Risk Analysis in Pharmaceutical and Biotech Industry

Question: Discuss about theRisk Analysis in Pharmaceutical and Biotech Industry. Answer: Introduction The company undertaken for review us Benitec Limited. This is the company that is engaged in the development of the novel, proprietary therapeutic technology platform which helps in combing the various genes silencing and gene therapy and has the goal of providing a sustained and a long lasting silence of the disease that causes the genes from a single administration. This technology is believed to have the potential of one shot cure for a majority of the diseases and they have been addressed by following the stricter ongoing treatment regimes and also has an effective treatment of all the care options. The company uses the technology referred to as the DNA directed RNA interface. This is used for the development of the pipeline products of the candidates for a variety of the treatments which involves several chronic and life threatening human diseases such as hepatitis B, age related muscular degeneration etc. these are the diseases that have a large patient population and has an exception of the OPMD which is considered to be very rare disease (Benitec, 2016). Foreign Currency Risk: As per the annual report of the company, the company is exposed to the foreign currency risk. And for this the company has many of the transactional currency exposures. Such an exposure gives rise to the licensing fees along with an increased amount of royalty. Further, the company also incurred an expenditure in the currencies which are other than the currency measurement of the unit. This goes with the expenditure of the group that are denominated in the other currencies as well other than the currency in which the same has been measured. Without taking into account the unrealised movements in the loans entered into between the various parent and the subsidiary companies, the income denominated in the foreign currency and the expenditure contributes to about less than 15% of the total of the transactions of the group and hence, the management would have an access to the various movements in the foreign exchange that would affect the financial statements. Credit Risk: The company is also exposed to the credit risk which arises from the investment that have been made in the various assets of the group. This contributes to the cash and cash equivalents and in the trade and the trade receivables. The group is also exposed to the credit risk from the various potential counter party payments and this has an exposure of the maximum amount which is somewhat equal to its carrying amount. There are various exposures each as on the date of reporting in respect there is an assessment and the same has bene disclosed in the financial statements. Liquidity Risk: Liquidity risk is another risk that the company is exposed to and the main objective of the company is to obtain the revenue from commercialisation and also contribute to the access to the funding markets. The company has a number of different programs that undertakes the research and development and also this originates form the licensing transactions with many of the pharmaceutical companies. Also, the trade payables along with the other financial liabilities takes place from the various financing activities of the research that was under progress and also there were many of the development programs that were in addition to the operations of the business in general. Inherent Risk: The next risk is the interest risk which generates the income form the interest on the various surplus funds (Benitec, 2016). The pharmaceutical and the biotechnology industry of the country is somewhat exposed to many of the changes that takes place in the global operating environment of these companies. These are the changes that challenges the sustainability of the various global and the Australian pharmaceutical industry along with the various companies and the individuals to which they are composed of. These are some of the changes that have come into existence during the global financial crisis and that has a significant impact over the industry of the pharmaceuticals. The global financial crisis pressurises these companies and has also led to the loss of jobs in this local industry and has also reduced the research and the development activities of the industry along with the manufacturing and the commercialisation activity. There is a difficulty in the sourcing for the biotechnology companies since they pursue the various drug development activities. These companies have a lower amount of cash reserves and hence it often becomes to raise the capital that they require to survive as the independent companies. In the nutshell, it is quite not likely that there is a reduction in the growth of the expenditure on this industry on the activity of research and development along with a further reduction in the employment. There is a negative predictions in the short term in which the companies remain firm in the view that they have the long term prognosis for the positive Australian pharmaceutical industry (Sai global, 2016). The industry has the world class research and medical based and this ensures a very strong research sector. There is a maturing biotechnology sector and also an expertise in the specialised manufacturing that helps in driving the string export performances for these companies. In this, the government plays a vital role since the government of the country plays a very important role when it comes to the creation of the right to the operating environment for a more successful and viable pharmaceutical industry for its emergence. These companies are of the view that the country is very competitive in nature since there is an involvement of research and development, clinical trials and the manufacturing sectors helps in ensuring a positive and an increase in the economic and a social contribution to the country. There is a viable and a sustainable pharmaceutical industry (Industry, 2016). Technological Risks: This industry is also exposed to the technological risks since there are rapid changes in the technology that have been taking place on a regular basis. And hence, the risks in this technology is immense. And due to the stiff competition in the country in this sector, there are many of the companies that are working on the similar lines and that causes an increased competition amongst these companies which makes them highly competitive. Legal and Regulatory Risks: There is also legal and regulatory risk that this company is exposed to since there are number of laws, rules and regulations that govern the manufacture of the various medicines etc. of the company (Invest in Australia, 2016). There are a number of trends that the industry is exposed to. First is the ageing population which has been ageing faster and hence, there are new diseases taking place which means more extensive medical treatments. The second are the demographic trends. There is an increase in the demand for the curative treatments along with an increase in the demand for the various preventive treatments. There is also an increase in the demand for the various elective surgeries and the treatments that renders the demand for the safe and less invasive medical technologies (The Australian, 2016). All the techniques of valuation of these risks are undertaken through an aggressive risk assessment of the various factors such as the management, market, science and technology, financial and funding phase (Venture evaluation, 2016). The following are the various risk valuation methods: Discounted cash flow: this is the method through which the future free cash flows could be computed and the way of discounting, they are used for the purposes of driving these to their present value. These method helps in the estimation of the values for the various potential investments. This method helps in the production of the various values that are somewhat higher than their initial investment which helps in indicating the investment that could be worthwhile and also must be taken into account. Risk adjusted net present value: this is the method that employs the use principles as the method that has been stated as above. But there is only one exception which is the fact that each one of the future cash flow is adjusted with the rate of the risk and then multiplied with the probability at which the same has been taking place. The probability in this case would be the probability of the success rate of any particular product or the drug that has been estimated by the way of comparing the drug with its different phases of development. Venture capital method: this method is for the investors that are looking for an exit within the period of 3 to 7 years. This method is used when it comes to the determination of the return of the investors that is expected from that investment Market comparable method: this method helps in the estimation of the valuation which is based in the market capitalisation of the many comparable companies. Comparable transaction method: this method helps this is the method that helps in valuing the company by the way of comparing the similar sized private company which is somewhat similar in the stated field. Decision tree analysis: this is the method which helps in the forecasting all the future outcomes by the way of assigning the certain probability in each of the decision (Mayer brown, 2016). There are mainly 2 types of options, one is put and call. The call option gives the holder the right to buy the underlying asset at an exercise price at a predetermined rate. In this, the buyer would have the right but not the obligation to buy some of the assets. On the other hand, the seller has been obliged to buy the same asset at an agreed terms. The buyer of the option refers to the case wherein there is a price of the financial instrument that he has bene growing. The seller of the call option in turn gets the price of the various financial instruments. Put option on the other hand refers to an agreement between the two sides of the exchange of an underlying asset at some of a specified price which is also the strike price and is by a predetermined rate as on the date of maturity or expiry. There is another option of the European options in which the Black Scholes option is considered to be the best option while there are many of the American options that are valued with the use of the binomial trees. This model is somewhat based on the financial call option which comprises of the new product development after the way of considering all of the relevant factors in these biotech companies (Ljumovi?, 2012). These real options when considered to be from the view of the value enhancement strategy helps in the maximisation of the various variables that are correlated with the value of the firm. There are many of the ways for such of the variables. This is due to the accounting variables such as the earnings or the return on investment. There is a marketing variable such as the share in the market. There is a cash flow variable which is the return on the cash flows on investment. There is a cash flow variable which has been risk adjusted, such as the Economic Value Added. There are various advantages when it comes to using these variable that they are. There are many of the simpler and a easier way of using the discounted cash flow system. But these have the disadvantage of the fact that the simplicity is always at a cost. These are the variables that are related with the value of the discounted cash flows. The method of economic value added helps in the measurement of the surplus of the va lue which has been created on an investment. The value of the firm would never go for a change when there is just a different metric for the value. All of these approaches uses the discounted cash flows that must yield the same value for the business. And this is what makes the use of the assumptions that are constant in nature. In case, there is a different in the value from the various different approaches, then the same would be attributable to the variety of the differences in the assumptions. These would be explicit or implicit behind each of the valuation (HBR, 2016) (Damodaran, 2012). The main key for the purposes of avoiding the mismatch in the various cash flows and the discount rates would be the discounting of these cash flows to the equity at the weighted average cost of capital that would lead to the upward biased estimation of the value of the equity. Whereas on the other hand, there would be discounting of these cash flows to the firm at the cost of equity that would yield in the downward biased estimate of the value of the firm (Stern, 2016). There have been many of the studies that have shown that there is a revolution of the real options for the purposes of valuing the various tasks in the pharmaceutical companies. Also, these real options are not considered to be obsolete in this industry and hence, these could be used. Another method that could be applies is the concept of return on assets which is considered to be the concept which is all about gaining the favour since it provides the project analysis which is holistic in nature. This also does not take into account the change in the various methods of the current valuation. This is the knowledge of the various theoretical foundations that helps in the analysis of the real options in the pharmaceutical section which seems better when it comes to the analysis of the various financial service companies. Hence the adoption of these real options would be advisable for this company and industry in which it operates. References: Annual report 2014. (2016).www.benitec.com. [online] Available at: https://www.benitec.com/documents/investor-centre/reports/BLT_Annual_Report_2014.pdf [Accessed 11 Oct. 2016]. Benitec.com. (2016).Read our story | Benitec. 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