Ws from innovation to litigation neil campell and james bird

Early stage ERM implementation for
Life Science and Biotech companies

Early stage ERM implementation for Life Science and Biotech companies

1
Foreword

Businesses in the Communication, Technology and evolve, too. In 2004 JLT founded the
Media sectors experienced rapid growth into the Communications, Technology & Media (CTM)
early-2000s, which at the time seemed unstoppable Practice to bring together our global expertise and
so long as the technology behind those businesses experience in these sectors. Today, the CTM
evolved at such an incredible rate. In fact, with Practice has an unrivalled record of working on
broadband becoming ubiquitous, the growth of data exciting and challenging projects for some of the
services exploding, and the plummeting price of most significant players in the global industry,
hardware against rising expectations of capability, providing consultancy, risk management and risk
the value chain has fragmented rapidly. Services financing services in Europe, North America, Africa
have been saturated and commoditised, meaning and Asia. As a result, we have developed an
slower growth and narrower margins. excellent understanding of the regulatory and
commercial issues affecting businesses in these
The breakneck speed of such change has brought
sectors. In this publication we seek to share some of
with it a whole host of new risks. Industry’s reliance
our findings with you.
on these new technologies, and others’ intent on
criminally exploiting that reliance, have both given Luke Foord-Kelcey
rise to an expanding range of first and third party
UK Head of the Communications, Technology &
exposures. However, unlike physical risks – with
Media Practice
their long and recorded history – or management
risks – typically driven by the slow pace of regulatory
change – the emerging risks of the digital era are
driven by technological development, and the speed
of such progress has been hitherto unknown to the
insurance industry.

Technological development has also driven the very
direction of some businesses. In 15 years a small
company selling books online has emerged not only
as one of the world’s most powerful retailers, but
also as owner of two publishing houses, numerous
web services, one of the world’s largest and most
robust global IT infrastructures, a purveyor of
wireless services, digital books, music and TV-on-
demand and, perhaps most surprisingly, an
emerging giant of B2B cloud computing services.
Was this their plan, or the opportunities that opened
up to them along the road?

Either way, the convergence of these industries, and
the nature of the risks they face, has required us to


1
Access to cheap and plentiful finance and achieving
a successful exit is typically at the top of the "must
have" list for CEO's of fast growing Life Science and
Biotech companies. For sure they and their fellow
directors and managers continuously strive to do
everything they can to secure these vital ingredients
and have their business priorities in the correct order.
But do they? Just imagine for a moment you're an investor being
Have they really looked carefully through the glasses asked to finance or buy a company. What would be
of "the other side'? Through the eyes of the bankers, running through your mind? Firstly, no doubt trying
the buyout funds, the investment analysts and the to figure out whether the financial projections are
detail-hungry due diligence teams, who's green light reasonable, robust? Remember, the client’s almost
is so essential when it comes to putting serious certainly pressurising you into paying dearly for the
money on the table - the preferred CEO prescription consistent growth and lack of volatility so proudly
medication for several good nights sleep. displayed in their future revenue and profit projection
PowerPoints. But you would also be thinking more
Maybe not... broadly what could go wrong. Quite a lot as it turns
out...What if that recent trade journal promotion,
Dull as it may appear at first blush, proven risk
which won an award for the ad agency, wandered
management excellence and discipline could well be
way outside of the strict zone allowed by the
the answer to the key questions posed in the title of
packaging label and that dreaded lawyer's first
this article. "We don't need all that stuff now" I hear
claim letter landed in the corporate in-tray? Or
you cry. "Of course we have insurance, my secretary
perhaps worse, the same shock revelation arose
takes care of that". Yes, insurance, that sure fire,
during an analyst presentation, with the trade
cocktail-party-room-emptying device. Perhaps it's
press in full attendance and the CEO was not fully
not quite as exciting as Tiger's recent love affair with
forewarned or prepared? What if that that seemingly
fire hydrants but having a properly constructed wall
inconsequential Puerto Rican supplier – but one that
of contingent capital - product liability insurance to
happened to provide a cheap yet critical ingredient
use is more mundane name - can be the difference
for the company's bestseller – went bust or was
between corporate life and death if something goes
shut down for a regulatory infringement or just
wrong. And the likelihood of something bad
blown away by the next hurricane? What if you
happening in the first place can be dramatically
suffered a major IP infringement? What if a
reduced with the early adoption of best practice in
significant environmental threat in one of your
Enterprise Risk Management (ERM).


2
production facilities, that cost 10% of your profit to Yet the real but simple difference between
manage, turned out to be not so serious after all and Companies A and B is that Company B decided,
the cash saved from earlier more considered and early on, to invest a little time, effort and money in
professional analysis could have been used to some professional risk management help and
finance another sure hit product? advice. The initial cost was probably no more than
fifty thousand dollars, maybe even less. But the real
When you raised all these issues with the senior
value was huge. It was perhaps hard to see at the
management of the company - let's call it company
time, but once the professional Enterprise Risk
A – and they appeared on the back foot, defensive
Management journey had commenced, Company
all the time, no real answers, a "Don't-worry-it-will-
B never doubted its long-term value for a second.
never-happen" nervous pat on the back from the
And yet, in the heat of battle, with the CEO trying
CEO in your wrap up meeting, you’d be more than a
to grow its precious company so it can be noticed
little concerned wouldn’t you? You'd probably want
among all the competitive noise, this long-term
to dig some more and see if there were more bones
core process can so easily be overlooked, with
lying in the corporate cupboards. After all, you are
the modest initial cost and investment buried in
being asked to invest a lot of money and you want to
the lower budget reaches or not even making it
be sure of meeting or exceeding your return targets.
on to the critical corporate "to do" list.
On the other hand, let's consider hypothetical
So, if you’re interested in how to add multiple
company B in these same circumstances. What if
millions of value and gain easier access to cheaper
each time you probed and dug deeper into the
finance, you'd better sit down, grab a cup of coffee
detail, a confident, well thought through response
and read on.
came back. And the more you probed, the more it
really did seem as though not only had the company
The best 50k you've ever spent: Initial ERM
considered the myriad of things that could go wrong
Implementation for Tier 3 companies
but also what to do if the proverbial happened.
You'd be reassured, would you not? Comforted that In the context of a commercial organisation,
your investment or refinancing capital was more Enterprise risk management (ERM) prescribes
secure with Company B than Company A. That the the methods and processes used to manage risks
former had a better chance of achieving its financial and seize opportunities related to the achievement
projections and was much less likely to spring any of business objectives. ERM provides a framework
nasty surprises along the journey to success. for risk management, which typically involves
identifying particular events or circumstances
Now, here's the real issue, The difference between the relevant to the organisation's objectives (risks and
price you might be prepared to pay for an investment rewards), assessing them in terms of likelihood and
in Company B might be tens or maybe hundreds of magnitude of impact, determining the most effective
millions of dollars more than Company A. In fact you method of managing or exploiting risk, and ongoing
may be put off making any investment at all in management and monitoring. Such a process
Company A. You may just conclude that it's too risky. creates value for all stakeholders, including


3
customers, shareholders, employees, and regulators. Company to then progress its ERM program at a
rate appropriate to its requirements. For purposes of
ERM can also be described as a risk-based
the discussion below, we will refer to this initialization
approach to managing an enterprise, integrating
phase as a Phase 1 engagement.
concepts of internal control, appropriate national
and international regulation, and strategic planning. During the Phase 1 process, The Company would be
ERM is evolving to address the needs of various professionally guided to develop its ERM structure,
stakeholders, who want to understand the broad overarching ERM terms and definitions, its perceived
spectrum of risks facing complex organizations to risk profile, and its initial perceived Risk list (via a
ensure they are appropriately managed.. review of existing materials, interviews, limited use
of a questionnaire). Importantly, a heavy emphasis
Effective Enterprise Risk Management is about
would be placed upon leveraging the information
identifying, mitigating and ultimately optimising the
that The Company has already developed rather
various risks that drive a company's success. Risk
than attempting to “reinvent the wheel”.
cannot be eliminated entirely. Indeed it would be
wrong to do so as measured and managed risk Further, we would work through the initial business
taking is actually what companies should be doing. area risk workshops with The Company, facilitate
ERM is part of the overall process that transforms the first so-called Risk Council meeting to review
risk to your competitive advantage. Done correctly the workshop findings, and help to develop The
and we would strongly recommend, at an early Company’s first validated and prioritized Risk Report
stage, ERM provides critical intelligence and for executive leadership. This work would also assist
processes to manage the gamut of financial, The Company to define the structure and processes
operational, reputational and natural and other that it can use as it later proceeds to the risk
catastrophic risks that would otherwise keep the mitigation stage of its program.
Board awake at night unnecessarily. In addition,
regulators and debt rating agencies have increased
PHASE 1: ERM Program Development:
their scrutiny on the risk management processes of
Define EBS’s ERM Program &
companies, further heightening the potential
Vocabulary; Risk Mapping Exercise; Risk
economic impact.
Workshop; Report to Management
To embark on this process, here's a summary of the
key steps that need to be taken with the appropriate
professional advice and guidance.
Step 1: Step 2: Step 3:
Long term, a three-phased approach might prove
ERM Program Risk Mapping Risk Workshop –
best suited to the needs of emerging Life Science
Development – Exercise – Data Risk Validation.
and Biotech companies. However, we would
Define EBS’s Gathering &
suggest that any Company starts its ERM program Step 4: Risk Council
ERM Program Development of
with a streamlined, practical baseline engagement Review and Report
& Vocabulary “Perceived Risk Map”
that will set the ERM foundation and allow The to Management.


4
PHASE 1: Following the meeting, a Draft ERM Handbook will
The Development of The Company’s ERM be prepared. The Handbook will summarize the
Program and its Initial Risk Mapping Exercise approach and definitions/materials developed by the
Core Working Group. Once approved by the Core
A Phase 1 engagement would provide The
Working Group, a status update can then be shared
Company with the foundation for an effective,
with the appointed Board representative, through to
sustainable ERM program. Based upon our
the executive leadership group. With the proposed
dialogue, we would suggest the following steps:
path finalised and signed off by the Board, the Core
Step 1 – ERM Program Development – Defining Working Group proceeds to Step 2.
The Company ERM Program and its Vocabulary:
Step 2 – Data gathering & the Development of The
At the start of any process, the Company would be Company’ Perceived “Risk Map”:
asked to identify an “ERM Project Leader” as well
After reviewing and consolidating available
as an “ERM Core Working Group”, which ideally will
information that has already been developed by
be cross functional and consist of four (4) to five (5)
and for The Company, best practice suggests that
persons including the ERM Project Leader. In
approximately five (5) to eight (8) members of the
addition, the appointment of a Board representative,
Senior Management Team be interviewed to identify
usually from the legal or finance disciplines, is highly
‘perceived’ material risks within the Company
recommended. In this role, they will oversee the
(approx. 1 hour/interview). These discussions
project, providing guidance and facilitating
would be on an anonymous basis to encourage a
organizational support as well as provide more
frank and candid dialogue. Some limited use of
intimate feedback to and discussion with the rest
questionnaires may also be considered, although
of the Board.
generally, questionnaires are not nearly as effective
The initial ERM Core Working Group session as actual interviews.
typically takes one full business day and is highly
The risk items developed during this interview/
interactive. During this session, the team will decide
questionnaire process would be combined with
upon the Company’s approach to ERM while also
other risks identified from existing materials for
crafting its formal ERM Mission Statement and
discussion with the Core Working Group and
developing the Company’s unique ERM vocabulary.
compiled into the draft perceived risk list. This set
Concepts and processes that are fundamental to
of risks will form the basis for the risk workshops
ERM success will also be reviewed. Finally, a
discussed in the next step.
strategy to move the ERM process forward will be
reviewed for endorsement and support, e.g. Step 3 – “Validation Workshops”:
development of achievable goals and objectives for
This process involves cross-functional “Bottom-Up”
the project; preparation of a draft annual
risk workshops for each of the main business areas.
timeline/schedule that will integrate the new ERM
These workshops, which usually include 8-12
process into the Company’s annual budget and
participants from the relevant business area (and
strategic planning cycles.
other related disciplines that interact with and may


5
have important insights) will: (possibly with additional membership) would
convene to participate in an initial Risk Assessment
• be provided with a background briefing on the
workshop (often called the Risk Council).
The Company's ERM process,
During this initial Risk Council session, the
• assess those pre-identified ‘perceived’ risks
group would be asked to assess the direct and
collected in step 2 as well as any new risks
consequential implications, assess current controls,
which may be raised during the workshop,
and vote on the significance to The Company of the
• identify any low cost items for which risk compiled/combined risks gathered and assessed
mitigation may be considered immediately during the previous steps, using an interactive,
anonymous voting tool. From this feedback, a
• prioritize those risks which may require funding
risk-prioritized “Heat Map” and summary report
consideration
will be developed for presentation to senior
• consider the appointment of potential Risk management and for consideration in the Strategic
Owners for specific items proposed for risk and Operational Budget process. The Core Working
mitigation (based on time constraints of the Group may also identify potential Risk Owners at this
day). “Risk Owners” are persons who are stage, time permitting. Risk Owners will eventually
believed to possess appropriate skills and be assigned to address priority issues approved by
expertise to lead a Risk Mitigation initiative The Company for risk mitigation initiatives.
following senior management approval.
Significantly, experience to date suggests that the
Ideally, one or two members of the Core Working cost to mitigate many of risks identified through the
Team will participate in each of these sessions. ERM process is fairly nominal. To address many
Workshop participants are normally senior risks, all that is often required is the identification of
executives (Director, Senior Director, Vice President) the issue, the dedication of focused effort, and the
that have a good understanding of the business, as removal of the internal barriers that has previously
well as the issues to be discussed. Validation and precluded a solution. In instances where some
prioritization are achieved via the use of an capital funding is needed, the prioritization
anonymous, wireless voting system that has proven methodologies of an effective ERM process provides
highly popular and effective. Senior Management with a unique advantage when
A report of Workshop findings and results is deciding where to best allocate limited capital. Just
generated that can be shared internally within The as importantly, ERM provides Senior Management
Company and consolidated into a group level report and the Board with an effective tool to define and
as described below. objectively measure progress against agreed upon
risk mitigation objectives.
Step 4 – Risk Workshop - Assessment of Phase 1
Findings: After this initialization phase, The Company can then
assess its progress and determine a path forward
Once the “Top Down” and “Bottom Up” assessment that meets with its needs and abilities.
of the risks are completed, the Core Working Group


6
PHASE 2 and beyond
Successful and growing organisations are
increasingly outsourcing risk management and other
similar advisory and management functions, much in
the same was as the software industry is moving
from an ownership to rent-as-a-service model. JLT
has wide-ranging, deep experience in working with
the World's largest Life Sciences companies and is
therefore in an excellent position to be able to share
this rich seam of knowledge with emerging and fast
growing Life Science and Biotech companies. grow
it's involvement with its clients to suit their future
advisory and risk financing requirements.

DON'T RUN BEFORE YOU CAN WALK

If you're not convinced yet that this is a "must do",
essential investment for your company and its
stakeholders, just reflect for a moment on some of
the outcomes for companies that ignored it. [list a
few here....]

Just remember that a small but critical investment
early on in developing a professional company-wide
risk management culture will make it easier and
cheaper to finance, more attractive to buy or invest
in and more valuable overall.

You know it makes sense.


7
NEIL CAMPBELL JAMES BIRD
Head of Life Science & Chemicals, Jardine Lloyd Partner, Jardine Lloyd Thompson Limited
Thompson Limited
James obtained a degree in Economics from the
After graduating in 1982 with a Masters in Applied University of Portsmouth and began his insurance
Biology Neil spent a short period in the Agrochemical career on Guardian Royal Exchange's graduate
Industry before joining Sedgwick Group (insurance training scheme in 1993. He subsequently became
brokers) in London, and subsequently moved to a Liability underwriter in the London Market. Moving
Imperial Chemical Industries in London to work in the to Chubb as a Senior Liability Underwriter, he took
company’s risk management department. responsibility for several of their largest multinational
clients. In 2001 James became Senior Insurance
In 1993 ICI demerged its bioscience business to
Manager at AstraZeneca, managing the global
form a separate company, Zeneca Group PLC, and
product liability, clinical trials, marine, credit and
Neil was appointed global Risk Manager. In 1999
travel accident programmes. He moved to JLT in
Zeneca merged with Astra AB to form AstraZeneca,
2004. He is a Fellow of the Chartered Insurance
one of the world’s biggest healthcare companies.
Institute and an Associate of the Institute of Risk
Neil was subsequently appointed Director, Risk &
Management.
Insurance Services based at AstraZeneca’s
headquarters in London. James leads JLT's approach to clinical trial
insurance and risk management, an area in which
Neil joined Jardine Lloyd Thompson Risk Solutions
he looks after some of JLT's largest clients. He is
in November last year to head up JLT’s Life
heavily involved in the development of products
Sciences Industry Practice.
and risk management approaches aimed at better
Neil earned an Honours degree from Cambridge addressing the risk profiles of life science companies
University in applied Biology, has post-graduate across the wider risk portfolio including supply
qualification in agronomy and is an associate of chains and liability exposures. James looks after a
the UK Chartered Institute of Insurers. number of clients in respect of their product liability
insurance programmes and is one of a team of JLT
Life Science Liability Insurance Practitioners who
T: + 44 (0)20 7558 3996 provide technical advice to JLT's clients.
E: Neil_Campbell@jltgroup.com James regularly speaks at industry events on a
broad range of life science related topics including
product liability, clinical trials and supply chain risks.

T: +44 (0)20 7558 3580

E: James_Bird@jltgroup.com

Jardine Lloyd Thompson Limited
Lloyd's Broker. Authorised and Regulated by the Financial Services
6 Crutched Friars Authority. A member of the Jardine Lloyd Thompson Group. Registered Office:
London EC3N 2PH 6 Crutched Friars, London EC3N 2PH. Registered in England No. 01536540.
Tel +44 (0)20 7528 4000 VAT No. 244 2321 96.
Fax +44 (0)20 7528 4500 www.jltgroup.com. © November 2010 262978

Ws from innovation to litigation neil campell and james bird

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