ALK’s Board of Management is responsible for the ongoing management of risks, including risk mapping, assessment of probabilities and potential consequences, and the introduction of risk-reducing measures. Board of Management has established a Risk Committee to assist it in meeting its overall responsibility for risk management. Risk management reports are given to the Board of Directors’ Audit Committee on an annual basis.
The following risks are of particular significance to ALK:
Risks related to research and development
The future success of ALK depends on the company's ability to maintain current products and successfully identify, develop and market new, innovative drugs. A pharmaceutical drug must be subjected to extensive and lengthy clinical trials to document aspects such as safety and efficacy before the drug can be approved for marketing. In the course of the development process, the outcome of these trials is subject to significant risks. Even though substantial resources are invested in the development process, the trials may produce negative results. Delays in obtaining regulatory approvals – or failure to obtain such approvals – may also have a major impact on the ability of ALK to achieve its long-term goals. ALK and its strategic partners perform thorough risk assessments of their research and development programmes throughout the development and registration processes with the objective of risk mitigation to optimise the likelihood of the products reaching the market.
Risks related to market conditions
Regulation and price control
ALK’s products are subject to a large number of statutory and regulatory requirements with respect to issues such as safety, efficacy and production. In most of the countries in which ALK operates, prescription drugs are subject to reimbursement from, and price controls by, national authorities. This often results in major price differences between individual markets. Regulatory requirements and interventions, as well as price controls, may therefore have a significant impact on the company’s earnings capacity. ALK actively engages in dialogue with the authorities with the aim of securing fair pricing and reimbursement agreements.
If ALK and its strategic partners succeed in developing new products and obtaining regulatory approval for them, the ability to generate revenue depends on the products being accepted by doctors and patients. The degree of market acceptance of a new product or drug candidate depends on a number of factors, including the demonstration of clinical efficacy and safety, cost effectiveness, convenience and ease of administration, potential advantages over alternative treatment methods, competition, and marketing and distribution support. If ALK’s new products fail to achieve market acceptance, this could have a significant influence on the company’s ability to generate revenue. ALK regularly conducts extensive surveys of market conditions and similar factors and expends significant resources on providing information on its products to doctors and patients. Commercialisation is a crucial part of the company’s strategic basis and strategic activities.
ALK’s products may be associated with allergic reactions of varying extents, durations and severities. If such events occur in unexpected situations, they may have an impact on the company’s earnings and sales. Due to the potentially serious consequences, it is crucial for ALK to stringently monitor product quality and safety, both in clinical development and in sales and marketing activities. If, despite the high level of quality and safety monitoring, a situation should occur in which it is necessary to recall a product, ALK has procedures in place to ensure that this can be managed swiftly and efficiently.
ALK operates in markets characterised by intense competition. If, for instance, a competitor launches a new and more effective treatment for allergy, it may have a material impact on ALK’s sales. A competitive market may also lead to market-driven price reductions just as the regulatory authorities may mandate price reductions. Both competition and price are risks that may have a material impact on ALK’s ability to achieve its long-term goals. ALK therefore monitors economic developments, the competitive situation and initiatives in all-important markets with the aim of appropriate risk mitigation.
Risks related to infrastructure
Production and quality
ALK has concentrated most of its production capacity at plants in Denmark, France, Spain and the USA. Although the plants are located in areas that have not historically been hit by natural disasters, this geographical diversification calls for risk planning in order to avoid emergency situations, such as lack of, or poor access to raw materials: for instance, pollen. This planning includes the prevention of unwanted events and preventative inventory management; such as the build-up of contingency inventories in order to ensure an unbroken chain of production and supply.
Production and manufacturing processes are also subject to periodic and routine inspections by the regulatory authorities as a regular part of their monitoring process in order to ensure that all manufacturers observe the prescribed requirements and standards. Meeting these quality standards is a prerequisite for the company’s competitive strength. ALK’s production processes and quality standards have been developed and optimised over many years. Production processes and quality standards are furthermore regularly audited by strategic partners.
Dependence on third parties
ALK has partnership agreements with third parties with a view to commercialising the company’s products in a number of markets and with parties supplying important input for key production processes. Although there are financial incentives for all of ALK’s partners to fulfil their contractual obligations, there can be no assurance that they will actually do so. The factors that motivate ALK’s partners to develop and commercialise products may be affected by conditions and decisions beyond ALK’s control. The agreements with strategic partners may entitle ALK to receive certain milestone payments. These payments depend on continuing favourable results in the development and commercialisation of the pharmaceutical products to which ALK’s partners hold the rights. Moreover, reliance on suppliers and third-party manufacturers entails risks. Such risks include but are not limited to:
- Reliance on a third party for regulatory compliance and quality assurance
- Possible breach of a manufacturing agreement by a third party due to factors beyond ALK’s control and influence
- Reliance on the ability of a third party to deliver and scale up the volume of production
ALK manages these risks through contractual relations, thorough planning and monitoring and through joint steering committees that work together with these external parties.
Risks related to key employees
ALK relies on being able to attract and retain employees in key positions. A loss of key employees may have a material impact on the company’s market and research efforts. ALK manages this risk, among other things, by continuously offering its staff professional development opportunities and competitive compensation.
Risks related to business ethics and legal issues
ALK's good reputation is essential for operating within the pharmaceutical industry. ALK aims to maintain its standing by acting in compliance with all applicable regulations and legislation. ALK strives to act professionally, honestly and with high integrity throughout the company in relation to stakeholders from customers, employees and shareholders, to society, suppliers and partners.ALK's Code of Conduct is updated regularly and defines ALK's high standard of ethical behaviour.
Patents and intellectual property rights
Patents and other intellectual property rights are important for developing and retaining ALK’s competitive strength. The risk that ALK might infringe patents or trademark rights held by other companies, as well as the risk that other companies may attempt to infringe the patents and/or trademark rights of ALK, are monitored and, if necessary, suitable measures are taken.
Risks related to financial reporting
ALK's risk management and internal controls related to financial reporting are designed to effectively control the risk of material misstatements. A detailed description of ALK's internal controls and risk management system in relation to financial reporting processes is included in the Statutory Corporate Governance Statement for 2016, cf. art 107b of the Danish Financial Statements Act available at the company's website: http://ir.alk.net/risk.cfm
Due to the nature of its operations, investments and financing, ALK is exposed to fluctuations in exchange rates and interest rates. The ALK Group's financial risks are managed centrally, based on policies approved by the Board of Directors. The objective of ALK's financial risk management is to reduce the sensitivity of earnings to fluctuations in exchange rates, interest rates, liquidity and changes in credit rating. Group policy is to refrain from active financial speculation. See Note 25 of the annual report 2016 for a specification of the Group's exposure to currency, interest rate and credit risks and the use of derivative financial instruments.
Foreign exchange risk
The general objective of ALK's foreign exchange risk management is to limit and delay any adverse impact of exchange rate fluctuations on earnings and cash flows and thus increase the predictability of the financial results.
The most significant financial risk in ALK relates to exchange rate fluctuations. The greatest exposure is to USD and GBP. In 2016, 14% of ALK's revenue was denominated in USD, 1% in GBP and 73% in EUR. ALK's sales are not deemed to be exposed to EUR due to Denmark's participation in the European Exchange Rate Mechanism.
Sensitivities for 2017 in the event of a 10% increase in exchange rates:
DKKm Revenue EBITDA
USD Approx. +60 Approx.+5
GBP Approx. +5 Approx. +3
The table above shows the estimated effect of a 10% increase in the USD and GBP exchange rates on revenue and EBITDA levels, respectively. Exchange rate risks relating to operations are primarily hedged by matching receipts and payments in the same currencies and by forward exchange contracts and options.
Moreover, ALK is exposed to exchange rate risks when intercompany balances and net assets of foreign subsidiaries are translated into DKK. In accordance with the accounting policies, such currency translation adjustments are recognised in the income statement and in other comprehensive income, respectively.
Foreign exchange exposure relating to future transactions and assets and liabilities is evaluated and hedged by instruments such as forward exchange contracts. This serves to limit the impact on the financial results of any exchange rate fluctuations. The exchange rate exposure relating to net investments in foreign subsidiaries is not hedged by forward exchange contracts.
Interest rate and liquidity exposure
At the end of the financial year, cash and marketable securities stood at DKK 840 million. An increase in the interest level by 1 percentage point on cash and marketable securities would consequently decrease profit and loss and equity by approximately DKK 3 million. It is not expected that the interest rate exposure will be hedged as this is not considered financially viable.
Cash is invested in credit-worthy, liquid, interest-bearing instruments of relatively short duration. The liquidity risk is considered to be minimal due to the company's current capital structure.
The credit exposure in connection with financial instruments is managed by contracting only with institutions with satisfactory credit-worthiness, in Denmark as well as abroad. In accordance with ALK's credit-risk policy, such institutions must have an acknowledged credit rating.
Trade receivables are monitored closely at the local level and are distributed across a number of markets and customers. The credit risk is therefore considered to be low.