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Product pipeline and IP risks
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Impact
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Failure or delay in delivery of pipeline or launch of new
products
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Our continued success depends on the development and successful
launch of innovative new drugs.
The development of pharmaceutical product candidates is a complex,
risky and lengthy process involving significant financial, R&D
and other resources. It may fail at any stage of the process due to
various factors, including failure to obtain the required
regulatory or marketing approvals for the product candidate or for
its manufacturing facilities, unfavourable clinical efficacy data,
safety concerns, failure to demonstrate adequate cost-effective
benefits to regulatory authorities and/or payers and the emergence
of competing products. More details of projects that have suffered
setbacks or failures during 2016 can be found in the Therapy Area
Review.
The anticipated launch dates of major new products significantly
affect our business, including investment in large clinical
studies, the manufacture of pre-launch product stocks, investment
in marketing materials pre-launch, sales force training and the
timing of anticipated future revenue streams from new Product
Sales. Launch dates are primarily driven by our development
programmes and the demands from various factors, including adverse
findings in pre-clinical or clinical studies, regulatory demands,
price negotiation, competitor activity and technology transfer.
More complex and stringent regulations govern the manufacturing and
supply of biologics products, thus impacting the production and
release schedules of such products more significantly.
In addition to developing products in-house, we also expand our
product portfolio and geographical presence through licensing
arrangements and strategic collaborations, which are key to growing
and strengthening our business. The success of such arrangements is
largely dependent on the technology and other IP rights we acquire,
and the resources, efforts and skills of our partners. Disputes or
difficulties in our relationship with our collaborators or partners
may arise, for example, due to conflicting priorities or conflicts
of interest between parties.
In many cases we make milestone payments well in advance of the
commercialisation of the products, with no assurance that we will
recoup these payments.
We experience strong competition from other pharmaceutical
companies in respect of licensing arrangements, strategic
collaborations, and acquisition targets.
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Failure or delay in development of new product candidates that
achieve the expected commercial success could frustrate the
achievement of development targets, adversely affect the reputation
of our R&D capabilities, and is likely to materially adversely
affect our business and results of operations. See also Failure to
achieve strategic plans or meet targets and expectations on page
223.
Since our business model and strategy rely on the success of
relatively few compounds, the failure of any in line production may
have a significant negative effect on our business or results of
operations.
Significant delays to anticipated launch dates of new products
could have a material adverse effect on our financial position
and/or results of operations. For example, for the launch of
products that are seasonal in nature, delays in regulatory
approvals or manufacturing difficulties may delay launch to the
next season which, in turn, may significantly reduce the return on
costs incurred in preparing for the launch for that season.
Furthermore, in immuno-oncology speed to market is critical given
the large number of clinical trials being conducted by other
companies.
In addition, a delayed launch may lead to increased costs if, for
example, marketing and sales efforts need to be rescheduled or
performed for longer than expected.
Failure to complete collaborative projects in a timely,
cost-effective manner may limit our ability to access a greater
portfolio of products, IP technology and shared expertise. Disputes
and difficulties with our partners may erode or eliminate the
benefits of our alliances and collaborations. In addition, failure
to perform on the part of parties to externalisation transactions
may diminish the future value of those transactions. Delay of
launch can also erode the term of patent exclusivity.
Competition from other pharmaceutical companies means that we may
be unsuccessful in implementing some of our intended projects or we
may have to pay a significant premium over book or market values
for our acquisitions.
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Difficulties in obtaining or maintaining regulatory drug approval
for products
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We are subject to strict controls on the commercialisation
processes for our pharmaceutical products, including their
development, manufacture, distribution and marketing. The criteria
for establishing safety, efficacy and quality, which are essential
for securing marketing approvals, may vary by country and by
region. Regulators can refuse to grant approval or may require
additional data before approval is granted, even though the
medicine may already be launched in other countries.
Factors, including advances in science and technology, evolving
regulatory science, and different approaches to benefit/risk
tolerance by regulatory authorities, the general public, and other
third party public interest groups influence the initial
approvability of new drugs. While we seek to manage many of these
risks, unanticipated and unpredictable policymaking by governments
and regulators, limited regulatory authority resources or
conflicting priorities often lead to severe delays in regulatory
approvals.
We may be required to conduct additional clinical trials after a
drug's approval because a regulatory authority may have a concern
that impacts the benefit/risk profile of one of our marketed drugs
or drugs currently in development. For our marketed drugs, new data
and meta-analyses have the potential to drive changes in the
approval status or labelling. In addition, recent years have seen
an increase in post-marketing regulatory requirements and
commitments, and an increased call for third party access to
regulatory and clinical trial data packages for independent
analysis and interpretation, and broader data transparency. Such
transparency, while important, could lead to inappropriate or
incorrect data analyses which may damage the integrity of our
products and our Company's reputation.
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Delays in regulatory reviews and approvals could delay our ability
to market our products and may adversely affect our revenue. In
addition, post-approval requirements, including additional clinical
trials, could result in increased costs, and may impact the
labelling and approval status of currently marketed
products.
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Failure to obtain and enforce effective IP protection
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A pharmaceutical product is protected from being copied for a
limited period of time under certain patent rights and/or related
IP rights, such as Regulatory Data Protection or Orphan Drug
status. Typically, products protected by such rights generate
significantly higher revenues than those not protected. Our ability
to obtain, maintain and enforce patents and other IP rights in
relation to our products is an important element in protecting and
recouping our investment in R&D and creating long-term value
for the business. Some countries in which we operate do not offer
robust IP protection. This may be because IP laws are still
developing, the scope of those laws is limited or the political
environment does not support such legislation.
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Limitations on the availability of patent protection, the ability
to obtain related IP rights or the use of compulsory licensing in
certain countries in which we operate could allow for earlier entry
of generic or biosimilar competitor products. This could have a
material adverse effect on the pricing and sales of our products
and, consequently, could materially adversely affect our
revenues.
More information about protecting our IP, the risk of patent
litigation and the early loss of IP rights is contained in the
Intellectual Property section on page 57, the Competitive pressures
including expiry or loss of IP rights and generic competition risk
on page 216 and Note 28 to the Financial Statements from page
185.
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Commercialisation risks
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Impact
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Competitive pressures including expiry or loss of IP rights and
generic competition
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A pharmaceutical product competes with other products marketed by
research-based pharmaceutical companies and with generic or
biosimilar drugs marketed by generic drug
manufacturers.
Approval of competitive products for the same or similar indication
as one of our products may result in immediate and significant
decreases in our revenues.
Generic versions of products, including biosimilars, are often sold
at lower prices than branded products, as the manufacturer does not
have to recoup the significant cost of R&D investment and
market development. Expiry or loss of IP rights can materially
adversely affect our revenues and financial condition due to the
launch of cheaper generic copies of the product in the country
where the rights have expired or been lost (see the table in the
Patent Expiries of Key Marketed Products section from page 211).
For example in 2016, our US Product Sales of Crestor fell to $1,223 million (2015: $2,844 million),
following the launch of generics.
Additionally, the expiry or loss of patents covering other
innovator companies' products may also lead to increased
competition and pricing pressure for our own, still-patented
products in the same product class due to the availability of lower
priced generic products in that product class.
Generic manufacturers may also take advantage of the failure of
certain countries to properly enforce Regulatory Data Protection or
other related IP rights and may launch generics during this
protected period. This is a particular risk in some Emerging
Markets where appropriate patent protection or other related IP
rights may be difficult to obtain or enforce.
Various regulatory authorities are implementing or considering
abbreviated approval processes for biosimilars, allowing quicker
entry to market for such products and earlier than anticipated
competition for patented biologics.
As well as facing generic competition upon expiry or loss of IP
rights, we also face the risk that generic drug manufacturers seek
to market generic versions of our products prior to expiries of our
patents and/or the Regulatory Exclusivity periods. For example, we
are currently facing challenges from numerous generic drug
manufacturers regarding our patents relating to key products,
including Brilinta, Faslodex, Byetta, Daliresp, Onglyza and Crestor.
IP rights protecting our products may be challenged by external
parties. We expect our most valuable products to receive the
greatest number of challenges. Despite our efforts to establish and
defend robust patent protection for our products, we bear the risk
that courts may decide that our IP rights are invalid and/or that
third parties do not infringe our asserted IP rights.
Where we assert our IP rights but are ultimately unsuccessful,
third parties may seek damages, alleging, for example, that they
have been inappropriately restrained from entering the market. In
such cases, we bear the risk that we incur liabilities to those
third parties.
We also bear the risk that we may be found to infringe patents
owned or licensed by third parties, including research-based and
generic pharmaceutical companies and individuals. These third
parties may seek remedies for patent infringement, including
injunctions (for example, preventing the marketing of one of our
products) and damages.
Details of material patent litigation matters can be found in Note
28 to the Financial Statements from page 185.
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If we are not successful in obtaining, maintaining, defending or
enforcing our exclusive rights to market our products, particularly
in the US where we achieve our highest Product Sales, our revenue
and margins could be materially adversely affected. In addition,
unsuccessful assertion of our IP rights may lead to damages or
other liabilities to third parties that could materially adversely
affect our financial performance.
Third parties may be awarded remedies for alleged infringement of
their IP, for example injunctions and damages for alleged patent
infringement. In the US, courts may order enhanced (ie up to
treble) damages for alleged wilful infringement of patents. From
time to time we may acquire licences, discontinue activities and/or
modify processes to avoid claims of patent infringement. These
steps could entail significant costs and our revenue and margins
could be materially adversely affected.
Unfavourable resolution of current and potential future patent
litigation may require us to make significant provisions in our
accounts relating to legal proceedings and/or could materially
adversely affect our financial condition or results of
operations.
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Price controls and reductions
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Most of our key markets have experienced the implementation of
various cost control or reimbursement mechanisms for pharmaceutical
products.
In the US, there is significant pricing pressure driven by payer
consolidation, restrictive reimbursement policies, and cost control
tools, such as exclusionary formularies and price protection
clauses. Many formularies employ 'generic first' strategies and/or
require physicians to obtain prior approval for the use of a
branded medicine where a generic alternative exists. These
mechanisms can be used by payers to limit the use of branded
products and put pressure on manufacturers to reduce net prices. In
addition, patients are seeing changes in the design of their health
plan benefits and may experience variation in how their plans cover
their medications, including increases in the out-of-pocket
payments for their branded medications. Patient out-of-pocket
spending is generally in the form of a co-payment or co-insurance,
but there is a growing trend towards high deductible health plans
that require that patients pay the full list price of their drugs
and services until they meet certain out-of-pocket thresholds.
Ongoing scrutiny of the US pharmaceutical industry, focused largely
on pricing, is placing increased emphasis on the value of
medications. This scrutiny will likely continue across many
stakeholders, including policymakers and legislators.
The new US political leadership has initiated various legislative
and policy processes that could affect the ACA. US prescription
drug costs and importation policies could be among the policy
proposals considered in initial steps to repeal and replace the
ACA. In addition to addressing the ACA directly, lawmaker and
policymaker proposals are also discussing a variety of other
related changes relating to, for example, tax and Medicare reform.
For more information, please see Pricing of medicines in the
Marketplace section from page 13. Currently it is difficult to
predict what specific proposals may be directed at existing laws
and regulations (including the ACA or the Medicare Part D program)
and to determine the implications for the healthcare system and
pharmaceutical industry. This uncertainty could impact our ability
to execute our plans, strategies, and business operations. However,
significantly modifying existing laws and regulations, including
the ACA and those relating to drug pricing and importation, could
affect private health insurance, coverage through Medicaid and the
health insurance exchange marketplaces, Medicare coverage and
savings provisions, and other facets of the US healthcare market,
with potentially significant impacts on the pharmaceutical
industry.
In Europe, the industry continues to be exposed to various
ad hoc
cost-containment measures and
reference pricing mechanisms, which impact prices. There is a trend
towards increasing transparency and comparison of prices among EU
Member States which may eventually lead to a change in the overall
pricing and reimbursement landscape.
In Emerging Markets, governments are increasingly controlling
pricing in the self-pay sector and favouring locally manufactured
drugs. In addition, the emergence of price referencing is seen in
some markets.
Concurrently, many markets are adopting the use of Health
Technology Assessment (HTA) to provide a rigorous evaluation of the
clinical efficacy of a product at, or post, launch. HTA evaluations
are also increasingly being used to assess the clinical effect, as
well as cost-effectiveness, of products in a particular health
system. This comes as payers and policymakers attempt to increase
efficiencies in the use and choice of pharmaceutical
products.
A summary of the principal aspects of price regulation and how
pricing pressures are affecting our business in our most important
markets is set out in Pricing of medicines in the Marketplace
section from page 13 and overleaf in the following risk
factor.
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Due to these pricing pressures, there can be no certainty that we
will be able to charge prices for a product that, in a particular
country or in the aggregate, enable us to earn an adequate return
on our product investment. These pressures, including the
increasingly restrictive reimbursement policies to which we are
subject, could materially adversely affect our business or results
of operations.
We expect these pricing pressures will continue and may
increase.
The continued disparities in EU and US pricing systems could lead
to marked price differentials between regions, which, by way of the
implementation of existing or new reference pricing mechanisms,
increases the pricing pressure affecting the industry. The
importation of pharmaceutical products from countries where prices
are low due to government price controls, or other market dynamics,
to countries where prices for those products are higher, is already
prevalent and may increase. Strengthened collaboration by
governments may accelerate the development of further
cost-containment policies (such as joint procurement). Increased
and simplified access to national and regional prices in markets
and the publication of these prices in centralised databases have
facilitated the uptake and efficiency of price referencing across
the world.
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Economic, regulatory and political pressures
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Operating in over 100 countries, we are subject to political,
socio-economic and financial factors both globally and in
individual countries.
A sustained global economic downturn may further exacerbate
pressure from governments and other healthcare payers on medicine
prices and volumes of sales in response to pressures on budgets,
and may cause a slowdown or a decline in growth in some markets.
Those most severely impacted by the economic downturn may seek
alternative ways to settle their debts through, for example, the
issuance of government bonds which might trade at a discount to the
face value of the debt. Other customers may cease to trade, which
may result in losses from writing off debts, or a reduction in
demand for products.
We are highly dependent on being able to access a sustainable flow
of liquid funds due to the high fixed costs of operating our
business and the long and uncertain development cycles of our
products. In a sustained economic downturn, financial institutions
with whom we deal may cease to trade and there can be no guarantee
that we will be able to access monies owed to us without a
protracted, expensive and uncertain process, if at
all.
More than 90% of our cash investments are managed centrally and are
invested in collateralised bank deposits, fixed income securities
in government, financial and non-financial securities and AAA
credit rated institutional money market funds. Money market funds
are backed by institutions in the US and the EU, which, in turn,
invest in other funds, including sovereign funds. This means our
credit exposure is a mix of US and EU sovereign default risk,
financial institution and non-financial institution default
risk.
On 23 June 2016, the UK held a remain-or-leave referendum on the
UK's membership within the EU, the outcome of which was a decision
for the UK to exit from the EU (Brexit). A process of negotiation
will likely determine the future terms of the UK's relationship
with the EU, as well as whether the UK will be able to continue to
benefit from the EU's free trade and similar arrangements. Until
the Brexit negotiation process is initiated and completed, it is
difficult to anticipate the potential impact on AstraZeneca's
market share, sales, profitability and results of operations. The
Group operates from a global footprint and retains flexibility to
adapt to changing circumstances. The uncertainty before, during and
after the period of negotiation is also expected to increase
volatility and may have an economic impact, particularly in the UK
and Eurozone. The Board reviews the potential impact of Brexit as
an integral part of its Principal Risks (as outlined from page 20)
rather than as a stand-alone risk. As the process of Brexit
evolves, the Board will continue to assess its impact on the
Company.
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Deterioration of, or failure to improve, socio-economic conditions,
and situations and/or resulting events, depending on their
severity, could adversely affect our supply and/or distribution
chain in the affected countries and the ability of customers or
ultimate payers to purchase our medicines. This could adversely
affect our business or results of operations.
While we have adopted cash management and treasury policies to
manage the risk of not being able to access a sustainable flow of
liquid funds (see the Financial risk management policies section of
the Financial Review from page 76), we cannot be certain that these
will be as effective as they are intended to be, in particular in
the event of a global liquidity crisis. In addition, open positions
where we are owed money and investments we have made in financial
and non-financial institutions or money market funds cannot be
guaranteed to be recoverable. Additionally, if we need access to
external sources of financing to sustain and/or grow our business,
such as the debt or equity capital financial markets, this may not
be available on commercially acceptable terms, if at all, in the
event of a severe and/or sustained economic downturn. This may, for
instance, be the case in the event of any default by the Company on
its debt obligations, which may materially adversely affect our
ability to secure debt funding in the future or our financial
condition in general. Further information on debt funding
arrangements is contained in the Financial risk management policies
section of the Financial Review from page 76.
It is too early to judge the impact of Brexit as it is unclear as
to the trading relationships the UK will be able to negotiate with
the EU and other significant trading partners. Any deterioration in
market access or trading terms including customs duties, VAT or
other tariffs that constitute real cost or delay to the movement of
goods and increased administration may materially adversely impact
our financial performance.
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Failures or delays in the quality and execution of our commercial
strategies
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Commercial success of our Growth Platforms are critical factors in
sustaining or increasing global Product Sales and replacing lost
Product Sales due to patent expiry. The successful launch of a new
pharmaceutical product involves substantial investment in sales and
marketing activities, launch stocks and other items. We may
ultimately be unable to achieve commercial success for various
reasons including difficulties in manufacturing sufficient
quantities of the product candidate for development or
commercialisation in a timely manner, the impact of price control
measures imposed by governments and healthcare authorities, the
outcome of negotiations with third party payers, erosion of IP
rights, including infringement by third parties, failure to show a
differentiated product profile and changes in prescribing
habits.
The commercialisation of biologics is often more complex than for
small molecule pharmaceutical products, primarily due to
differences in the mode of administration, technical aspects of the
product, and rapidly changing distribution and reimbursement
environments.
We face particular challenges in Emerging Markets,
including:
> More volatile economic conditions and/or political
environments.
> Competition from multinational and local companies with
existing market presence.
> The need to identify and to leverage appropriate opportunities
for sales and marketing.
> Poor IP protection.
> Inadequate protection against crime (including counterfeiting,
corruption and fraud).
> The need to impose developed market compliance
standards.
> The need to meet a more diverse range of national regulatory,
clinical, manufacturing and distribution requirements.
> Potential inadvertent breaches of local and international
law.
> Not being able to recruit appropriately skilled and
experienced personnel.
> Difficulty in identifying the most effective sales and
marketing channels and routes to market.
> Intervention by national governments or regulators restricting
market access and/or introducing adverse price
controls.
> Difficulty in managing local partnerships such as co-promotion
and co-marketing; both driving performance and adhering to
AstraZeneca's compliance standards which are often higher than the
market norm.
> Difficulties in cash repatriation due to strict foreign
currency controls and lack of hard currency reserves in some
Emerging Markets.
> Complexity inherent within a direct exports business from UK
and Sweden operations to countries where we do not have a legal
entity.
We may also seek to acquire complementary businesses or enter into
other strategic transactions. The integration of an acquired
business could involve incurring significant debt and unknown or
contingent liabilities, as well as having a negative effect on our
reported results of operations from acquisition-related charges,
amortisation of expenses related to intangibles and charges for the
implementation of long-term assets.
We may also experience difficulties in integrating geographically
separated organisations, systems and facilities, and personnel with
different organisational cultures. Disputes or difficulties in our
relationship with our collaborators or partners may also arise,
often due to conflicting priorities or conflicts of interest
between parties.
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Failure to execute our commercial strategies could materially
adversely impact our business or results of
operations.
If a new product does not succeed as anticipated or its rate of
sales growth is slower than anticipated, there is a risk that we
may be unable to fully recoup the costs incurred in launching it,
which could materially adversely affect our business or results of
operations.
Due to the complexity of the commercialisation process for
biologics, the methods of distributing and marketing biologics
could materially adversely impact our revenues from the sales of
biologics medicines, such as Synagis and FluMist/Fluenz.
The failure to exploit potential opportunities appropriately in
Emerging Markets or materialisation of the risks and challenges of
doing business in such markets, including inadequate protection
against crime (including counterfeiting, corruption and fraud) or
inadvertent breaches of local and international law may materially
adversely affect our reputation, business or results of
operations.
Integration processes may also result in business disruption,
diversion of management resources, the loss of key employees and
other issues, such as a failure to integrate IT and other
systems.
The incurrence of significant debt or liabilities due to the
integration of an acquired business could cause deterioration in
our credit rating and result in increased borrowing costs and
interest expense. We may issue additional shares to pay for
acquired businesses, which would result in the dilution of our then
existing shareholders.
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Supply chain and business execution risks
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Impact
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Failure to maintain supply of compliant, quality
product
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We may experience difficulties, delays and interruptions in the
manufacturing and supply of our products for various reasons,
including:
> Demand significantly in excess of forecast demand, which may
lead to supply shortages (this is particularly challenging before
launch).
> Supply chain disruptions, including those due to natural or
man-made disasters at one of our facilities or at a critical
supplier or vendor.
> Delays in construction of new facilities or the expansion of
existing facilities, including those intended to support future
demand for our products (the complexities associated with biologics
facilities, especially for drug substance, increases the
probability of delay).
> The inability to supply products due to a product quality
failure or regulatory agency compliance action such as licence
withdrawal, product recall or product seizure.
> Other manufacturing or distribution problems, including
changes in manufacturing production sites, limits to manufacturing
capacity due to regulatory requirements, changes in the types of
products produced, or physical limitations or other business
interruptions that could impact continuous supply.
We increasingly rely on third parties for the timely supply of
goods, such as raw materials (for example, the API in some of our
medicines and drug substances and/or finished drug products for
some of our biologics medicines), equipment, formulated drugs and
packaging, and services, all of which are key to our operations.
Many of these goods are difficult to substitute in a timely manner
or at all. We expect that external capacity for biologics drug
substance production will remain constrained for the next few years
and, accordingly, may not be readily available for supplementary
production in the event that we experience an unforeseen need for
such capacity.
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Difficulties with manufacturing and supply, forecasting,
distribution or third party suppliers may result in product
shortages, which may lead to lost Product Sales and materially
adversely affect our reputation and revenues. Even slight
variations in components or any part of the manufacturing process
may lead to a product that is non-compliant and does not meet
quality standards. This could lead to recalls, spoilage, product
shortage, regulatory action and/or reputational harm.
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Illegal trade in our products
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The illegal trade in pharmaceutical products is widely recognised
by industry, non-governmental organisations and governmental
authorities to be increasing. Illegal trade includes
counterfeiting, theft and illegal diversion (that is, when our
products are found in a market where we did not send them and where
they are not approved or not permitted/allowed to be sold). There
is a risk to public health when illegally traded products enter the
supply chain, as well as associated financial risk. Authorities and
the public expect us to help reduce opportunities for illegal trade
in our products through securing the integrity of our supply chain,
surveillance, investigation and supporting legal action against
those found to be engaged in illegal trade.
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Public loss of confidence in the integrity of pharmaceutical
products as a result of illegal trade could materially adversely
affect our reputation and financial performance. In addition, undue
or misplaced concern about this issue may cause some patients to
stop taking their medicines, with consequential risks to their
health. Authorities may take action, financial or otherwise, if
they believe we are liable for breaches in our own supply
chains.
There is also a direct financial loss when, for example,
counterfeit and/or illegally diverted products replace sales of
genuine products or genuine products are recalled following
discovery of counterfeit products.
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Reliance on third party goods and services
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Many of our business-critical operations, including certain R&D
processes, IT systems, HR, finance, tax and accounting services
have been outsourced to third party providers. We are thus heavily
reliant on these third parties not just to deliver timely and high
quality services but also to comply with applicable laws and
regulations and adhere to our ethical business expectations from
third party providers.
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The failure of outsource providers to deliver timely services, and
to the required level of quality, or the failure of outsource
providers to cooperate with each other, could materially adversely
affect our financial condition or results of operations. Moreover,
the failure of these third parties to operate in an ethical manner
could adversely impact our reputation both internally and
externally or even result in non-compliance with applicable laws
and regulations.
Our business and financial results could be materially adversely
affected by disruptions caused by our failure to successfully
manage either the integration of outsourced services or the
transition process of insourcing services from third parties. For
instance, insourcing some of the previously outsourced services
into our service centre in Chennai, India and Guadalajara, Mexico
may result in deterioration of the quality of service or deployment
of resources by these third parties.
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Failure of information security, data protection and
cybercrime
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We are dependent on effective IT systems. These systems support key
business functions such as our R&D, manufacturing, supply chain
and sales capabilities and are an important means of safeguarding
and communicating data, including critical or sensitive
information, the confidentiality and integrity of which we rely
on.
Examples of sensitive information that we protect include clinical
trial records (patient names and treatments), personal information
(employee bank details, home address), IP related to manufacturing
process and compliance, key research science techniques,
AstraZeneca property (theft) and privileged access (rights to
perform IT tasks).
The size and complexity of our IT systems, and those of our third
party vendors (including outsource providers) with whom we
contract, have significantly increased over the past decade and
this makes such systems potentially vulnerable to service
interruptions and security breaches from attacks by malicious third
parties, or from intentional or inadvertent actions by our
employees or vendors.
Significant changes in the business footprint and the
implementation of the IT strategy, including the creation and use
of captive offshore Global Technology Centres, could lead to
temporary loss of capability.
We increasingly use the internet, digital content, social media,
mobile applications and other forms of new technology to
communicate internally and externally. The accessibility and
instantaneous nature of interactions with such media may facilitate
or exacerbate the risk of data leakages from within AstraZeneca. It
may also lead to false or misleading statements being made about
AstraZeneca, which may damage our reputation. As existing social
media platforms expand and evolve and new social media platforms
emerge, it becomes increasingly challenging to identify new points
of entry and to put structures in place to secure and protect
information.
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Any significant disruption to these IT systems, including breaches
of data security or cybersecurity, or failure to integrate new and
existing IT systems, could harm our reputation and materially
adversely affect our financial condition or results of
operations.
While we invest heavily in the protection of our data and IT, we
may be unable to prevent breakdowns or breaches in our systems that
could result in disclosure of confidential information, damage to
our reputation, regulatory penalties, financial losses and/or other
costs.
The inability to effectively back up and restore data could lead to
permanent loss of data that could result in non-compliance with
applicable laws and regulations.
We and our vendors could be susceptible to third party attacks on
our information security systems. Such attacks are of
ever-increasing levels of sophistication and are made by groups and
individuals with a wide range of motives and expertise, including
criminal groups, 'hacktivists' and others. From time to time we
experience intrusions, including as a result of computer-related
malware.
Inappropriate use of certain media vehicles could lead to the
unauthorised or unintentional public disclosure of sensitive
information (such as personally identifiable information on
employees, healthcare professionals or patients, such as those
enrolled in our clinical trials), which may damage our reputation,
adversely affect our business or results of operations and expose
us to legal risks and/or additional legal obligations. Similarly,
the involuntary public disclosure of commercially sensitive
information or an information loss could adversely affect our
business or results of operations. In addition, negative posts or
comments about us (or, for example, the safety of our products) on
social media websites or other digital channels could harm our
reputation.
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Failure of critical processes
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Unexpected events and/or events beyond our control could result in
the failure of critical processes within the Company or at third
parties on whom we are reliant.
The business faces threats to business continuity from many
directions.
Examples of material threats include:
> Disruption to our business if there is instability in a
particular geographic region, including as a result of war,
terrorism, riots, unstable governments, civil insurrection or
social unrest.
> Natural disasters in areas of the world prone to extreme
weather events and earthquakes.
> Cyber threats similar to those detailed in the Failure of
information security, data protection and cybercrime section
above.
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Failure of critical processes may result in an inability to
research, manufacture or supply products to patients. AstraZeneca
has developed a Business Resilience framework which is designed to
mitigate such risks. However, there is no guarantee that these
measures will be sufficient to prevent business
interruption.
This may expose the Company to litigation and/or regulatory action
which may result in fines, loss of revenue and adversely affect the
Company's financial results.
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Any expected gains from productivity initiatives are
uncertain
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We continue to implement various productivity initiatives and
restructuring programmes with the aim of enhancing the long-term
efficiency of the business. However, anticipated cost savings and
other benefits from these programmes are based on estimates and the
actual savings may vary significantly. In particular, these
cost-reduction measures are often based on current conditions and
cannot always take into account any future changes to the
pharmaceutical industry or our operations, including new business
developments or wage or price increases.
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Our failure to successfully implement these planned cost-reduction
measures, either through the successful implementation of employee
relations processes (including consultation, engagement, talent
management, recruitment and retention), or the possibility that
these efforts do not generate the level of cost savings we
anticipate, could materially adversely affect our business or
results of operations.
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Failure to attract and retain key personnel, and engage
successfully with our employees
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We rely heavily on recruiting and retaining talented employees with
a diverse range of skills and capabilities to meet our strategic
objectives.
We face intense competition for well-qualified individuals, as the
supply of people with specific skills and significant leadership
potential or in specific geographic regions may be
limited.
The successful delivery of our business objectives is dependent on
high levels of engagement, commitment and motivation of the
workforce.
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The inability to attract and retain highly skilled personnel may
weaken our succession plans for critical positions in the medium
term, may materially adversely affect the implementation of our
strategic objectives and could ultimately impact our business or
results of operations.
Failure to engage effectively with our employees could lead to
business disruption in our day-to-day operations, reduce levels of
productivity and/or increase levels of voluntary turnover, all of
which could ultimately materially adversely affect our business or
results of operations.
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Legal, regulatory and compliance risks
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Impact
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Failure to adhere to applicable laws, rules and
regulations
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Our many business operations are subject to a wide range of laws,
rules and regulations from governmental and non-governmental bodies
around the world.
Any failure to comply with these applicable laws, rules and
regulations may result in us being investigated by relevant
agencies and authorities and/or in legal proceedings being filed
against us. Such investigations or proceedings could result in us
becoming subject to civil or criminal sanctions and/or being forced
to pay fines or damages. Relevant authorities have wide-ranging
administrative powers to deal with any failure to comply with
continuing regulatory oversight and this could affect us, whether
such failure is our own or that of our contractors or external
partners.
Material examples of statutes, rules and regulations impacting
business operations include:
> Compliance with Good Manufacturing Practice.
> Local, national and international environment or occupational
health and safety laws and regulations.
> Trade control laws governing our imports and exports including
nationally and internationally recognised trade agreements,
embargoes, trade and economic sanctions and anti-boycott
requirements.
> Competition laws and regulations, including challenges from
competition authorities to patent settlement agreements and private
damages actions.
> Rules and regulations established to promote ethical supply
chain management.
> Financial regulations including, but not limited to, external
financial reporting, taxation and money laundering.
> Employment practices.
> Disclosure of payments to healthcare professionals under the
Sunshine Act and EFPIA legislation.
> Appropriate disclosure of community support, patient group
support and product donations.
We have environmental and/or occupational health and safety-related
liabilities at some current, formerly owned, leased and third party
sites. For more information on the most significant of these and
for details on other significant litigation matters, please refer
to Note 28 to the Financial Statements from page 185.
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Failure to comply with applicable laws, rules and regulations;
manage our liabilities; or to adequately anticipate or proactively
manage emerging policy and legal developments could materially
adversely affect our licence to operate, or results of operations;
adversely affect our reputation; cause harm to people or the
environment; and/or lead to fines or other penalties. For example,
once a product has been approved for marketing by the regulatory
authorities, it is subject to continuing control and regulation,
such as the manner of its manufacture, distribution, marketing and
safety surveillance. If regulatory issues concerning compliance
with environmental, current Good Manufacturing Practice or safety
monitoring regulations for pharmaceutical products (often referred
to as pharmacovigilance) arise, this could lead to loss of product
approvals, product recalls and seizures, and interruption of
production, which could create product shortages and delays in new
product approvals, and negatively impact patient
access.
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Safety and efficacy of marketed products is questioned
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Our ability to accurately assess, prior to launch, the eventual
efficacy or safety of a new product once in broader clinical use
can only be based on data available at that time, which is
inherently limited due to relatively short periods of product
testing and relatively small clinical study patient
samples.
Any unforeseen safety concerns or adverse events relating to our
products or failure to comply with laws, rules and regulations
relating to provision of appropriate warnings concerning the
dangers and risks of our products that result in injuries could
expose us to large product liability damages claims, settlements
and awards, particularly in the US. Adverse publicity relating to
the safety of a product or of other competing products may increase
the risk of product liability claims.
Details of material product liability litigation matters can be
found in Note 28 to the Financial Statements from page
185.
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Serious safety concerns or adverse events relating to our products
could lead to product recalls, seizures, loss of product approvals
and interruption of supply and could materially adversely impact
patient access, our reputation and financial revenues.
Significant product liability claims could also arise which could
be costly, divert management attention or damage our reputation and
demand for our products.
Unfavourable resolution of such current and similar future product
liability claims could subject us to enhanced damages, require us
to make significant provisions in our accounts relating to legal
proceedings and could materially adversely affect our financial
condition or results of operations, particularly where such
circumstances are not covered by insurance. For more information,
see the Limited third party insurance coverage risk on page
224.
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Adverse outcome of litigation and/or governmental
investigations
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We may be subject to various product liability, consumer
commercial, anti-trust, environmental, employment or tax litigation
or other legal proceedings and governmental investigations.
Litigation, particularly in the US, is inherently unpredictable and
unexpectedly high awards for damages can result from an adverse
verdict. In many cases, plaintiffs may claim enhanced damages in
extremely high amounts. In particular, the marketing, promotional,
clinical and pricing practices of pharmaceutical manufacturers, as
well as the manner in which manufacturers interact with purchasers,
prescribers and patients, are subject to extensive regulation,
litigation and governmental investigation. Many companies,
including AstraZeneca, have been subject to claims related to these
practices asserted by federal and state governmental authorities
and private payers and consumers, which have resulted in
substantial expense and other significant consequences. Note 28 to
the Financial Statements from page 185 describes the material legal
proceedings in which we are currently involved.
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Governmental investigations, for example under the Foreign Corrupt
Practices Act or federal or state False Claims Acts or other types
of legal proceedings, regardless of their outcome, could be costly,
divert management attention, or damage our reputation and demand
for our products. Unfavourable resolution of current and similar
future proceedings against us could subject us to criminal
liability, fines, penalties or other monetary or non-monetary
remedies, including enhanced damages, require us to make
significant provisions in our accounts relating to legal
proceedings and could materially adversely affect our business or
results of operations.
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Failure to adhere to increasingly stringent anti-bribery and
anti-corruption legislation
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There is an increasing global focus on the implementation and
enforcement of anti-bribery and anti-corruption
legislation.
In the UK, the Bribery Act 2010 has extensive extra territorial
application, and imposes organisational liability for any bribe
paid by persons or entities associated with an organisation where
the organisation failed to have adequate preventative controls in
place at the time of the offence. In the US, there has been
significant enforcement activity in respect of the Foreign Corrupt
Practices Act by the SEC and DOJ against US companies and non-US
companies listed in the US. China, Brazil, India and other
countries are also enforcing their own anti-bribery laws more
aggressively and/or adopting tougher new measures.
We have been the subject of anti-corruption investigations and
there can be no assurance that we will not, from time to time,
continue to be subject to informal enquiries and formal
investigations from governmental agencies. In the context of our
business, governmental officials interact with us in various roles
that are important to our operations, such as in the capacity of a
regulator, partner or healthcare payer, reimburser or prescriber,
among others. Details of these matters are included in Note 28 to
the Financial Statements from page 185.
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Despite taking measures to prevent breaches of applicable
anti-bribery and anti-corruption laws by our personnel and
associated third parties, breaches may still occur, potentially
resulting in the imposition of significant penalties, such as
fines, the requirement to comply with monitoring or self-reporting
obligations, or debarment or exclusion from government sales or
reimbursement programmes, any of which could materially adversely
affect our reputation, business or results of
operations.
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Economic and financial risks
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Impact
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Failure to achieve strategic plans or meet targets and
expectations
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We may from time to time communicate our business strategy or our
targets or expectations regarding our future financial or other
performance (for example, the expectations described in Future
prospects in the Financial Review on page 76). All such statements
are of a forward-looking nature and are based on assumptions and
judgements we make, all of which are subject to significant
inherent risks and uncertainties, including those that we are
unaware of and/or that are beyond our control.
Any failure to successfully implement our business strategy,
whether determined by internal or external risk factors, may
frustrate the achievement of our financial or other targets or
expectations and, in turn, materially damage our brand and
materially adversely affect our business, financial position or
results of operations.
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There can be no guarantee that our financial targets or
expectations will materialise on the expected timeline or at all.
Actual results may deviate materially and adversely from any such
target or expectation, including if one or more of the assumptions
or judgements underlying any such target or expectation proves to
be incorrect in whole or in part.
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Unexpected deterioration in the Company's financial
position
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A wide range of financial risks could result in a material
deterioration in the Company's financial position.
As a global business, currency fluctuations can significantly
affect our results of operations, which are reported in US dollars.
Approximately 35% of our global 2016 Product Sales were in the US,
which is expected to remain our largest single market for the
foreseeable future. Product Sales in other countries are
predominantly in currencies other than the US dollar, including the
euro, Japanese yen, Chinese renminbi and Australian
dollar.
Our consolidated balance sheet contains significant investments in
intangible assets, including goodwill. The nature of the
biopharmaceutical business is high risk and requires that we invest
in a large number of projects in an effort to develop a successful
portfolio of approved products. Our ability to realise value on
these significant investments is often contingent upon, among other
things, regulatory approvals, market acceptance, competition and
legal developments. As such, in the course of our many acquisitions
and R&D activities, we expect that some of our intangible
assets will become impaired and be written off at some time in the
future.
Inherent variability of biologics manufacturing increases the risk
of write-offs of these product batches. Due to the value of the
materials used, the carrying amount of biological products is much
higher than that of small molecule products. As we continue to grow
our biologics business, we also increase the risk of potential
impairment charges.
In recent years, the costs associated with product liability
litigation have increased the cost of, and narrowed the coverage
afforded by, pharmaceutical companies' product liability insurance.
To contain insurance costs, we have continued to adjust our
coverage profile, accepting a greater degree of uninsured exposure.
The Company has not held any material product liability insurance
since February 2006. In addition, where claims are made under
insurance policies, insurers may reserve the right to deny coverage
on various grounds. For example, product liability litigation cases
relating to Crestor and Nexium in the US are not covered by third party product
liability insurance. See Note 28 to the Financial Statements from
page 185 for details.
The integrated nature of our worldwide operations can produce
conflicting claims from revenue authorities as to the profits to be
taxed in individual countries. The majority of the jurisdictions in
which we operate have double tax treaties with other foreign
jurisdictions, which provide a framework for mitigating the
incidence of double taxation on our revenues and capital
gains.
The Company's worldwide operations are taxed under laws in the
jurisdictions in which they operate. International standards
governing the global tax environment regularly change. The
Organisation for Economic Co-operation and Development (OECD) has
proposed a number of changes under the Base Erosion and Profit
Shifting (BEPS) Action Plans.
Our defined benefit pension obligations are largely backed by
assets invested across the broad investment market. Our most
significant obligations relate to defined benefit pension funds in
the UK, Sweden and the US. The largest obligation is in the
UK.
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Movements in the exchange rates used to translate foreign
currencies into US dollars may materially adversely affect our
financial condition or results of operations. Some of our
subsidiaries import and export goods and services in currencies
other than their own functional currency, and so the financial
results of such subsidiaries could be affected by currency
fluctuations arising between the transaction and settlement dates.
In addition, there are foreign exchange differences arising on the
translation of investments in subsidiaries.
We have significant investments in goodwill and intangible assets
as a result of our acquisitions of various businesses and our
purchases of certain assets, such as product development and
marketing rights. Impairment losses may materially adversely affect
our financial condition or results of operations. Details of the
carrying values of goodwill and intangible assets, and the
estimates and assumptions we make in our impairment testing, are
included in Notes 8 and 9 to the Financial Statements from page
156.
Financial liabilities arising due to product liability or other
litigation, in respect of which we do not have insurance coverage,
or if an insurer's denial of coverage is ultimately upheld, could
require us to make significant provisions relating to legal
proceedings and could materially adversely affect our financial
condition or results of operations.
For more information, please see the Adverse outcome of litigation
and/or governmental investigations risk on page 223.
The resolution of tax disputes regarding the profits to be taxed in
individual territories can result in a reallocation of profits
between jurisdictions and an increase or decrease in related tax
costs, and has the potential to affect our cash flows, EPS and
post-tax earnings. Claims, regardless of their merits or their
outcome, are costly, divert management attention and may adversely
affect our reputation.
If any double tax treaties should be withdrawn or amended,
especially in a territory where a member of the AstraZeneca Group
is involved in a taxation dispute with a tax authority in relation
to cross-border transactions, such withdrawal or amendment could
materially adversely affect our financial condition or results of
operations, as could a negative outcome of a tax dispute or a
failure by tax authorities to agree through competent authority
proceedings. See the Financial risk management policies section of
the Financial Review on page 76 for tax risk management policies
and Note 28 to the Financial Statements from page 185 for details
of current tax disputes.
Changes in tax regimes could result in a material impact on the
Company's cash tax liabilities and tax charge, resulting in either
an increase or a reduction in financial results depending upon the
nature of the change. We represent views to the OECD, governments
and tax authorities through public consultations to ensure
international institutions and governments understand the business
implications of proposed law changes. Specific OECD BEPS
recommendations that we expect to impact the Company include
changes to patent box regimes, restrictions of interest
deductibility and revised transfer pricing guidelines.
Sustained falls in asset values could reduce pension fund solvency
levels, which may result in requirements for additional cash,
restricting the cash available for our business. Changes to funding
regulations for defined benefit pensions may also result in a
requirement for additional cash contributions by the Company. If
the present value of the liabilities increase due to a sustained
low interest rate environment, an increase in expectations of
future inflation, or an improvement in member longevity (above that
already assumed), this could also reduce pension fund solvency
ratios. The likely increase in the IAS 19 accounting
deficit
generated by any of these factors may cause the credit rating
agencies to review our credit rating, with the potential to
negatively affect our ability to raise debt and the price of new
debt issuances. See Note 20 to the Financial Statements from page
165 for further details of the Group's pension
obligations.
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Failure in financial control or the occurrence of
fraud
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Effective internal controls are necessary for us to provide
reliable financial reports and are designed to prevent and detect
fraud. Lapses in controls and procedures could undermine the
ability to prevent fraud or provide accurate disclosure of
financial information on a timely basis. Testing of our internal
controls can provide only reasonable assurance with respect to the
preparation and fair presentation of financial statements and may
not prevent or detect misstatements or fraud.
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Significant resources may be required to remediate any lapse or
deficiency in internal controls.
Any such deficiency may also trigger investigations by a number of
organisations, for example, the SEC, the DOJ or the SFO and may
result in fines being levied against the Company or individual
directors.
Serious fraud may lead to potential prosecution or even
imprisonment of senior management.
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Media Enquiries
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Esra
Erkal-Paler
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UK/Global
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+44 203 749 5638
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Vanessa
Rhodes
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UK/Global
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+44 203 749 5736
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Karen
Birmingham
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UK/Global
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+44 203 749 5634
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Rob
Skelding
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UK/Global
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+44 203 749 5821
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Jacob
Lund
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Sweden
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+46 8 553 260 20
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Michele
Meixell
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US
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+1 302 885 2677
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Investor Relations
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Thomas Kudsk Larsen
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+44 203 749 5712
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Craig Marks
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Finance, Fixed Income, M&A
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+44 7881 615 764
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Henry Wheeler
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Oncology
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+44 203 749 5797
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Mitchell Chan
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Oncology
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+1 240 477 3771
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Lindsey Trickett
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Cardiovascular & Metabolic Diseases
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+1 240 543 7970
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Nick Stone
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Respiratory
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+44 203 749 5716
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Christer Gruvris
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Autoimmunity, Neuroscience & Infection
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+44 203 749 5711
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US toll free
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+1 866 381 7277
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Date:
07 March 2017
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By: /s/
Adrian Kemp
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Name:
Adrian Kemp
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Title:
Company Secretary
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