Risk management
Identifying and mitigating risks is a key part of any manager’s job. At Novo Nordisk a formal risk identification process encourages everyone to keep an eye on both immediate risks and those emerging on the horizon.
Strategic risk management is high on the agenda of the Board of Directors and Executive Management. The aim is not to avoid risks, but to ensure that key risks are proactively managed. This allows Novo Nordisk to better allocate resources and to target future growth opportunities. An analytical and systematic approach to risk management makes the assumptions behind decisions more transparent. It allows management to discuss risks and choose whether to accept, transfer, share or eliminate the individual risk in order to align Novo Nordisk’s consolidated risk profile with the readiness of Executive Management and the Board of Directors to take risks. Clearly, the appetite to take calculated risks will be higher in early discovery phases, while in other areas such as quality and patient safety the tolerance of risks will be close to zero.
Novo Nordisk defines risks as ‘events or developments which could reduce our ability to meet our overall objectives’. This broad definition includes all types of risk, both financial and non-financial, ranging from discovery and development, through manufacturing, sales and support functions that might impede the long-term objectives set out in the company’s Vision and reflected in its business plans.
Novo Nordisk is operating in an industry that is impacted by consolidation, cost containment and intensified competition. Articulating risks can improve decision-making, and Novo Nordisk has developed an integrated and systematic risk reporting approach, which is aligned with existing reporting and recurs on a quarterly basis. It is designed
to ensure that key business risks are identified, assessed and reported to Novo Nordisk’s Executive Management and Board of Directors.
Once a year Novo Nordisk undertakes a strategic planning process involving in-depth identification and evaluation of long-term growth opportunities. Through this process, risk factors and mitigations are identified and factored into the individual units’ business plans. This disciplined questioning of the context for identified risks and assessment of which objectives may be threatened enables Novo Nordisk to be more attentive to factors that help or hinder long-term value creation.
Assessing risks
In all assessment of risks two factors are considered: the likelihood of the event and its potential impact on the business. Impacts are quantified and assessed in terms of potential financial loss and reputational damage. The risks are assessed at both gross level and net level. The gross level is the assessment of the risk with the assumption that no mitigating actions have been implemented. The net risk level is the residual risk when taking into account the mitigating actions and their anticipated effect.
Impact in terms of reputational damage is included because Novo Nordisk sees its repu tation as one of its most valuable assets. A good reputation, based on solid performance and the business principles laid down in the Novo Nordisk Way of Management, helps the company to attract talented people, investments and collaboration partners – and opens doors to customers and regulators. Consequently, any significant damage to its reputation impairs Novo Nordisk’s ability to meet its business goals in the longer term.
In 2006, Novo Nordisk developed a more comprehensive and systematic method for assessing the reputational impact of potential risks. It aims to make more fact-based assessments of the likelihood and impact of a risk from a reputation perspective. As such, the tool serves as a common starting point for management’s discussion on specific risks.
Examples from the current risk profile
To provide an understanding of the factors that constitutes key risks to Novo Nordisk, some examples of critical assets, risk factors and their contexts are given below.
Inability to attract and retain talent
The ability to drive innovative products into and through the pipeline and to ensure cost-effective, high-output performance relies on attracting and developing the right people. In areas where Novo Nordisk does not currently have a leadership position, recruiting talent
is a constant challenge. Another potential risk factor is loss of key talents to big pharma companies seeking to build a strong platform within the diabetes therapeutic segment. Novo Nordisk focuses on the individual employee by investing in ongoing career development and a high degree of empowerment.
Insufficient production capacity
There is a risk of failure or breakdown in any of the company’s vital production facilities, which, in addition to the potential physical damage or loss of life, could affect the supply of products. Fire-prevention design, alarms and fire instructions, annual inspections, back-up facilities and minimum safety inventories help mitigate this risk.
To spread risks and optimise costs and logistics, Novo Nordisk is building up a global sourcing programme, with major investments in expanding production capacity in for example the US, Brazil and China. This also entails contracting with local suppliers. To mitigate risks of non-compliance with Novo Nordisk’s environmental and social standards, specific requirements are made and audits conducted.
In pharmaceutical production, quality is paramount. The gross risk of a potential failure in quality levels is very high because ultimately patient safety could be put at risk. The net risk is low, because Novo Nordisk has a corporate-wide quality system in place, ensuring compliance to all external and internal standards, maintaining product quality at the highest levels, and continuously surveying and improving products, processes and training.
Biosimilar competition
The market for therapeutic proteins is becoming more attractive to biosimilar producers as more lenient regulatory rules in Europe and in the US give biosimilar companies an easier pathway to these markets, when branded products go off-patent. Low-priced biosimilar human insulin from producers in China, India and Poland is one example.
Novo Nordisk’s exposure to this risk factor is diminishing due to the increasing use of patented modern insulins in Novo Nordisk’s portfolio.
Healthcare cost containment
In mature markets the increased government focus on rising healthcare costs is putting pressure on pharmaceutical companies’ commercial pricing structures. Such a situation may discourage investments in research into therapeutic areas with limited prospects for commercialisation.
Government price regulation and other healthcare reforms would most likely result in lower prices on products if their benefits are not well-documented. Novo Nordisk is therefore conducting several clinical and health-economic studies of the benefits of modern insulins to further support its product claims by pharmaco-economical evidence.
Ethical marketing practices
In a competitive environment with increasing public scrutiny and regulation, the risk of legal action related to marketing practices is ever present. A Business Ethics Policy and related audits as well as other initiatives to reinforce the Novo Nordisk Way of Management paired with close monitoring of performance and enhanced reporting requirements help to mitigate such risks.
The policy supplements existing local ethics and compliance policies. However, cases may occur in which the policy is violated. In December 2005, Novo Nordisk was served with a subpoena requesting documents relating to the company's US marketing and promotional practices. Investigations of potential criminal offences relating to healthcare benefit programmes are ongoing.
Novo Nordisk is also under investigation for a possible breach of the UN sanctions related to the Oil-for-Food programme in Iraq.
Legal issues
Vigilant compliance with regulations and legislation is expected of any pharmaceutical company. Patient safety must never be compromised. Any questioning of this entails a violation of Novo Nordisk’s values as well as major financial and reputational risks. A related risk is product liability claims. The most significant risk for Novo Nordisk in this context is in relation to HRT products, where Novo Nordisk Inc., together with the majority of hormone therapy product manufacturers in the US, is a defendant in product liability lawsuits related to hormone therapy products. There is a risk of an unfavourable outcome for Novo Nordisk in the HRT litigation. Also, Menarini, Italy, has sued Novo Nordisk for damages relating to distribution on the Italian market.
At this point in time, Novo Nordisk does not expect the pending claim to have a material impact on Novo Nordisk’s financial outlook.
See a list of current legal issues here.
Currency exposure
Foreign exchange risk is the principal financial risk to Novo Nordisk. To limit the short-term negative impact on earnings and cash flow from exchange rate fluctuations, the company undertakes currency hedging based on expectations of future exchange rates and cash flows. Hedging is mainly done by using foreign exchange forwards and foreign exchange options matching the due dates of the hedged items. Novo Nordisk only hedges commercial exposures and does not enter into derivative transactions for trading or speculative purposes.
Risk management set-up
Executive Management has established a dedicated Risk Management Board of senior executives representing all key business activities and selected support functions. Chaired by the chief financial officer, it reports to Executive Management and the Board of Directors. The Risk Management Board meets at least four times a year.
It sets the strategic direction and challenges for risk management, and analyses the risk and control information generated by the individual business areas. This process helps to reduce blind spots and consider potential cross-functional impacts. In quarterly reports to Executive Management and the Board of Directors, risks are assessed and quantified in terms of potential financial impact and reputational damage. For each risk the potential impact is specified, as are mitigating actions.
The Risk Office is the secretariat of the Risk Management Board. It drives and consolidates risk reporting from discovery and development, through manufacturing and logistics, to marketing and sales. In addition, risks related to support functions such as regulatory, business development, finance, legal & IT and people & organisation are included. This is done in consultation with relevant Novo Nordisk committees, boards and management groups.
This page has been assessed by PricewaterhouseCoopers as part of its assessment of Novo Nordisk’s statement that it reports ‘in accordance’ with GRI. Please refer to Audit and assurance for a full description of the nature of assurance offered.
