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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. A project 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 2017 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
or license, 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
219.
Since
our business model and strategy rely on the success of relatively
few compounds, the failure of any compound in our late-stage
pipeline or in-line products 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 in
particular, 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 or, in some cases,
allow a competitor to beat us to market with a similar or
first-in-class product. 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, defend and enforce effective IP protection and
IP challenges by third parties
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A
pharmaceutical product may be 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, defend 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.
We may
also face challenges early in the patent application process and
throughout a patent's life. The grounds for these challenges could
be the validity of a patent and/or its effective scope and are
based on ever-evolving legal precedents. We are experiencing
increased challenges in the US and elsewhere in the world and there
can be no guarantee of success for either party in patent
proceedings and litigation.
We also
bear the risk that our products 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 (for example, research-based competitors are
alleging infringement of their patents and are seeking damages in
relation to our marketing of Imfinzi and Calquence).
Details
of material patent proceedings and litigation matters can be found
in Note 28 to the Financial Statements from page 182.
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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, as well as our ability to defend and
enforce our patents, 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.
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.
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 32, the Competitive pressures including
expiry or loss of IP rights and generic competition risk on
page 212 and Note 28 to the Financial Statements from page
182.
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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 208).
For example in 2017, our US Product Sales of Crestor fell to $373 million (2016:
$1,223 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.
The
biosimilars market has experienced notable growth in 2017, with
approval of several monoclonal antibody biosimilars in the US and
Europe. This trend is expected to continue. Increased regulatory
and legal activity related to the launch and approval of these
therapeutics is anticipated. Regulatory authorities in other
territories continue to implement or consider 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.
Details
of material patent litigation matters can be found in Note 28 to
the Financial Statements from page 182.
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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.
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 continues to consider a range of
legislative and regulatory proposals to address the high costs of
prescription drugs as well as reforms to the US healthcare system.
These may include changes to the ACA, modifications to Medicare and
other government programmes, and policies aimed at reducing drug
prices such as importation schemes. For more information, please
see Pricing of medicines in the Marketplace section from page 12.
However, many of these proposals have not achieved broad support
from policymakers and, in the near term, legislators have shifted
focus away from healthcare reform. It is difficult to predict what
specific proposals could be enacted and to determine the
implications for the healthcare system and pharmaceutical industry.
However, healthcare reform remains a key campaign promise of the
current administration and proposals that would significantly
modify existing laws and regulations, including the ACA, government
programmes and policies relating to drug pricing, 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 has been seen in some
markets combined with a call from authorities to provide greater
global price transparency.
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 12 and on the next page 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.
The
majority 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 referendum on the UK's continuing
membership of the EU, the outcome of which was a decision for the
UK to leave the EU (Brexit). On 29 March 2017, the UK Government
formally notified the EU under Article 50 of the UK's intention to
leave the EU. This notification began the process of negotiation
that will likely determine the future terms of the UK's
relationship with the EU. Absent a negotiated agreement, the UK
will leave the EU on 29 March 2019 and relevant EU law and
agreements will cease to apply. Until the Brexit negotiation
process is 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 during and after the period of negotiation is also
expected to increase volatility and may have an economic impact on
the countries in which we operate, 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 63)
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 79), 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 79.
It is
still 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, delay or restrictions 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 is a critical factor 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:
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More volatile economic conditions and/or political
environments.
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Competition from multinational and local companies with existing
market presence.
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The need to identify and to leverage appropriate opportunities for
sales and marketing.
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Poor IP protection.
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Inadequate protection against crime (including counterfeiting,
corruption and fraud).
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The need to impose developed market compliance
standards.
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The need to meet a more diverse range of national regulatory,
clinical, manufacturing and distribution requirements.
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Potential inadvertent breaches of local and international
law.
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Not being able to recruit appropriately skilled and experienced
personnel.
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Difficulty in identifying the most effective sales and marketing
channels and routes to market.
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Intervention by national governments or regulators restricting
market access and/or introducing adverse price
controls.
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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.
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Difficulties in cash repatriation due to strict foreign currency
controls and lack of hard currency reserves in some Emerging
Markets.
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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
products
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We may
experience difficulties, delays and interruptions in the
manufacturing and supply of our products for various reasons,
including:
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Demand significantly in excess of forecast demand, which may lead
to supply shortages (this is particularly challenging before
launch).
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Supply chain disruptions, including those due to natural or
man-made disasters at one of our facilities or at a critical
supplier or vendor.
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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, increase the probability
of delay).
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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.
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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, critical product components 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 our supply chains, 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 in a market 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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AstraZeneca
spends approximately $10 billion each year with trade
suppliers. The spend supports the length of our value chain
from discovery to manufacture and commercialisation of our
medicines.
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 therefore
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 of
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 co-operate 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 also 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.
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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.
In addition, we must ensure that the personal data which we, or
third-party vendors operating on our behalf, hold and process is
protected in a manner that complies with the EU GDPR which was
approved by the EU on 28 May 2016, and will enter into force in May
2018.
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 unauthorised data loss 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 sensitive information.
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Any
significant disruption to these IT systems, including breaches of
data security or cyber security, failure to integrate new and
existing IT systems or failure to prepare for emerging EU GDPR and
other applicable laws, 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 or other sensitive
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, and otherwise harm our
business.
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. We
may be unable to ward off such attacks which could have an adverse
affect on our business.
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 or may not be achieved at
all. 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 and in the UK the
added uncertainty created by Brexit could impact the hiring and
retention of staff in some business-critical areas.
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 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 182.
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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 182.
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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
219.
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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 182 describes the material legal
proceedings in which we are currently involved.
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Governmental
investigations, for example under the US 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.
Two
relevant pieces of legislation include the UK Bribery Act and the
US Foreign Corrupt Practices Act, and many other countries where we
operate are also enforcing their own laws more aggressively and/or
adopting tougher new measures. There has also been an increase in
co-operation and co-ordination between regulators across countries
with respect to investigation and enforcement.
We have
been the subject of anti-corruption investigations and there can be
no assurance that we will not, from time to time, 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. To the
extent we are the subject of any such pending and material matters,
details are included in Note 28 to the Financial Statements from
page 182.
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Despite
taking measures to prevent breaches of applicable antibribery 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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From
time to time, we 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 78). 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.
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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.
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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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 31% of our global 2017 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 biologic 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.
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,
as of February 2006, we adjusted our product liability coverage
profile, accepting uninsured exposure above $100 million. 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
Farxiga and Nexium in the US are not covered by
third-party product liability insurance. See Note 28 to the
Financial Statements from page 182 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 which are now being progressively
implemented by tax authorities around the world.
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
154.
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 218.
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.
Changes to the application of double tax treaties, as a result of
the parent company of the Group no longer being an EU entity
following Brexit, could also result in adverse consequences such as
those described above. See the Financial risk management policies
section of the Financial Review on page 79 for tax risk management
policies and Note 28 to the Financial Statements from page 182 for
details of current tax disputes.
Changes
in tax regimes, such as the recently announced changes to the US
federal tax regime effective 1 January 2018, 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 increases 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 164 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 UK Serious
Fraud Office and may result in fines being levied against the
Company or individual directors or officers.
Serious
fraud may lead to potential prosecution or even imprisonment of
senior management.
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Media
Relations
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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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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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Matt
Kent
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UK/Global
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+44 203
749 5906
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Gonzalo
Viña
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UK/Global
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+44 203
749 5916
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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
|
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;
Other
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+1 240
477 3771
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Christer
Gruvris
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Brilinta; Diabetes
|
+44 203
749 5711
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Nick
Stone
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Respiratory;
Renal
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+44 203
749 5716
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US toll
free
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+1 866
381 7277
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AstraZeneca
PLC
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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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