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 Executive Management an accurate and complete overview of activities and resources, and a clear basis for decision-making on our overall risk-exposure-derived opportunities.
Although Lundbeck’s risk management teams report to a central Risk Office, we believe risks are best assessed by decentralized and specialized units, which are monitored and reassessed centrally. The decentralized units have detailed and extensive knowledge of the risks within their area of responsibility and systematically identify, quantify, respond to and monitor risks.
Lundbeck assesses the likelihood of an event occurring and the potential impact on the group 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, follow-up procedures, workshops and risk roundtables. The overall risk exposure is 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 further defined as belonging to three risk types: ‘external’, ‘actionable’ and ‘strategic’.
Using this information, the Risk Office assesses the overall risk exposure and discusses it with Executive Management. Finally, a two-dimensional risk ‘heat map’ is reviewed by our Audit Committee and shared with the Board of Directors annually.
R&D in Lundbeck is focused on developing innovative pharmaceuticals. However, there are risks involved in developing new pharmaceuticals and treatments for complex 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 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. Lundbeck is engaged in understanding price development in the important US market, addressing this through dialogue with our stakeholders and incorporating it in our financial planning models.
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, IT 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 four independent sites: Lumsås and Valby (Denmark), 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 to ensure a swift, 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 (IP) 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 information technology (IT). Sensitive information and data are key elements of Lundbeck’s business and require a sufficient and solid security strategy. The department responsible 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.
In light of the upcoming EU General Data Protection Regulation, Lundbeck is engaged in assessing and implementing solutions, processes and guidelines to ensure adherence to these new rules and regulations.
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 evaluating performance helps 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 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 sustaining Lundbeck’s compliance culture. It helps our employees around the world to comply with international laws and regulations, pharmaceutical industry association standards and corporate requirements. We provide relevant training and conduct regular audits of our business and selected partners against our Code of Conduct. We revise our Code of Conduct and related procedures to meet changing regulations, to implement best practice and to respond to audit observations.
The marketing of pharmaceutical products is strictly regulated and we are committed to complying with these regulations. Our employees and all 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 accurate, balanced, fair, objective and sufficiently complete information on our products.
At Lundbeck, we are committed to having an open and honest dialogue about ethical dilemmas. Our Compliance Hotline allows people to report any legal or other serious concerns they have so that management can quickly address them. The Compliance Hotline can be used by both internal and external stakeholders and is a part of our monitoring efforts to continuously improve our compliance culture.
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 our IP rights are valid and enforceable and defend these rights wherever they may be violated.
The Group is involved in a number of legal proceedings, including patent disputes.
In June 2013, Lundbeck received the European Commission’s decision that the company’s agreements concluded with four generic competitors concerning citalopram violated competition law. The decision included fining Lundbeck EUR 93.8 million (approximately DKK 700 million). In September 2016, Lundbeck announced that the General Court of the European Union had delivered its judgment concerning Lundbeck’s appeal against the European Commission’s 2013 decision. Lundbeck’s appeal was rejected by the General Court. Lundbeck has appealed the judgment to the European Court of Justice. Lundbeck paid the fine in the third quarter of 2013. A final judgment is expected during 2018.
In December 2011, the Brazilian antitrust authorities SDE (Secretariat of Economic Law) 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 (Administrative Council for Economic Defense) and remains pending.
H. Lundbeck A/S and Lundbeck Canada Inc. are involved in three product liability class-action law suits relating to Cipralex®/Celexa® and four relating to Abilify Maintena® in Canada. The cases are in the preliminary stages and as such associated with significant uncertainties. Lundbeck strongly disagrees with the claims raised.
In January 2016, Lundbeck LLC, USA, 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 the relevant authorities on this investigation.
In May 2016, Lundbeck NA Ltd. (formerly known as Chelsea Therapeutics, Inc.) received a subpoena from the US Attorney’s Office in Boston, Massachusetts, relating to an investigation of payments to charitable organizations providing financial assistance to patients taking Lundbeck products, and to Northera® and Xenazine® sales, marketing and related practices. Lundbeck LLC is cooperating with the relevant authorities on 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), the Canadian dollar (CAD), the Chinese yuan (CNY) and the Japanese yen (JPY). Lundbeck hedges a significant part of the Group’s currency risk for a period of 12-18 months. Fluctuations in exchange rates, including impact from currency devaluations, are inherent risks for Lundbeck, as we also operate in volatile countries. Lundbeck monitors and takes actions to safeguard net financial exposure at an acceptable level.
Interest rate risks arise in connection with our financial investment portfolio and cash reserves. We reduce these risks by seeking short duration on these assets. There are also credit risks associated with the sale of goods, investments and cash reserves. To reduce these risks, we avoid concentrating our credit risks and we diversify our receivables by trading with a large number of creditworthy trading partners. In addition, we only deal with or invest in financial institutions that have a solid “investment grade” credit rating.