Risk Management and financial derivatives Essay

Risk Management and financial derivatives - Essay Example In this regard, pharmaceutical firms are relatively more volatile than most companies in other industries ("Risk Management in the Pharmaceuticals Industry" 2005). This paper discusses the major business risks that have significant impact on pharmaceutical companies, specifically AstraZeneca. Moreover, it explains how the company utilises derivative financial instruments such as interest rate swaps and forward foreign contracts to minimise its exposure to financial risks brought about by fluctuations in the interest rate and exchange rate. This paper also presents alternative strategies that the firm can adopt in order to hedge against these risks. Based on their annual reports, AstraZeneca and other multinational pharmaceutical companies including GlaxoSmithKline and Merck have identified risk factors affecting their operations. These are summarised as follows: Most pharmaceutical companies have recognised that the pharmaceutical companies throughout the world have become highly competitive ("Risk Management in the Pharmaceuticals Industry" 2005). AstraZeneca cited that industry consolidation have resulted in the establishment of few but very large and formidable companies which are able to match, if not exceed, the firm's resources allocated for research and development as well as marketing. This threatens the company's competitive edge, thus, directly impacting its bottomline ("AstraZeneca Annual Report" 2004). Similarly, GlaxoSmithKline explained that product innovations and advent of technological advances which competitors may adopt could adversely affect the firm's operating results ("GlaxoSmithKline Annual Report" 2001). These factors have facilitated the emergence of new global players, particularly in the markets of China and India, which are playing increasingly significant roles in the business models of industry players ("China and India: Risk and Returns in Asia's Blockbuster Pharma Markets" 2005). Apart form these, AstraZeneca also mentioned that risk relative to competition is aggravated by the loss or expiration of patents, marketing exclusivity and trademarks. The company noted that once patent protection or other types of marketing exclusivity for a certain product have expired, lower priced generic copy products may be legally manufactured. The introduction of generic products generally leads to substantial loss of sales for the pharmaceutical companies' proprietary products ("GlaxoSmithKline Annual Report" 2001). The competition from generic medicines exerts downward pressure on profit margins and results in decreasing revenues. This is evidenced by the study conducted by Deloitte which asserts that the very large number of drugs coming off patent in the next three to five years equates to billions of dollars in current in potential sales. However, it is estimated that the pharmaceutical giants could lose about $35 billion to $50 billion in product sales during the said time frame due to competition from generic brands. (Rhodes & Mulder 2004) Regulatory Approvals and Price Controls Pharmaceutical companies are also facing increasing pressures from regulatory bodies in various countries. In