ALK’s Board of Management is responsible for the ongoing management of risk, including risk mapping, the 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. The Risk Committee comprises representatives from each functional area relevant to ALK’s risk profile. The Risk Committee meets twice a year or more, as required, to perform its tasks. Risks are assessed according to a two-dimensional matrix, rating the impact and likelihood of each risk. A risk management report with key risks and recommended mitigation plans is submitted to the Board of Directors’ audit committee on an annual basis and subsequently approved at board level.
The following risks of particular significance to ALK have been identified for 2019:
Commercial risks
Research and development
The future success of ALK depends on the Group’s ability to maintain current products and successfully identify, develop and market new, innovative drugs, which involves significant risks. A pharmaceutical drug must be subjected to extensive and lengthy clinical trials to document aspects such as safety and efficacy before it can be approved for marketing. In the course of the development process, the outcomes 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 collaborative partners perform thorough risk assessments of its 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.
In 2018, the Board of Directors updated the charter for the Scientific Committee to include responsibility for other patient/product related innovation activities . The committee advises on matters relating to R&D activities and other patient/product-related innovation activities, including reviewing R&D programmes and the overall R&D pipeline.
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 control measures, may therefore have a significant impact on the Group’s earnings capacity.
ALK actively engages in dialogue with the authorities aimed at securing fair pricing and reimbursement agreements.
Commercialisation – market acceptance
If ALK and its partners succeed in developing new products and obtaining regulatory approvals for them, the ability to generate revenue depends on the products being accepted by doctors and patients. The degree of market acceptance for 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 Group’s ability to generate revenue.
ALK regularly conducts extensive surveys of market conditions and similar factors and commits significant resources to providing information on its products to doctors and patients.
Commercialisation – allergic reactions
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 Group’s earnings and sales.
ALK stringently monitors product quality and safety, both in clinical development and in sales and marketing activities. If, despite the high levels of quality and safety, 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.
Competition and pricing
ALK operates in markets characterised by intense competition. If, for instance, a competitor launches a new and more effective treatment of allergy, it may have a material impact on ALK’s sales. A competitive market may also lead to market-driven price reductions just as national and regional 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 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 its key in-house 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 spread calls for risk planning in order to avoid emergencies, such as lack of, or poor access to raw materials: for instance, pollen.
Production and manufacturing processes are also subject to periodic and routine inspections by regulatory authorities as a regular part of their monitoring processes in order to ensure that all manufacturers observe the prescribed requirements and standards. Meeting these quality standards is a prerequisite for the Group’s competitive strength.
ALK conducts risk planning including for the prevention of unwanted events, and preventative inventory management, such as the build-up of contingency stocks in order to ensure an unbroken chain of production and supply.
ALK’s production processes and quality standards have been developed and optimised over many years. ALK invests significantly to increase the robustness and compliance of the legacy business by reducing manufacturing complexity, which involves an extensive portfolio rationalisation programme.
Dependencies on third parties
ALK has partnership agreements with third parties with a view to commercialising the Group’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. Moreover, reliance on suppliers and third-party manufacturers entails risks that ALK would not be subject to if the Group possessed the necessary in-house manufacturing capabilities. 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 stipulations, thorough planning and monitoring, and through joint steering committees that work together with these external parties.
IT security
Disruption to IT systems, such as breaches of data security, may happen across the global value chain, where well-functioning IT systems and infrastructure are critical for the Group’s ability to operate effectively.
ALK manages this risk, among other ways, by having a security strategy in place to prevent intruders from causing damage to systems and gaining access to critical data and systems. Awareness campaigns, access controls, intrusion detection and prevention systems have all been implemented.
Risks related to business ethics and legal issues
Business ethics
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 Group 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 in relation to customers, employees, shareholders, society, suppliers and partners. Once a year, all employees are asked to sign and confirm their knowledge of the Code of Conduct and in addition, all employees were asked to take an anti-corruption online test in 2018.
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 both monitored and, if necessary, suitable measures are taken.
The Scientific Committee regularly reviews the strategy for intellectual property rights.
Risks related to financial reporting
If well-functioning risk management and internal controls are not implemented at ALK, there is a risk of material misstatements in the 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 reviewed annually by the Audit Committee and is included in the Statutory Corporate Governance Statement, cf. section 107b of the Danish Financial Statement Act, andis available at the company’s website: https://ir.alk.net/financial-reporting/riskmanagement
Financial risks
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 24 of this annual report for a specification of the Group’s exposure to currency, interest rate and credit risks and its use of derivative financial instruments.