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.