Pharmaceutical companies need to improve their risk management framework: KPMG The report by KPMG LLP in the US — which was undertaken with the research support of Professor S.P. Kothari, head of the Department of Accounting, Finance and Economics at the MIT Sloan School of Management, and colleagues from Wharton and Darden — states that pharma companies are struggling to take a more comprehensive view of risk. According to the KPMG research, while they have risk frameworks and a “controls culture” in place, from being part of a highly regulated industry, they may not be able to keep pace with their changing business models and industry risk profiles. An additional factor is that pharma companies have tended to operate in business silos. The report highlights how both positive and negative events tend to have extraordinarily pronounced effects on shareholder value. Statistical research into industry cash flows, net income, sales and investment returns over the past 13 years generated a standard deviation for the pharma industry which was as much as 50 percent higher than the entire S&P 500. As evidence of just how much that risk profile has changed, the report contains a breakdown of the risks, which were reported on by pharma companies in 2003, compared to 1998. In 1998, there was not one single risk that was mentioned by every one of the 18 companies analysed. Just five years later, there had been an increase in the number of firms reporting on the risks associated with issues such as product supply, under-developed product pipelines, changes in the competitive environment, product launch delays and the retention of key talent. Richard Sharman, head of enterprise risk management at KPMG in the UK, commented: “The key issue this report highlights is that many pharma companies’ response to managing business risk has not kept pace with the changes in risk. This research indicates that companies’ approaches to risk management are generally detective in nature, reactive in approach and vary widely. At a time when boards and management are being encouraged to better understand, anticipate and manage their business risks, many pharma companies urgently need to review and update their approaches to risk management.” The KPMG research found that companies judged to fall at the ‘poor’ end of the scale for risk management preparedness had significant business silos, which isolated different parts of their operation from each other. Businesses that were judged to have better risk management had cross-functional teams to assess risk and make recommendations to mitigate them. The research also highlights how there is apparently no single, uniform approach to risk. In fact, risk assessments and risk management processes vary widely. Companies in the study perceived different risk exposures and their risk forecasting and risk management methods are still evolving. For the most part, companies appear to be working on several independent initiatives and the process for prioritising risk is largely subjective and detective in nature, involving the cataloguing of risk after the fact. Richard Sharman concluded: “A positive point to be taken from this report is that the industry does recognise that it has flaws in its risk management processes. The response to this will vary from company to company but, generally, it will necessitate an organisational response to assess their current risk management framework, an operational response to improve their risk assessments and risk management processes and a governance response to enhance their risk oversight. “Additionally, the implementation of new practices around risk management will move toward mitigating the extreme negative events impacting the industry while providing a competitive advantage in better anticipating the next big risk.”
•Date: 22nd September 2005 • Region: US/UK • Type:
Article •Topic: Manufacturing |
