Reading the "Risk Radar"
The concept of risk is in the very DNA of the life science industry—consider the following terms: risk assessment, risk adjustment, risk benefit, risk factors, risk management, risk perception, risk profile, risk ratios, risk scores, risk stratification, etc... For good measure, Ernst & Young, has added a new term—‘risk radar’— in a report published this month (The 2009 Ernst & Young business risk report, April 2009). The report surveyed over 100 industry specialists and asked them to identify and rank the top ten business risks affecting life science firms today, including both biotech and Big Pharma. Andrew Jones, a senior analyst in the pharmaceutical practice at Ernst & Young, outlines the context in which the report was commissioned: “Historically, pharma has been highly regulated, and the risk landscape can change dramatically—one change can have widespread consequences. We are seeing a number of changes at the corporate level: business models are changing, there is geographical expansion, life science companies are more reliant on third parties, patient groups are more empowered, and the customer environment is changing. Tomorrow’s businesses will look materially different from today’s.
This is a view shared by Andrew Hobbs, managing director of PopeWoodhead Consulting, who tells me: “Payers are a big—but neglected—group, segmented at the local, regional, and national levels. Now there is a big shift towards embracing payers as a customer group—not just as a technical hurdle.”
However, demonstrating and articulating value throughout the company is seen as particularly important now, firstly because of the global financial crisis and concomitant shrinking tax base, and secondly in the light of patent expiries and the need to justify premia placed on drugs in the light of generic alternatives.
To the question of how an entire company could demonstrate value externally, Andrew responds: “Companies have deep knowledge about their product, but to compete, they need to leverage that knowledge and add value in all their interactions. For example, at the doctor level, training can be about product as well as about tools to increase patient compliance. It is just as important not to destroy value, for example, through illegitimate promotional practices, which can cause direct financial damage and brand reputation.” The reference to interactions will be familiar to AstraZeneca employees; CEO, David Brennan, is famous for his personal motto: “make every interaction count.”
So why were political risks were not considered in the report? Andrew comments: “The report focuses on wellcharacterised, industry-specific risks; in practice, companies should also look to the horizon at the periphery to pick up emerging risks. However, it can only go so far. You can’t plan for ‘black swans’—some risks can come out of nowhere. Management should therefore strive to improve the resilience of their businesses to the impact of such events.”and almost bankrupted the firm. So why were political risks were not considered in the report? Andrew comments: “The report focuses on wellcharacterised, industry-specific risks; in practice, companies should also look to the horizon at the periphery to pick up emerging risks. However, it can only go so far. You can’t plan for ‘black swans’ —some risks can come out of nowhere. Management should therefore strive to improve the resilience of their businesses to the impact of such events.”
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