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.

Risk Radar
One of the tools used to assess risks affecting tomorrow’s business model is the ‘risk radar,’ which can be customised and used as a basis for ongoing dialogue in one’s organisation. The risk radar (see left) is a circular map which places the top ten risks into quadrants—financial, compliance, strategic, and operations risks—and signifies the relative importance of a risk by its proximity to the centre. For life science firms in general, financial and compliance quadrants include just two of the business risks in the top ten—‘capital access/allocation’ and ‘ensuring safeproducts,’ respectively. Of the remaining eight leading risks, four are strategic and three are in operations; ‘sustaining a culture of innovation’ as a risk sits on the border of strategy and operations.

Top Risk
For industry analysts and specialists alike, the top risk was demonstrating value amid pricing pressures, with capital access/allocation and boosting R&D productivity claiming silver and bronze positions respectively. Andrew explains to whom demonstrating value was most important: "The commercial model of pharma has to address a wider group of stakeholders than ever before, including patients, physicians, nurses, care-givers, payers, insurers and pricing and reimbursement specialists—and the customer mix changes by product and by geography. A patient cares about getting better; for a physician it’s about improving health outcomes. A payer may also value that, but will consider the financial dimensions too.”

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.”

Black Swans
The Ernst & Young report, quite rightly, is highly focused on life sciences; however, there is little discussion of risks from the macro-environment, which can severely affect business. PEST is a wellknown tool, used to assess the political, economic, social and technological trends in any given business context. Consider that Swiss pharmaceutical firm Hoffman-La Roche, founded in 1896, rapidly established nine international operations across Europe, Japan, and the US within twenty years. The Russian affiliate, established in St Petersburg in 1910, grew into Roche’s biggest market by 1916. However, the Russian Revolution in October 1917 abruptly ended Roche’s operations in Russia 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.”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.”