ANALYSIS: Pharma Firms Still Trust Board Oversight as Risks Grow

The High-Stakes Landscape of Pharmaceutical Risk Management

In an industry where a single misstep can have far-reaching consequences, pharmaceutical companies are navigating a complex web of risks. From clinical trial design and drug approval to global commercial practices and cybersecurity threats, the stakes have never been higher. Yet, despite these heightened risks, many pharmaceutical firms continue to rely on board oversight as a cornerstone of their risk management strategies. This article delves into the current state of risk management in the pharmaceutical industry, exploring both the challenges and the strategies employed by these companies.

The Growing Risks in Pharmaceuticals

Pharmaceutical companies are facing a myriad of risks that could potentially derail their operations. Clinical trials, for instance, are a critical phase in drug development, but they also come with significant risks. Late-stage failures are common, with the attrition rate from Phase I to new drug application averaging around 86% (1). This high attrition rate can sink a company’s growth prospects and stock price, particularly when several high-profile failures have recently made headlines.

Pricing and Reimbursement Challenges

Another critical area of concern is pricing and reimbursement. Traditional pricing models are becoming increasingly irrelevant as exclusion lists expand, indication-specific pricing becomes more complex, and outcomes-based rebate structures evolve. The public scrutiny of pharmaceutical pricing has intensified, with pharmacy benefit managers like CVS and Express Scripts excluding more drugs from their coverage lists due to high price increases (1). This has led to a sharp decline in the valuation of specialty companies, generic-drug manufacturers, and biotech companies over the past two years.

Clinical Trial Design and Approval

The process of drug approval is another high-risk area. The probability of moving a drug from Phase I to launch has decreased in recent years, with eight out of the top ten global pharmaceutical companies experiencing lower success rates between 2007 and 2016 (1). Even after approval, drugs can still fail in the market, as several recent examples illustrate.

Challenges Abroad

Pharmaceutical companies also face significant challenges abroad, including legal, compliance, and commercial issues. As supply chains globalize, companies become increasingly dependent on their suppliers, exposing them to supply-chain risks (1). The severe cyberattack on Merck in June 2017, which disrupted global operations and caused extensive losses, highlights the vulnerability of even the largest multinational corporations to cyber threats.

The Role of Board Oversight

Despite these mounting risks, many pharmaceutical companies continue to trust in the effectiveness of board oversight as a cornerstone of their risk management strategies. Boards of directors are increasingly recognized as crucial in managing corporate risk, as they must continually reassess the company's risk profile and adapt policies accordingly (2). The board's vision should include a commitment to risk oversight, ethics, good corporate citizenship, and avoiding oversight failures that could lead to fiduciary breaches (2).

Enhancing Risk Oversight

To effectively manage risks, companies are adopting advanced risk-management practices that emulate those used in heavily regulated sectors like banking and energy. For instance, one leading biopharmaceutical company has developed a taxonomy of risks and a process to calculate their impact using workshops, qualitative and quantitative assessments, and simulation-based models (1). This comprehensive approach helps identify and mitigate risks more effectively, ensuring that the company is prepared for various scenarios, including those involving cyber threats and supply-chain disruptions.

Measuring Stakeholder Trust

Beyond risk management, boards are also recognizing the importance of nurturing stakeholder trust. According to Deloitte, nearly all respondents believe that the board should play a key role in building and protecting stakeholder trust (3). This involves regular reporting from the CEO to the board, ensuring that trust is action-oriented and not just an organic byproduct of organizational operations. Boards also need clear ownership of day-to-day systems and processes to manage trust effectively (3).

The Challenges of Effective Risk Management

Despite these efforts, many pharmaceutical companies face significant barriers in their risk management efforts. One major challenge is the existence of silos and the use of manual processes like spreadsheets, which can lead to organizational fragmentation and inaccurate risk data (4). This approach often results in duplicated risk mitigation efforts, gaps in risk analysis, inaccurate risk data, and limited sharing of risk information across the organization (4).

Integrating Risk Management

To overcome these challenges, an integrated approach to risk management is essential. This involves using technology to support the adoption of an integrated risk framework, ensuring that all areas of the business are working together to monitor and manage risks effectively (4). By adopting a zero-trust cybersecurity model and regularly reviewing and updating risk frameworks, pharmaceutical companies can better prepare for both internal and external threats.

Conclusion

The pharmaceutical industry operates within a high-risk marketplace, with a multitude of challenges ranging from clinical trial failures to cybersecurity threats. Despite these risks, many pharmaceutical companies continue to rely on board oversight as a crucial component of their risk management strategies. By adopting advanced risk-management practices, integrating risk frameworks, and nurturing stakeholder trust, these companies can better navigate the complex landscape of pharmaceutical risk management. However, the existence of silos and manual processes remains a significant barrier to effective risk management, highlighting the need for a more integrated and technologically advanced approach.

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References

1. Expanding horizons for risk management in pharma | McKinsey
2. Risk Management and the Board of Directors
3. How boards are nurturing and measuring stakeholder trust - Deloitte
4. Managing Risk in the Pharmaceutical & Life Sciences Sector