Lundbeck attempts to secure a reasonable balance between risk exposure and generation of value. Our risk management processes are consistently updated with and adapted to match intra-Group and external requirements and needs. We have a risk management organisation with a centralised Risk Office, the purpose of which is to provide the Corporate Management Group with a solid basis for decisions regarding the company’s overall risk exposure and give them a solid overview of the activities and resources available.

The fundamental principle is that risks, in addition to central monitoring and coordination, should be managed by decentralised units as they have the most extensive knowledge of such risks and the best possibility of mitigating the exposure. The individual business units take a systematic approach to monitoring, identifying, quantifying and responding to risks. Furthermore, we have defined reporting, decision-making and follow-up procedures and routines.

We assess the likelihood of an event occurring and the potential consequences for Lundbeck in the form of financial loss or damaged reputation. The decentralised risk evaluation in the business units is regularly reported and processed by the organisation.

Half-yearly risk reporting
Every six months, Risk Office updates Lundbeck’s overall risk exposure when the business units report on the principal risks in their area. The reports contain the following:

• Description of risk
• When is the event likely to happen
• What sort of risk-hedging and mitigating initiatives and possibilities do we have
• Potential consequences if the event occurs
• Who is responsible

The Risk Office assesses Lundbeck’s overall risk exposure and discusses it with the Risk Board. Subsequently, risks and risk exposure are presented to the Audit Committee. Risk reporting forms an integral part of Lundbeck’s overall reporting process.

Risk exposure
The reporting and management of risk exposure follows the pharmaceutical value chain. Below we describe the risks that we have defined as particularly critical.

Research and development risks
Lundbeck relies on its ability to protect its intellectual rights in connection with new pharmaceuticals and to operate its business without infringing the rights of others. Patenting and the patent application process in pharmaceutical companies are legally and scientifically complicated processes and are thus subject to a certain degree of uncertainty. We are taking major steps to develop and retain competencies in this area, and we consistently defend our intellectual property rights.

Throughout the research and development process, there is a risk that new pharmaceuticals will be delayed or have to be abandoned altogether. In each of our late-stage projects, we thoroughly assess if factors such as the initiation of new clinical trials or support in ongoing clinical trials could lead to a more successful completion of the projects.

Lundbeck participates in a number of research and development collaborations. In 2010, Lundbeck signed research partnership agreements with Genmab A/S, Kyowa Hakko Kirin Co., Ltd., Zenobia Therapeutics, Inc. and Vernalis plc. These new agreements are part of the new research strategy. Before we enter into agreements, we conduct a comprehensive and detailed review of the contract and its conditions, drawing on specialists from relevant business areas in order to mitigate any risks.

Production risks
Managing reliability of supply is crucial in ensuring that patients constantly have access to the pharmaceuticals they need. For this reason, we carefully monitor the supply situation and as a rule maintain an inventory level that will help us overcome a production breakdown.

To mitigate production risks, Lundbeck currently has production and packing facilities at four independent sites: Lumsås and Valby (Denmark), Padua (Italy) and Sophia-Antipolis (France). In this way we enhance flexibility in our pharmaceutical production, while we also reduce our costs as we rely less on external suppliers.

In rare cases, pharmaceutical companies are forced to recall a product from the market due to a problem with the safety or quality of the pharmaceutical. Lundbeck has systems and procedures in place to ensure a swift and effective response if the need should arise.

Sales and marketing risks
The pharmaceutical market is characterised by the aim of the authorities to cap or reduce the otherwise rising healthcare costs. The authorities may opt for example to reduce prices or regulate market access as we have experienced in a number of countries in recent years.

Market changes such as price reductions may have a considerable impact on the earnings potential of pharmaceuticals. For example, Lundbeck experienced significant mandatory price reductions in 2010 in several countries in southern Europe, where higher debts have compelled the governments to cut the public budgets. These savings have resulted in a number of healthcare reforms resulting in comprehensive price reductions, especially in Greece and Spain. We consider the uncertainty surrounding public debts and the resulting savings as a risk factor in 2011.

We are working with the health authorities around the world to document the value of our pharmaceuticals, for example by preparing health-economic reports and considerations. We also seek to adjust our organisation and activities to accommodate changes in market conditions, for example by using external sales consultants.

We monitor and analyse the Group’s intellectual property rights and the risk of generic competition. We believe that Lundbeck’s intellectual property rights are valid and enforceable, and we defend these rights, wherever they may be violated.

Lundbeck is involved in pending trials concerning intellectual property rights concerning escitalopram in Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hungary, Latvia, Lebanon, Lithuania, The Netherlands, Norway, Portugal, Saudi Arabia, Spain, Taiwan, Turkey and the UK.

New clinical trials, publications and letters to the editor may change the perception of the position of our pharmaceuticals relative to competing products. We invest considerable resources in establishing a factual and scientific foundation that allows doctors and patients to maintain confidence in our pharmaceuticals.

A growing problem in the pharmaceutical market in recent years has been the sale of counterfeit medicine, e.g. on the Internet. However, only a few cases of counterfeit Lundbeck medications have been registered, with one case in 2010 versus four cases in 2009. In 2010, we completed an in-depth analysis of security in the supply chain from the procurement of raw materials to distribution of finished goods, focusing on providing maximum security against counterfeit medicine. Lundbeck pursues all cases through its Anti-Counterfeit Task Force and is a member of the World Health Organization’s (WHO) anti-counterfeit organisation IMPACT.

Risks across the value chain
Partnerships, in-licensing and acquisitions
Lundbeck’s business model is based on partnerships, among other things. Partner-ships offer a number of benefits, but also mean that we do not retain full control of the individual projects and products. However, through close and open dialogue with our partners we seek to ensure that our targets are met by sharing ideas and best practices in research, development, production, marketing and sales.

The in-licensing of pharmaceuticals is characterised by sharp competition. This involves the risk that prices of attractive projects are pushed up to a level that would render them unprofitable, considering the risk involved.

In 2010, Lundbeck signed an agreement with Merck & Co., Ltd., under which we in-licensed Sycrest®/Saphris® for the treatment of bipolar disorder and schizophrenia. Before we enter into such an agreement, we make comprehensive investigations in which relevant in-house and external specialists are involved, contributing analyses and assessments. Subsequently, the final recommendation is presented to the Board of Directors for approval, and the management can close the deal within the given framework. Lundbeck has other in-licensed products in its portfolio, including Ebixa® for the treatment of Alzheimer’s disease, Azilect® for the treatment of Parkinson’s disease and Xenazine® for the treatment of Huntington’s disease.

Human capital and knowledge
Lundbeck is a knowledge business, and that means that our success depends on our having the right employees with the right competencies. Consequently, we are taking great strides to secure our human capital.

We spend substantial resources on developing employee know-how and competencies. Employee know-how and competencies are the key to our success, but it also means that the employees are attractive to other businesses. Therefore, remuneration, employee benefits, recognition and development opportunities are key factors for us in retaining our employees.

To a company such as Lundbeck, it is crucial that we can protect the knowledge that is the basis of our success. We have sharpened our focus on information security with the aim of protecting own intellectual property rights and, not least, avoiding the infringement of third party rights. We need to keep our information secure but also need to share knowledge between employees around the world.

Financial risks
Most of Lundbeck’s commercial transactions are settled in foreign currency. At the present time, the currency risk is primarily associated with movements in the US dollar (USD), but also a number of other currencies such as Canadian dollar (CAD) and Turkish lira (TRY).

At the end of 2010, Lundbeck has hedged income in these currencies for most of 2011. Accordingly, if the exchange rates change during 2011, this will only have a small impact on Lundbeck’s financial results for 2011, but it may affect the financial performance from 2012 onwards.

Interest rate risks arise in connection with the company’s bond portfolio, debt portfolio and cash holding. Interest rate risks are reduced by seeking short duration on both the asset side and the liabilities side.

The credit risk that arises in connection with the sale of goods, the Group’s bond portfolio and cash holdings is reduced by avoiding credit risk concentration and by diversifying receivables on a large number of creditworthy trading partners. In addition, the Group exclusively deals with banks that have a high credit rating.

Other risks
Corporate governance, including risk management, is the cornerstone of Lundbeck’s way of running its business. The preconditions for preventive and forward-looking risk management are in place. The organisation delivers ongoing, value-creating, valid and fast reports on issues such as Lundbeck’s reputation, risk profile on marketed products and operational, tactical and strategic financial planning.