ERM and the Pharmaceutical Industry

Risk  An innate part of every aspect of life, and the business environment is of no exception  Severity, both in terms of impact and likelihood, of risks are increasing in general due to the influence of globalization  Systematic risks › General economic conditions, competition, regulation  Industry specific risks › Ex: Political tensions and their impact on the oil industry

Pharmaceutical Industry  More than ever before, advances in healthcare are reaching new horizons never before believed to be possible  Perhaps the riskiest industry due to its unique environment › Intense competition to create new drugs and from generic drug manufacturers › Government regulation -- FDA Drug Approval Process › Patent protection issues › Drug failure › Litigation exposure

FDA Approval Process  Food and Drug Administration (FDA) regulates pharmaceuticals in the United States › Drug safety, quality standards, labeling and warnings, etc.  The drug approval process is extremely complex › Preclinical laboratory testing (often involves experimentation with animals) › Three phases of human testing › Post market monitoring

FDA Approval Process › Graphical Depiction › Statistical Reality › For every 5,000 compounds that enter preclinical testing, only about 5 reach first phase of human testing › Of the 5 that make it to human testing, only roughly 1 will achieve approval

COSO’s ERM Framework  Enterprise Risk Management (ERM) involves the procedures and methods used by an organization to assess, manage, and mitigate risk  Committee of Sponsoring Organizations of the Treadway Commission (COSO) developed a widely used ERM framework during a period of widespread corporate scandals

COSO’s ERM Framework  ERM Objectives (4) › strategic objectives › operations objectives › reporting objectives › compliance objectives  ERM Components (8) › internal environment › objective setting › event identification › risk assessment › risk response › control activities › information and communication › monitoring

Application of ERM to Pharmaceutical Companies  Internal environment is a vital component in terms of protecting an organization’s sensitive research and development information › Corporate culture built upon high ethical standards › Proactive measures to hire individuals with integrity › Adequate and effective internal controls

Conclusion  Clearly, pharmaceutical companies face a myriad of risk factors › Intense competition and government regulation (FDA approval process)  However, ERM is an effective way for pharmaceutical companies to manage their risks › Reduce exposure to losses due to competition, drug failure, litigation, etc.