Risk management

The Group’s business involves exposure to a number of risks, many of which are inherent in pharmaceutical product development. Risks particular to the Group include the following:

Industry risk

The nature of pharmaceutical development is such that drug candidates may not be successful owing to an inability to demonstrate in a timely manner the necessary safety and efficacy in a clinical setting to the satisfaction of appropriate regulatory bodies, such as the European Medicines Agency (EMA) in Europe and the Food and Drug Administration (FDA) in the US. The Group may be unable to attract, by itself or from partners, the funding necessary to meet the high cost of developing its products through to successful commercialisation.

Clinical and regulatory risk

Drug substances may not be stable or economic to produce. Unacceptable toxicities or insufficient efficacy in the chosen indication may cause the medicine to fail or limit its applicability. Lack of performance by third-party clinical research organisations or an inability to recruit patients to clinical trials may cause undue delays in clinical trial results. Clinical and regulatory issues may arise or changes to the regulatory environment may occur that lead to delays, further costs, reduction in the commercial potential of a product in development, or the cessation of programmes. Ethical, regulatory or marketing approvals may be delayed or withheld or, if awarded, may carry unacceptable conditions to further development or commercial success. The Group’s manufacturing facilities and those of its third-party manufacturers are subject to regulatory requirements and licensing and there can be no assurance that such facilities will continue to comply with such regulatory requirements. Given the cutting-edge nature of the technology, alternative manufacturing facilities may not be available. The Group manages its regulatory risk by working closely with its expert regulatory advisers and, where appropriate, by seeking advice from regulatory authorities on the design of key development plans for its pre-clinical and clinical programmes.

Counterparty risk

The Group relies on third party organisations to conduct its clinical trials and to manufacture certain of its products. If the relationship with or performance of any of these partners is adversely affected, the Group’s operations may be adversely impacted. As part of the Group’s routine vendor assessment, detailed due diligence is performed on all third party organisations to establish that such organisations have the required capability, expertise and financial stability to perform the relevant services for the Group. Where possible, alternative third party suppliers are identified to take over the performance of such services in the event difficulties are experienced with the original vendor.

Competition and intellectual property risk

Certain companies are developing medicines that may restrict the potential commercial success of the Group’s products or render them obsolete. Third party companies may have intellectual property that restricts the Group’s or the Group’s partners’ freedom to operate. Obtaining licences to intellectual property may not be possible or may be costly and may reduce net royalty income to the Group. The Group’s intellectual property may become invalid or expire before its products are successfully commercialised. The Group works closely with its legal advisers and obtains where necessary opinions on the intellectual property landscape relevant to the Group’s product development programmes and manufacturing activities and processes.

Economic risk

The successful development and commercialisation of medicines carries a high level of risk and the returns may be insufficient to cover the costs incurred. Restrictions on health budgets worldwide or on the prices that may be charged for new medicines through competitive or other pressures may limit a medicine’s sales potential. The Group may not be able to attract partners on favourable terms or recruit the appropriate calibre of staff to develop or commercialise its products. Any partners may fail to perform or commit the resources necessary to commercialise the Group’s products successfully.

Financial risk

The Group’s activities expose it to a number of financial risks including cash flow risk, credit risk, liquidity risk and price risk. In accordance with policies approved by the Board of Directors, the Group does not use financial derivatives to manage these risks. In addition, the Group does not use financial instruments for speculative purposes.

Cash flow risk

The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates. The majority of the Group’s revenues are in euros or US dollars. Where known liabilities arise in these currencies the revenues are retained on deposit in the appropriate currency in order to off-set the exchange risk on these liabilities. As at 31 March 2011, the Group had sufficient euro and US dollar reserves to cover its immediate and short-term liabilities in respect of these currencies.

Credit risk

The Group’s credit risk is primarily attributed to its cash and cash equivalents. This risk is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. Deposits are made in accordance with the Group’s Treasury Policy approved by the Board which contains strict criteria on minimum credit ratings and maximum deposit size. However, the recent global credit problems could result in the failure of even high credit-rated banks where funds are deposited.

Liquidity risk

In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group closely monitors the cash available to the Group, which is invested in a mixture of current and short-term deposit accounts.

Price risk

The Group is exposed to pricing risk in respect of its income and expenditure. The Group manages its exposure to price risk through commercial negotiations with customers and suppliers, working closely with its legal advisers on negotiations that are of significant importance to the Group.

Risk management

The Group’s extensive risk management process is detailed in the corporate governance statement section of the business review. The process seeks to identify material risks and to determine how best to manage them. Specific risk managing actions the Group has in place are set out against certain of the risks identified in this section.