim of the authorities to reduce prices and regulate access to the market in order to minimise increases in government healthcare budgets. Unexpected market changes such as price reductions may have a material impact on the earnings potential of each individual pharmaceutical.

Lundbeck expects that new healthcare reforms will be initiated in 2008 in several of Lundbeck’s markets, reducing prices and restricting access for Lundbeck’s pharmaceuticals. Lundbeck has established functions to ensure systematic and coordinated monitoring and response with a view to maintaining pharmaceutical prices as well as market access. Also, Lundbeck continuously seeks to adjust its organisation to accommodate the effect of changes in market conditions for the Group’s pharmaceuticals.

Risks associated with reliability of supply
Managing reliability of supply is pivotal for Lundbeck, enabling the Group to secure patients’ access to Lundbeck’s pharmaceuticals at all times. To handle the risk associated with reliability of supply, Lundbeck carefully monitors the supply situation, and in principle the aim is to maintain an inventory level that will help overcome a production breakdown. In addition, Lundbeck has prepared plans for accessing alternative production facilities. Conversely, having too high an inventory level may entail e.g. a financial risk, which the Group takes into account when evaluating the size of inventories held by Lundbeck or its collaboration partners.

It sometimes happens that pharmaceutical companies have to recall a product from the market due to the safety or quality of the pharmaceutical. Fortunately, pharmaceuticals are seldom recalled because the health of the patients is in jeopardy. However, due to the serious consequences that such situations may have, it is paramount that pharmaceutical companies thoroughly monitor the safety and quality of their pharmaceuticals. At Lundbeck, quality and safety is a key concern, and the company has procedures and systems to ensure the quality and safety of its pharmaceuticals. If, despite high levels of quality and safety, Lundbeck should be faced with a situation in which the company had to recall a product, procedures to ensure a swift and efficient response have been set up and risk-reducing measures to minimise the impact of a product recall have been launched.

The sale of counterfeit medicine in the pharmaceuticals market has become a growing problem in recent years. In particular, this has been a problem with respect to pharmaceuticals to treat impotence and regulate weight, which is not the type of pharmaceuticals that Lundbeck markets. So far, Lundbeck has only experienced very few cases where attempts have been made to sell counterfeit medicine in the Group’s markets in Asia and the Middle East.

However, counterfeit pharmaceuticals represent a very serious problem as they jeopardise patient health and generally contribute to undermining confidence in the healthcare system. Lundbeck therefore continuously seeks to limit and counter any attempt to adulterate the Group’s pharmaceuticals.