Which of the risks identified in COH’s 2022 annual report will affect its beta? Which of the risks identified there will affect COH’s unsystematic risks?
Transcribed Image Text: Business risks
Cochlear has a sound and robust risk management framework to identify, assess
and appropriately manage risks.
Our principal business risks are outlined below. These are risks that may have a material adverse effect on the
business strategy, financial position or future performance. It is not possible to identify every risk that could
affect the business and the actions taken to mitigate these risks cannot provide absolute assurance that a risk
will not materialise. Cochlear's Risk Management Policy and details of its risk management standard can be
found in the Corporate Governance Statement, both available on the website.
Risk
Pandemics
Product
innovation and
competition
Misappropriation
of Cochlear's
know-how
and intellectual
property
infringement
Medical device
regulations
Description and potential consequences
As COVID has demonstrated, pandemics have the
potential to impact our markets as elective surgeries
may be deferred to reduce the strain on healthcare
systems. Travel restrictions, government mandated
shutdowns and potential supply chain impacts could
also have business impacts.
Increased competition exposes us to the risk of losing
market share and lower average selling prices. This risk
may be exacerbated by failure to produce innovative
products and services. We are also exposed to the
risk that our products are superseded by medical,
biological and/or technological advancements
resulting in alternative products or treatments being
commercialised, which may impact new business.
We are exposed to the risk that our proprietary
know-how may be misappropriated through hacking
of our systems, or by employees, consultants or third
parties who may have access to systems. Our market
share is at risk of competitors accessing and using this
information.
We are also exposed to allegations of infringement by
third parties, including competitors, which could result
in us paying damages and/or receiving injunctions
preventing us from selling our products and/or paying
royalties to continue selling.
We operate in a highly regulated industry. Medical
devices and the information they produce are strictly
regulated in countries where our products are sold.
Failure to meet regulations may result in product
sanction or recall resulting in loss of sales and
reputational harm.
Product quality Delivery of high quality and safe outcomes for our
customers is central to our ongoing development of
innovative product. As the developer, manufacturer,
marketer and distributor, any failure in product
quality might lead to injury, litigation, liability, recall
and reputational harm.
Strategies used to mitigate the risk
In addition to developed business continuity
and crisis management plans, our geographic
spread of customers may mitigate the impact
of a pandemic on our business.
Our active and continuous assessment of
markets (new and existing) informs our
strategy, operating plans and innovation
programs.
The creation and protection of intellectual
property are a key focus for us. We target an
annual investment of 12% of sales revenue on
R&D aimed at retaining our market leadership
position and growing the hearing implant
market.
Confidentiality agreements are in place with
staff and third parties with access to our
know-how. We limit access to key systems
by business need and monitor access by
individuals.
We have an increasing and evolving patent
portfolio across our technologies to assert
against competitors, and internal and external
legal resources to manage litigation, and our
internal product development processes
include 'freedom to operate' checks.
Regulatory uncertainty is assessed as part of
product development. We actively monitor
the regulatory environment with regulators
and incorporate requirements and changes
into our product quality assurance system.
Our focus on quality throughout the design,
testing, manufacture and post-market
monitoring of our products ensures high
standards of product safety and efficacy.
Effective collaboration with customers aligns
clinical processes and technology with
evidence-based practices. We also maintain
product liability insurance.
Risk
Market access
Credit and
currency
Privacy and
information
security
Talent
management
Interruption to
Our reliance on suppliers for key materials and services
product supply carries inherent risk of delay and disruption. This
risk is distinct from that where alternative materials/
sources and regulatory requirements make substitution
costly, time-consuming or commercially unviable.
While products are manufactured across six sites
globally, supply may be disrupted by a site becoming
inoperative. New manufacturing facilities require
regulatory approval for products to be saleable. Such
approval could take many months or years.
Geo-political
Description and potential consequences
The majority of our developed market customers
rely on a level of reimbursement from insurers and
government health authorities to fund their purchases.
Pressure on healthcare budgets globally may lead to
pressure on reimbursement levels. Healthcare-related
taxes by government agencies could also impact
candidates' ability to access our products.
risk
We provide credit to a limited number of
governments, government-supported universities
and clinics or major hospital chains. The extension
of credit creates a risk that borrowers fail to
pay resulting in interrupted cash flow and lower
earnings.
Over 90% of our revenues and over 50% of costs
are denominated in currencies other than Australian
dollars. We bear exchange rate risk from AUD
fluctuation against primarily US dollars, Euros,
Japanese yen, Sterling, Swedish kroner and Swiss
francs. Long-term permanent changes in market
rates may impact earnings.
We handle and store personal information, including
health information, for our customers and employees.
With expanding information privacy and security
regulations, we recognise its security as a key element of
our relationship with our customers.
We operate in a competitive environment in relation
to attracting and retaining scientific, technology and
engineering talent. The absence of this talent may cause
key positions to be unfilled, impacting our ability to
innovate and grow.
Our business is subject to risks associated with
doing business internationally. Unexpected geo-
political events in foreign countries in which wer
operate could adversely affect our supply chain or
manufacturing through increased cost or a reduced
choice of supply, impacting our ability to execute
our strategic plans.
Strategies used to mitigate the risk
We continue to work with reimbursement and
government agencies throughout the world to
emphasise the health and economic benefits
of cochlear and acoustic implants.
Credit risk is not significantly concentrated
and varies by location and customer type.
Credit and receivables management
(including identifying high risk customers.
and potential restrictions on future trading)
is executed at a regional level, subject to
country limits set by the Chief Financial
Officer and overseen by the Audit & Risk
Committee. Monthly credit balances and
ageing are monitored by the Board.
Financial instruments are used to manage
foreign exchange risk in accordance with the
Board approved policy.
We work closely with our suppliers to mitigate
potential interruption or delay to supplies.
In addition, purchase quantities of inventory
are managed to avoid short-term impacts.
Where appropriate, lifetime buys, strategic
raw materials purchases, alternate sources
and other supply chain interventions are
undertaken to mitigate production impacts.
We also review the business continuity plans
for manufacturing and maintain business
interruption insurance.
We regularly assess our privacy governance
and information security controls to ensure
that when customer information is held it is
secure. Whilst we maintain cyber insurance
as part of our overall risk mitigation strategy,
our pro-active approach aims to ensure that
controls of these risks are prevalent.
Talent management programs are in
place, both within Australia and in our key
international markets. These programs
develop the longer-term capabilities required
for us to achieve our strategic goals.
Whilst the international politics which
influence the level of risk are, and will
remain, outside our control, we closely
monitor our key suppliers, and assess
opportunities to diversify supply and reduce
key dependencies. Engagement with
governments, experts and regulators, enables
us to ensure compliance with the latest
regulations, economic sanctions and trade
rulings.