ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL COMPANY.

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ENTERPRISE RISK MANAGEMENT IN PHARMACEUTICAL COMPANY (A CASE STUDY OF FIDSON HEALTHCARE LIMITED.)

ABSTRACT

Risk is at the center of life itself. How pharmaceutical companies successfully implements an Enterprise Risk Management (ERM) programme, to identify and manage potential risks, can mean the difference between financial freedom and financial despair. As a practical option for managing risk, it is associated with a number of factors that hamper its smooth flow. These difficulties manifest when companies lack knowledge of ERM Frameworks; still using the traditional ways of risk management. The problems become more compounded when the adopted ERM frameworks would not fully be utilized; as in the case with pharmaceutical companies in Nigeria. The researcher then quickening to use this piece of study, to evaluate the use of ERM in pharmaceutical companies, with its associated prospects, challenges and problems. The researcher sourced data from the primary and secondary sources of data for this work, using works by other authors and information from the oral interview carried out on the respondent. Despite the new accreditation guidelines and a provincial strategy for managing risk, adherence to effective risk management remains suboptimal in our pharmaceutical companies and in many industries. It was discovered that although ERM is being implemented in Nigerian pharmaceutical industry, the level of implementation is either very low or cannot be easily ascertained. Also, it was further discovered, that there exist an insignificant but positive relationship between ERM and total assets and liabilities as proxies for firm size and leverage. The researcher made recommendation from the findings of this works that there is need to encourage and adopt the full use of ERM frameworks in industries and there is need for more explicit measures in identifying firms that engage in ERM and those that do not.

TABLE OF CONTENTS

TITLE PAGE

Inside Title Page ii

Approval Page iii

Dedication iv

Acknowledgement v

Abstract vi

Table of Content vii

CHAPTER ONE: INTRODUCTION

1.1 Background of the study 1

1.2 Statement of the Problems 4

1.3 Objectives of the Study 5

1.4 Relevant Research Questions 6

1.5 Scope and Limitations of the Study 6

1.6 Significance of the Study 7

1.7 Definition of Terms 7

CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction 10

2.1 Concept of Risk 10

2.2 Objectives and Principles of Risk Management 13

2.3 Historical Context of ERM 16

2.4 The ERM Frameworks of Pharmaceutical 18

Companies

2.5 Risks in Pharmaceutical Companies 23

2.6 The ERM process for Pharmaceutical Companies 27

2.7 Risk and Economic Capital Models 30

2.8 Risk Tolerance in Pharmaceutical Companies 31

2.9 Main Risk and Regulatory Requirements 33

2.10 Problems and Challenges in Pharmaceutical 37

Companies

2.11 How Pharmaceutical Companies manage these 39

Main Risks

CHAPTER THREE: RESEARCH METHODOLOGY

3.0 Introduction 42

3.1 Research Design 42

3.2 Population of the Study 43

3.3 Sources of Data 43

3.3.1 Primary Data 44

3.3.2 Secondary Data 44

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.0 An Overview 45

4.1 Introduction 45

4.2 Analysis 46

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.0 Introduction 60

5.1 Summary of Findings 60

5.2 Conclusion 63

5.3 Recommendation 65

5.4 Suggestions for Further Studies 66

REFERENCES 68

APPENDICES 73

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In the business world, every individual and businesses are exposed to risk. For any business to exist and survive, the business has to go through some challenges of risk. Risks are in existence simply because entities, companies and organizations have ‘assets’ of a material or immaterial nature that could be subject to physical harm that has consequences on the known entity (Andy Osborne 2012- Risk Management made easy).

In Risk management, there is no formal definition of. Risk has been defined by different scholars based on their level of understanding. One of such definition of risk is “Risk implies exposure to uncertainty or threat (Kannan and Thangavard, 2008) and “a decision to do nothing to explicitly avoid the opportunities that exists and leaving threats unmanaged.”(Webster, 2007). Also, Risk can be defined as the combination of the probability of an event and its consequences (ISO/IEC Guide 73).

Risk management therefore, is a proactive approach to reduce threats, increase opportunities, and optimize achievements of objectives (Pearce and Robinson, 2000, Webster, 2004,’ Gray and Larson, 2006.’Rejda, 2001). Also, Andy Osborne 2012 says risk management is a structured and coherent approach to identify, analyze and manage risks that affects the strategy, process, people and technologies.

“Prior the emergence of ERM, organizations used to handle their risk individually and independently, using the traditional ways of risk managements of”:

· Identification

· Evaluation

· Control

As time goes on, companies now realized that it would favour them more to treat their risks as a whole (portfolio), as would surely reduce its costs and expenditure incurred in managing risk. And that was how ERM came into existence in 2004 Olaf Passenheim, 2011).

ERM is a holistic way of treating risk in an organization, Olaf Passenheim-2011). ERM is a risk cover that takes into considerations, all types of risks faced by an organization, such as – Strategic, Financial, Operation and Hazard risks. These frameworks are the ways ERM can be effected by an organization (Olaf Passenheim- 2011).

ERM is usually decided and effected by senior managers of an organization, and after the decision is taken, it passes on to other personnel of the organization, until it gets to the lowest rank of the organization. This is because; everyone has to have knowledge of the way risk is being managed in their organization.

In the corporate environment, COSO (2004) also says Enterprise risk management is the best tool to be used in combating all risk available and causing damages to the industry; using its frameworks guide of:

§ Strategic Risk

§ Operational Risk

§ Financial/Reporting Risk

§ Hazard/Compliance Risk

§ Enterprise risk management is a procedure to minimize the adverse effects of a possible financial loss by:

§ Identifying potential sources of loss

§ Measuring the financial consequences of a loss occurring.

§ Using controls to minimize actual losses or their financial consequences (Olaf Passenheim-2011).

A closer look on Enterprise risk management in pharmaceutical company reveals that in Fidson Healthcare limited, that there are lots of risks that need proper management. Some of the risks are IT risk, financial reporting risks, environmental or legal risks, production risk and administrative risk. With the situation of all risk exposures in the industry, the industry needs to set goals of risk management which are to protect the industry against downside risks, to manage volatility around business and financial results of the industry and to optimize risk and returns of Fidson Healthcare Limited.

1.1 STATEMENT OF THE PROBLEMS

§ It’s been discovered that some pharmaceutical companies, considers and handles their risk individually and independently( Traditional ways of risk management); like fire risk, theft risk and so on, thereby neglecting some main risk they encounter during operations.

§ Also pharmaceutical companies spend much time and resources in handling those risk traditionally, and when not properly handled, lead to huge losses on their part.

§ It has also been discovered that most pharmaceutical companies, have not been introduced to or have knowledge of a more advanced and effective way of managing risk (ERM) in their organization.

§ Also, some of the pharmaceutical companies who have adopted ERM as a practical way of handling corporate risk find it difficult to cover the whole ERM frameworks; rather, they concentrate on a section of the frameworks and pay little or no attention to the others.

These have been giving the industry a reputation of low profitability and returns on investments.

1.2 OBJECTIVES OF THE STUDY

The aim and objectives of this research study are:

1.To know and examine previous risk management strategy used by Fidson Healthcare Limited.

2.To know if ERM is being used to manage risk in Fidson Healthcare Limited.

3.To find out the mostly used ERM frameworks in Fidson Healthcare Limited.

4. To know and examine the challenges faced by Fidson Healthcare Limited, in the chosen ERM framework in managing their risk.

1.3 RELEVANT RESEARCH QUESTIONS

The following research questions were raised from this study:

§ What previous risk management strategy was used by Fidson Healthcare Limited in managing their risk?

§ Is ERM a practical option for managing risk in Fidson Healthcare Limited?

§ Which of the ERM frameworks is mostly used by Fidson Healthcare Limited?

§ What challenges does Fidson Healthcare Limited encounter in the course of using the ERM framework?

1.4 SCOPE AND LIMITATIONS OF THE STUDY

The study focuses on pharmaceutical industries; their employees, management and their products, while gathered information will be within this industry. Specifically, Fidson Healthcare limited will be focused on, among the fast rising pharmaceutical companies based in Lagos, using COSO ERM Frameworks in managing their organizational risks.

However, the limited time scarce and financial resources at the researcher’s disposal, calls for this limited scope.

1.5 SIGNIFICANCE OF THE STUDY

This study will be beneficial in the following ways:

§ It will be of immense benefits to body of knowledge in the area of investigation.

§ It will serve as an instrument of enlightenment to industries, especially pharmaceutical companies on the need for an effective management of risk using Enterprise risk management tools/frameworks.

§ The finding of this study will also provide a basis where Fidson Healthcare limited will use Enterprise risk management to safe and secure the business risk of the industry.

§ Similarly, it will help academia and scholars to expand their frontiers of knowledge and provide s basis from which future researchers may benefit.

1.6 DEFINITION OF TERMS

RISK: Is the possibility of an unfortunate occurrence (Aneke J.I (1998).

It is the uncertainty of a loss (Dickson (1981:11).

It is the chance of loss (Dickson (1981:11).

HARZARD: They are events or conditions that creates or increases the chance of loss arising from a given peril (Irukwu(1990:67).

PERIL: It is the cause of a loss or a loss producing agent, without which there can be no loss, even though the uncertainty of event may exist (Aneke(1998).

RISK MANAGEMENT: Is a proactive approach to reduce threats and adverse effects of risk increasing opportunities and optimize achievements of objectives (Pearce and Robinson(2000; Webster(2004; Gray and Larson(2006; Rejda(2011).

ENTREPRISE RISK MANAGEMENT: Is a procedure to minimize the adverse effects of a possible financial loss in an organization (Olaf Passenheim(2011).

HAZARD RISK: It refers to any source that may cause harm or adverse effects, such as equipment lost due to natural disaster (Skipper and Kwon, 2007)

FINANCIAL RISK: It refers to any loss due to economic conditions such as foreign exchange rates, derivatives, liquidity risk and credit risk (Jones, 2006; Benston et al.,2003) .

STRATEGIC RISKS: Is the uncertainty of loss of a whole organization and the loss may be profit or non-profit (Li and Liu (2002).

OPERATIONAL RISK: It refers to risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events (Basel Committee (2001).

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