Risk managementand internal control
At Zealand, we constantly monitor and assess both the overall risk of doing business in the pharmaceutical biotech industry and the particular risks associated with our current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks.
Doing business in the pharmaceutical and biotech industry involves major financial risk. The development period for novel medicines typically stretches over many years; costs are high and the probability of reaching the market relatively low due to developmental and regulatory hurdles.
Zealand’s management is responsible for implementing adequate systems and policies on risk management and internal control and to assess the overall risks and specific risks associated with Zealand’s business and operations and seek to ensure that such risks are managed best possible in a responsible and efficient manner.
Risks of particular importance to Zealand are scientific and development risks, partner interest risks and commercial as well as financial risks. Risk and mitigation plans are monitored by management and this continuous risk assessment is an integral part of the quarterly reporting to the Board of Directors.
Scientific and development risks
During the course of the research and development process Zealand regularly assesses these risks through a quarterly risk assessment of all the company’s research and development projects conducted by management in collaboration with the department heads and project managers and presented to the Board of Directors. Each project is described and progress is measured based on milestones. An individual risk analysis for each of the projects is conducted and a prioritizing of the project portfolio is performed.
On a regular basis, our Clinical and Scientific Advisory Board provides input to the risks in Zealand’s research and development portfolio as well as in individual projects.
From early on in the research phase and all the way through development, risks related to patent protection, market size, competition, development time and costs and partner interest are assessed to make sure that final products are potentially commercially viable. Any major changes in the commercial potential for a drug candidate can lead to reduced value prospects and eventually discontinued development.
Partner interest risks
Zealand has ongoing discussions with potential industry partners in order to gauge and encourage interest in the research programs. The aim is to ensure that Zealand focuses on programs that are attractive to partners. Entering into collaborations with partners can bring significant benefits but also potentially involve risks. In addition, full control of the products is often given over to the collaborator. In order to mitigate these risks Zealand strives to foster a close and open dialogue with its partners thereby building strong partnerships that work effectively.
Financial risks such as cash and treasury management, liquidity forecasts and financing opportunities are managed in accordance with the Finance Policy and regularly assessed by the company’s management and reported to the audit committee and the Board of Directors. See also p. 62; Note 14 – Financial and operational risk.
Risk management and internal control related to financial reporting
Zealand has a number of internal control and risk management systems in place to ensure that its financial statements provide a true and fair view and are in accordance with the International Financial Reporting Standards as adopted by the EU and Danish disclosure requirements for listed companies. On a yearly basis, an evaluation with special emphasis on risk management and internal control related to the financial reporting is done to ensure that risks are managed in a responsible and efficient manner.
Zealand has several policies and procedures in key areas of financial reporting. The internal control and risk management systems are designed to mitigate, detect and correct material misstatements rather than eliminate the risks identified in the financial reporting process.
A review and prioritization of material accounting items is also performed. Items in the financial statements that are based on estimates or that are generated through complex processes carry a relatively higher risk for error. Zealand performs continual risk assessments to identify such items and to assess the scope and related risk.
The policies and procedures are approved by the Board of Directors and on a daily basis the responsibility is of the Executive Management. The Board of Directors has established an audit committee with an advisory role relative to the Board of Directors. Considering Zealand’s legal structure, size and the fact that operations are carried out at one single site, the Board of Directors have concluded that it is not relevant to establish an internal audit function in Zealand.
Description of management reporting systems and internal control systems
Zealand has management reporting and internal control systems in place that enable it to monitor performance, strategy, operations, business environment, organization, procedures, funding, risk and internal control. The company believes that the reporting and internal controls are adequate to avoid misstatements in the financial reporting.
A full description of the risk management and internal control system in relation to financial reporting is included in the statutory report on Corporate Governance, cf. section 107b of the Danish Financial Statements Act, which can be found on the company’s website: