Risk management
Increased pressure for substantial innovation in research and development and the need to sustain the growth of Novo Nordisk's business require an entrepreneurial spirit that encourages calculated risk-taking while upholding rigorous quality standards.
At the same time, to protect its people, assets and reputation, Novo Nordisk has to be vigilant about assessing and effectively managing financial and non-financial risks. In the volatile economic climate of 2008, the importance of Novo Nordisk's approach became clearer than ever.
Overseen by its Risk Management Board, representing senior managers from all parts of the company's value chain, Novo Nordisk has a systematic, integrated process to continually risk assess a wide range of potential issues. Enterprise risk management increases the company's ability to assess and understand risks separately and in relation to each other.
Each quarter, all major business areas in the company are required to report to the Risk Office their most significant risks, along with plans or processes to manage these risks. The Risk Office challenges business areas about reported risks and encourages exploration of longer-term concerns. Reported risks are then consolidated into a ranking and assessment of the company’s key risks. This information is presented to the Risk Management Board, who challenges the overall risk and control profi le of Novo Nordisk. The process is linked to the strategic planning process and considers both financial and non-financial risks.
All assessments of risk take into account the likelihood of an event and its potential impact on the business. Impacts are quantified and assessed in terms of potential financial loss and reputational damage.
Risks are assessed based both on the assumption that no mitigating actions will be implemented and at the net risk level, taking into account mitigating actions and their anticipated effect. The risks that Novo Nordisk deems of greatest importance to its business are categorised and described below.
Novo Nordisk’s risk management structure
Each quarter, all major business areas in the company are required to report to the Risk Office their most significant risks, along with plans or processes to manage these risks. The Risk Office challenges business areas about reported risks and encourages exploration of longer-term concerns. Reported risks are then consolidated into a ranking and assessment of the company's key risks.
This information is presented to the Risk Management Board, who challenges the overall risk and control profile of Novo Nordisk. The process is linked to with the strategic planning process and considers both financial and non-financial risks.
Examples of key risks
The risks that Novo Nordisk deems of greatest importance to its business are categorised and described below. They are not, however, ranked.
Market risks: Price pressures
Novo Nordisk focuses on developing differentiated products that offer improved treatment options for patients and economic benefits to healthcare systems. As healthcare costs have risen, outstripping the pace of economic growth, there is increasing economic, political and regulatory pressure to contain pharmaceutical prices.
The current global economic contraction is likely to add to pressure on government budgets, exacerbating this trend, which could impact the company's profitability. Documenting treatment benefits is critical to ensuring that innovation is properly valued. Novo Nordisk is increasing the number of clinical and health economic studies to substantiate the benefits of its products, particularly for improved diabetes treatment.
Market risks: Biosimilar competition
The market for therapeutic proteins is becoming more attractive to biosimilar producers as more lenient regulatory rules in Europe have made it easier for producers to introduce biosimilar products when patent protection for branded products expires. More lenient rules have also been proposed in the US. The introduction of lower-priced, biosimilar products could potentially result in a significant reduction in net sales.
Traditional insulins have been off patent for years so this is a risk with which Novo Nordisk is familiar and has considerable experience addressing. In countries such as India and China, where the company has long had biosimilar competition, Novo Nordisk has a volume market share of approximately 60% in insulin.
Market risks: Infringement of intellectual property rights
Patent rights promote and protect investment in innovation, which leads to new and better treatments and long-term economic growth and job creation. Novo Nordisk defends its patent rights whenever there is infringement that could have financial implications for the company.
R&D risks: Bringing new products to market
Continued growth in Novo Nordisk's business, particularly as patents expire, depends on the company's ability to develop and market new treatments or breakthrough products. While Novo Nordisk commits substantial effort and resources to research and development activities, certain challenges could delay the introduction of new products. These include an increasingly difficult regulatory environment, recruitment of patients for clinical trials and issues related to production processes.
R&D risks: Regulatory approval
Before a new treatment can be launched, it must receive regulatory approval based on its safety and efficacy. The approval process for new products is generally lengthy and can be expensive and subject to delays. Failure to obtain, or delays in obtaining, regulatory clearance to market products could adversely affect the results of operations.
Even after a product is approved, it may be subject to regulatory action based
on newly discovered findings about safety or efficacy. Regulatory action may adversely affect product marketing, require changes to product labelling or even lead to withdrawal of regulatory approval.
Production and quality risks: Supply disruptions
Failure or breakdown in any of the company's vital production facilities could adversely affect the results of operations, as well as possibly causing employee injuries or infrastructure damage. Fire-prevention design, alarms and fire instructions, annual inspections, back-up facilities and safety inventories are aimed at mitigating this risk. To spread this risk geographically and optimise costs and supply logistics, Novo Nordisk is expanding production capacity beyond the company's European base to the US, Brazil and China.
Production and quality risks: Risk of product recalls
Product safety is directly linked to patient well-being, so safety and product quality are paramount concerns from both financial and reputational perspectives. While the gross risk is very high, with product safety having the potential to adversely affect operations, Novo Nordisk believes that its vigorous efforts to manage and mitigate this risk effectively reduce the company's net risk profile. Novo Nordisk has a corporate quality system in place, with quality audits, quality improvement plans and systematic management reviews.
People-related risks: Attracting and retaining talented people
The company's ability to develop innovative products and ensure growth and high performance depends on its ability to attract and develop talented people. Particularly in areas where Novo Nordisk does not currently have a leadership position, recruiting can be a challenge. Novo Nordisk makes substantial investments in training, and this makes Novo Nordisk people attractive to other companies, particularly those seeking to build a strong platform within the diabetes segment. Appropriately managing remuneration, non-financial benefits and recognition is critical to the company's long-term success and is prioritised accordingly.
Financial risks: Exchange rates
As a global business, fluctuations in currency exchange rates impact the reported performance. Novo Nordisk's reporting currency and the functional currency of corporate operations is the Danish krone, which is closely linked to the euro in a narrow range of ±2.25%. However, the company has substantial exposure to other currencies, including US dollar, Japanese yen, Chinese yuan and British pound. For information on how the company manages these risks, see Note 31 in the financial statements.
Ethical risks: Marketing practices
In a competitive environment with increasing public scrutiny and regulation, marketing practices can be the source of legal action or reputational risk. The company's reputation as a trusted healthcare partner is integral to its ability to effectively maintain and grow its business. At the same time, the regulatory context for marketing activity is constantly changing. A business ethics policy and global business ethics procedures, paired with close monitoring of performance and enhanced reporting requirements, all aim to mitigate these risks. The policy supplements long-standing local ethics and compliance policies. Significant resources are also dedicated to training marketing and sales people around the world.
Legal risks
Legal issues related to intellectual property, product liability claims or business practices are included in the overview of current legal cases.
