Pharma 2020: The vision - which path will you take?

A Report by PricewaterhouseCoopers

The link between risk and reward has never been more important than it is now in the  pharmaceuticals industry as it grapples with the challenges of delivering profitable, new solutions for better healthcare in the global marketplace. Never before has effective management of business risk been so critical to achieving positive results and to enhancing corporate reputation. At the same time, the industry has witnessed a series of extreme events that have exerted pressure on shareholder value and proven costly to resolve. History has shown that although significant risks are often known in some parts of a company, those risks may not have come to the attention of the right people at the right time.

These companies, which have focused so much on innovation in science, are now looking for progressive ways to manage and mitigate their business risk not only to gain competitive advantage but, in some cases, to survive. They are sensing that their current approaches to risk may no longer be sufficient to support their rapidly changing business models.

Boards and management are looking to better understand, anticipate, and be able to mitigate business risk in order to deliver the rewards of risk taking, and to minimize the frequency and impact of risk on the downside. As boards and their audit committees contend with their new responsibilities for risk oversight, they are looking for greater assurance that there is a system in place, with well-documented, effective controls and accountability, that provides relevant information for decision making to the appropriate people in a timely manner.

KPMG believes companies must be more proactive in their efforts to manage risk on an enterprisewide basis. This will help them comply with the corporate governance requirements of the New York Stock Exchange and those of the Combined Code on Corporate Governance contained in the Turnbull Report, which is supported and endorsed by the London Stock Exchange. It also will help their presentation to bond-ratings agencies, which are now examining the effectiveness of governance, including risk-management processes. In fact, a recent report by The Conference Board* indicated more than half of the companies they survey from various industries are already actively moving forward with enterprise risk management and another third are positively endorsed.

As the foundation for improving their approach to risk management, some companies may have looked to compliance with the Sarbanes-Oxley Act of 2002, especially section 404 of the Act, which requires stronger controls around financial reporting. But, compliance with Sarbanes-Oxley is aimed at preventing the financial reporting issues rooted in the manipulation of GAAP. The Act does not necessarily address issues for pharmaceuticals companies when their root causes are in operations such as research, clinical testing, channel management, pricing, and patient communications. And, while pharmaceuticals companies already have a strong controls culture from being in a highly regulated industry, risk today goes beyond regulatory compliance to other aspects of the business, including intangibles such as reputation. Nevertheless, both the lessons learned from compliance with Sarbanes-Oxley and their embedded focus on regulatory compliance create a strong foundation for pharmaceuticals companies to improve controls over their management and mitigation of risk going forward.

To gain insight into the changing nature of risk in the pharmaceuticals industry, to learn about leaders’ perspectives on risk management, and to identify effective, practical ways to improve management and mitigation of risks, KPMG’s Pharmaceuticals practice commissioned a research program with S.P. Kothari, Head of the Department of Economics, Finance, and Accounting, and Gordon Y. Billard Professor of Management at Massachusetts Institute of Technology Sloan School of Management. Professor Kothari was joined in the research by colleagues from The Wharton School of the University of Pennsylvania and The Darden Graduate School of Business Administration of the University of Virginia.

Along with KPMG’s research findings, Pressure Points: Risk Management in the Pharmaceuticals Industry offers insights from work done by KPMG LLP in the United States on the changing roles and responsibilities of the board and management regarding risk assessment and risk management.

The purpose of this paper is to put forward ideas on how risk management can be improved. We present the view that a new environment exists, one in which “business as usual” may fail. While pharmaceuticals companies have their processes and controls in place to manage risk, it is now time to reassess their risk framework and to make any modifications that are needed to stay current with the evolving business model and the changing industry risk profile. These improvements need to address the company's risks in a more comprehensive manner, across silos and with the goal of enhancing the ability to anticipate risk in line with the goals and the culture of the organization.

KPMG believes that pharmaceuticals companies need:

• An organizational response to assess their risk framework

• An operational response to improve their risk-assessment and risk-management processes

• A governance response to improve risk oversight

There is no “shrink-wrapped” solution that fits every company. There are certainly ways to build on the current foundations, to improve the existing risk framework, and to leverage the investments companies have made in improving controls. This is important, as management will support a plan to invest in improving risk management only if the plan builds on existing activities and processes, does not increase bureaucracy, and is not seen as yet another corporate-sponsored initiative, the value of which has not been fully articulated.

Most important, it is a critical time to share ideas, thinking, and views as to what is working best, and our intention is to have Pressure Points: Risk Management in the Pharmaceuticals Industry serve as catalyst and contributor to this exchange.

For further information contact Richard Sharman (Richard.mas.Sharman@KPMG.co.uk), Ed Giniat (eginiat@kpmg.com), or Stephen Oxley (stephen.oxley@KPMG.co.uk).

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