Merck 2014 Annual Report Download - page 132

127GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
Risks and opportunities of product quality and availability
Risk of a temporary ban on products / production facilities or
of non-registration of products due to non-compliance with
quality standards
The Group is required to comply with the highest standards of
quality in the manufacture of pharmaceutical products (Good
Manufacturing Practice). In this regard the company is subject to
the supervision of the regulatory authorities.
Conditions imposed by national regulatory authorities could
result in a temporary ban on products / production facilities, and
possibly affect new registrations with the respective authority. The
Group takes the utmost effort to ensure compliance with regula-
tions, regularly performs its own internal inspections and carries
out external audits. Thanks to these quality assurance processes,
the occurrence of a risk is unlikely, however cannot be entirely
ruled out. Depending on the product concerned and the severity of
the objection, such a risk can have a critical negative impact on
the net assets, financial position and results of operations. There-
fore, the Group rates this as a medium risk.
On a positive note in comparison with 2013, the FDA warning
letter received in 2011 was closed, thus eliminating the risk result-
ing from this warning letter of a ban on importing products to the
United States.
Risks of dependency on suppliers
Quality controls along the entire value chain reduce the risks
related to product quality and availability. This starts with the
qualification of our suppliers. Quality controls also include com-
prehensive quality requirements for raw materials, purchased
semi-finished products and plants, as well as long-term strategic
alliances in the case of supply- and price-critical precursor prod-
ucts. The Group is dependent on individual suppliers of precursor
products for some of its main products. In the event that one of
these suppliers curtails or discontinues production, or supply is
disrupted, this could possibly have a critical negative impact on
the Group business concerned. With long-term strategic alliances
for precursor products critical to supply and price as well as alter-
native sourcing strategies, the company reduces the probability of
occurrence of these risks and rates them as unlikely. Overall, these
are classified as medium risks.
Damage and product liability risks
Further risks include the risk of operational failures due to force
majeure, for example natural disasters such as floods or earth-
quakes, which could lead to a substantial interruption or restric-
tion of business activities. Insofar as it is possible and economical
to do so, the Group limits its damage risks with insurance coverage,
the nature and extent of which is constantly adapted to current
requirements. Although the occurrence of these risks is considered
unlikely, an individual event could have a critical negative effect
on the net assets, financial position and results of operations and
is therefore classified as a medium risk.
Companies in the chemical and pharmaceutical industries are
exposed to product liability risks in particular. Product liability
risks can lead to considerable claims for damages and costs to
avert damages. The Group has taken out the liability insurance
that is standard in the industry for such risks. However, it could be
that the insurance coverage available is insufficient for individual
cases. Although the occurrence of product liability claims in excess
of the existing insurance coverage is considered unlikely, individ-
ual cases could still have a critical negative effect on the net assets,
financial position and results of operations. The company there-
fore rates potential product liability risk as a medium risk.
Risks due to product-related crime and espionage
Owing to its portfoli o, the company is expo sed to a number of
sector- specific crime risks. This relates primarily to products, in-
cluding,
among other things, counterfeiting, illegal channeling,
misuse as well as all types of property crime, including attempts
at these crimes. Crime phenomena such as cybercrime and espio-
nage could equally affect our innovations or innovation ability as
such; this includes in particular undesirable losses of information
in all relevant possible ways, both in the IT area as well as with
respect to non-IT-based threats.
To combat product-related crime, Merck KGaA, Darmstadt,
Germany, established an internal coordination network covering
all functions and businesses (“ Anti-Counterfeiting of Merck KGaA,
Darmstadt, Germany”) several years ago. In addition, security
measures are in use to protect products against counterfeiting.
Innovative technical security solutions and defined preventive ap-
proaches are used to ward off dangers relating to cybercrime and
espionage. Measures to prevent risks and to prosecute identified
offenses are conducted in all the relevant crime areas in close and
trustworthy cooperation with the responsible authorities.
The impact of these risks on business operations depends on
the respective individual case, product-specific factors, the value
chain, as well as on regional aspects in particular. Group Security
is responsible for the overall coordination of all measures in this
area. Overall, the threat resulting from crime in general is seen as
being likely for the company and is classified as a medium risk.