The principal aim of Lundbeck’s risk management is to strike the right balance between risk exposure and value creation. Our risk management processes are continually updated and adapted to match internal and external requirements. This gives our Corporate Management Group an accurate and complete overview of activities and resources, and a clear basis for decision-making on Lundbeck’s overall risk exposure.
Although Lundbeck’s risk management team reports to a central Risk Office, we believe that risks are best managed by decentralized units, which are coordinated and monitored centrally. The decentralized units have detailed and extensive knowledge of the risks within their area of responsibility. They systematically identify, quantify, respond to and monitor risks, and they are ideally placed to mitigate our exposure in the first instance.
Lundbeck assesses the likelihood of an event occurring and the potential impact on the company in terms of financial loss or reputational damage. Risk identification, evaluation, qualification, recording and reporting are carried out by our decentralized units and are continually reviewed by the risk management team through clearly-defined reporting, decision-making and follow-up procedures. The overall risk exposure is then evaluated by our central Risk Office.
Risk reporting and assessment
Risk reporting is an integral part of Lundbeck’s overall reporting process. Our corporate risk register provides a consolidated picture of our risk exposure by detailing each risk, risk category and type. The risk descriptions give details of the event, its current status, the status of the response, an assessment of likelihood and potential impact, and the name of the person responsible for managing the risk. Our reporting process defines six risk categories, which are defined as belonging to three risk types: ‘external’, ‘actionable’ and ‘strategic’. Using this information, the Risk Office assesses the overall risk exposure and reviews it with the Corporate Management Group. After this review, the Corporate Management Group presents a two-dimensional risk ‘heat map’ for review by Lundbeck’s Audit Committee, which is shared with the Board of Directors annually.
Research and development risks
R&D in Lundbeck is focused on developing innovative pharmaceuticals. However, there are risks involved in developing new pharmaceuticals and treatments for known diseases. During the R&D process, there is the risk that new products will be delayed or do not materialize. In each of our late-stage pipeline projects, we consider whether starting new clinical studies or giving additional support to ongoing studies could lead to more successful outcomes. Understanding and mitigating the strategic risks associated with the development of new products is a crucial element of Lundbeck’s overall risk management strategy.
The pharmaceutical market, especially in Europe, has been and will most likely continue to be characterized by attempts by authorities to cap or reduce increasing healthcare costs. These cost containment measures are structured in several ways, such as regulation of prices or reimbursement, or by having to engage in lengthy and resource-consuming market access processes in each country.
In recent years, we have seen patents and data exclusivity on some of our established products running out, while at the same time we are launching several new products. Lundbeck is in a transition phase, where it is important to strike a successful balance between efforts to optimise our current and established product portfolio while simultaneously obtaining approval and market access for new products. We are working with healthcare authorities around the world to document the value of our pharmaceuticals, through health-economic assessments and other initiatives. And we are constantly looking for ways to adapt to the changing market conditions.
Infrastructure, information technology and resource risks
It is crucial for patients to always have access to the pharmaceuticals they require. As a pharmaceutical manufacturer, we must ensure reliability of supply. We monitor supply carefully and maintain an inventory in order to respond to any interruption in production. To reduce production risks, we have production and packaging facilities at five independent sites: Lumsås and Valby (Denmark), Tianjin (China), Nice (France) and Padova (Italy). Having a number of alternative facilities increases our production flexibility so we can respond to volatile market demand.
In rare cases, pharmaceutical companies are forced to recall a product from the market due to safety or quality issues. At Lundbeck, we have systems, policies and procedures in place to ensure a swift and effective response should such a situation arise.
It is also crucial that we are able to protect the proprietary knowledge that underpins our success. We have increased our focus on information security to protect our intellectual property rights and to avoid infringing third-party rights. We have developed secure internal information systems and procedures to ensure smooth and safe flow of information and critical data around our global network.
Lundbeck continually evaluates the risks associated with the use, ownership, operation, involvement, influence and adoption of IT. Sensitive information and data are key elements of Lundbeck’s business and require a sufficient and solid security strategy. The responsible department ensures that updated processes are in place to mitigate IT risks and that partners comply with the required standards when handling sensitive information on behalf of Lundbeck.
As a knowledge-based company, Lundbeck’s success depends on having the right employees with the right competencies. We seek to motivate, engage and retain our employees through competitive remuneration and employee benefits as well as through individual recognition and development opportunities. Monitoring employee satisfaction and evaluation of performance help us to improve our ways of working.
As a leading pharmaceutical company, we know that coverage of new clinical studies in publications, or even letters to editors, can influence the perception of products and manufacturers. To build confidence and trust in our capabilities, we invest in creating factual and scientific information resources for the benefit of healthcare professionals and patients.
Strong corporate governance is an essential part of the way we manage our business and is also integral to protecting our reputation. We have the right systems and processes in place to ensure proactive risk management, and we deliver fast and accurate reports on the risk profile of marketed products as well as on operational, tactical and strategic financial planning.
Our Code of Conduct is pivotal to Lundbeck’s approach to compliance. It helps ensure that we comply with international laws and regulations, pharmaceutical industry association standards and corporate reporting requirements. We conduct regular audits of our business against our Code of Conduct. We revise our procedures to meet changing regulations, to implement best practice and to respond to audit observations.
Marketing of pharmaceutical products is strictly regulated and we are committed to comply with these regulations. Our employees and third parties involved in the marketing of our products are trained to comply with all relevant laws and regulations. We have systems in place to provide fair, accurate and comprehensive information on our products.
At Lundbeck, we are committed to having an open and honest dialogue about ethical dilemmas. We have set up a Compliance Hotline to allow people to report any legal or other concerns they have so that the company can quickly address them. The hotline can be used by both internal and external stakeholders and is a part of our efforts to continually improve our approach to compliance.
Lundbeck relies on its ability to protect its intellectual rights for new pharmaceuticals. We must also operate our business without infringing the rights of others. For pharmaceutical companies, patenting and the patent application process are extremely complex, both legally and scientifically. We take great care to develop and retain competencies in this high-risk, highly technical area. We believe that our intellectual property (IP) rights are valid and enforceable, and we defend these rights wherever they may be violated.
The Group is involved in legal proceedings in a number of countries against a number of businesses, including patent disputes. In the opinion of management, the outcome of these proceedings will not have a material impact on the Group’s financial position, results of operations or cash flows beyond the amount already provided for in the financial statements. Due to uncertainty about the outcome of the legal proceedings, the amount of the provision is uncertain.
In June 2013, the European Commission issued a decision in which it found that, by entering into a few selected patent settlement agreements in 2002, Lundbeck had violated EU competition law and thereby hindered a lawful entry of generic citalopram into markets in the European Economic Area (EEA). The European Commission issued a fine of EUR 93.8 million (approximately DKK 700 million). In September 2013, Lundbeck appealed against this decision to the General Court, and in November 2015 Lundbeck presented its case at a hearing before the General Court. Lundbeck expects a judgment from the General Court during 2016. If either party appeals against the judgment to the European Court of Justice, it may take several years before the matter reaches its final conclusion. Lundbeck does not expect that the fine will increase as a result of the appeal. Lundbeck paid the fine in the third quarter of 2013. Consequently, Lundbeck has a contingent asset corresponding to the maximum of the amount of the fine.
In December 2011, the Brazilian antitrust authorities (Secretariat of Economic Law – SDE) initiated administrative proceedings to investigate whether Lundbeck’s enforcement of data protection rights could be viewed as anticompetitive conduct. In January 2012, Lundbeck submitted a response to the authorities. Due to a change in the Brazilian Antitrust Law, handling of the case has shifted from SDE to CADE (the Administrative Council for Economic Defense) and remains pending.
H. Lundbeck A/S and Lundbeck Canada Inc. are involved in two product liability class-action law suits in Canada. The cases are in the preliminary stages and as such associated with significant uncertainties. Lundbeck strongly disagrees with the claims raised.
In late January 2016, Lundbeck LLC received a subpoena from the US Attorney’s Office for the District of Rhode Island relating to an investigation of Xenazine sales, marketing and related practices. Lundbeck LLC is cooperating with this investigation.
Most of Lundbeck’s commercial transactions are settled in foreign currencies. The main currency risk at the moment concerns fluctuations of the US dollar (USD), Japanese yen (JPY) and the Canadian dollar (CAD). Lundbeck’s treasury policy allows the hedging of income in these currencies for up to 12 months.
Interest rate risks arise in connection with our debt portfolio and cash reserves. We reduce these risks by seeking short duration on both assets and liabilities. There are also credit risks associated with the sale of goods and cash reserves. To reduce these risks we avoid concentrating our credit risk and we diversify receivables from a large number of creditworthy trading partners. In addition, we only deal with banks that have an ‘investment grade’ credit rating.