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Annual Report 2009 Download PDF (4.56MB)

Business review - risk management

The Group’s business involves exposure to a number of risks, many of which are inherent in pharmaceutical product development. Risks particular to the Group include the following.

Industry risk

The nature of pharmaceutical development is such that drug candidates may not be successful owing to an inability to demonstrate in a timely manner the necessary safety and efficacy in a clinical setting to the satisfaction of appropriate regulatory bodies, such as the European Medicines Evaluation Agency (EMEA) in Europe and the Food and Drug Administration (FDA) in the USA. The Group may be unable to attract, by itself or from partners, the funding necessary to meet the high cost of developing its products through to successful commercialisation.

Clinical and regulatory risk

Drug substances may not be stable or economic to produce. Unacceptable toxicities or insufficient efficacy in the chosen indication may cause the medicine to fail or limit its applicability. Lack of performance by third party clinical research organisations or an inability to recruit patients to clinical trials may cause undue delays in clinical trial results. Clinical and regulatory issues may arise or changes to the regulatory environment may occur that lead to delays, further costs, reduction in the commercial potential of a product in development, or the cessation of programmes. Ethical, regulatory or marketing approvals may be delayed or withheld or, if awarded, may carry unacceptable conditions to further development or commercial success. The Group’s manufacturing facilities and those of its third party manufacturers are subject to regulatory requirements and licensing and there can be no assurance that such facilities will continue to comply with such regulatory requirements. Given the cutting-edge nature of the technology, alternative manufacturing facilities may not be available.

Competition and intellectual property risk

Certain companies are developing medicines that may restrict the potential commercial success of the Group’s products or render them obsolete. Third parties may have intellectual property that may restrict the Group’s or the Group’s partners’ freedom to operate. Licences may not be available or may be costly and may reduce net royalty income to the Group. The Group’s intellectual property may become invalid or expire before its products are successfully commercialised.

Economic risk

The successful development and commercialisation of medicines carries a high level of risk and the returns may be insufficient to cover the costs incurred. Restrictions on health budgets worldwide or on the prices that may be charged for new medicines through competitive or other pressures may limit a medicine’s sales potential. The Group may not be able to attract partners on favourable terms or recruit the appropriate calibre of staff to develop or commercialise its products. Any partners may fail to perform or commit the resources necessary to commercialise the Group’s products successfully.

Financial risk management objectives and policies

The Group’s activities expose it to a number of financial risks including cash flow risk, credit risk, liquidity risk and price risk. In accordance with policies approved by the Board of Directors, the Group does not use financial derivatives to manage these risks. In addition, the Group does not use financial instruments for speculative purposes.

Cash flow risk
The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates. The majority of the Group’s revenues are in either euros or US dollars. Where known liabilities arise in these currencies the revenues are retained on deposit in the appropriate currency in order to off-set the exchange risk on these liabilities.

Credit risk
The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments. The Group’s credit risk is primarily attributable to its trade receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows.

The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. However, the recent global credit problems could result in the failure of even high credit-rated banks where funds are deposited.

The Group’s credit risk is concentrated on the five principal banks that hold its bank balances and cash, and on its collaboration partners and licensees from whom it receives licensing fees, development fees, royalties and proceeds from device sales.

Liquidity risk
In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group closely monitors the cash available to the Group, which is invested in a mixture of current and short-term deposit accounts.

Price risk
The Group is exposed to pricing risk in respect of its income and expenditure. The Group manages its exposure to price risk through commercial negotiations with customers and suppliers.

Risk management

The Group’s risk management processes are detailed in the Corporate governance statement.