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.