The pharmaceutical industry is operating within a marketplace of heightened risk, according to a Bloomberg Law analysis of Form 10-K filings. But pharma companies aren’t changing their risk governance approach, clearly favoring board oversight over other recommended means.
A Bloomberg Law EDGAR Advanced Search of Form 10-K, Item 1A Risk Factor filings submitted by companies categorized with a Standard Industrial Classification (SIC) of pharmaceutical preparations shows that the number of corporate risks filings—and the amount of detail in them—that these pharma companies have disclosed over the past decade has more than doubled.
From 2014 to 2018, risk factor filings grew gradually from 150 to just over 200. In every year since then, however, the annual totals have been more than twice as high. There have already been 430 risk factor filings this year, and with more than three months left, it’s highly likely that 2024 will surpass the 500 mark.
The sudden increase in the number of risk filings in 2019 to a level that has been maintained until present day may be due to several pivotal Delaware Chancery decisions scrutinizing director’s oversight claims. But whatever the reason, it’s clear that pharmaceutical companies are operating in a heightened risk landscape.
Pharma Risks Are More Complex
A comparison of pharmaceutical company risk factor filings from the same periods of time (March 1–Aug. 31) in 2014 and 2024 provides an excellent snapshot of how these risks have evolved in the past decade.
In 2014, 106 companies disclosed risk factors to their shareholders in the six-month period. In this time period in 2024, the number nearly tripled, with 305 pharmaceutical companies filing Form 10-K risk factors.
Also notable: The 2024 risk factor filings are substantially more detailed than 2014’s, listing a wider range of risk factors for pharmaceutical companies. For example in 2014, pharmaceutical companies mostly disclosed standard financial risk factors related to inability to secure financing, substantial debt holdings, or material weakness in their internal control of financial reporting.
Ten years later, pharmaceutical companies consider a myriad of factors related to financial reporting, market competition, regulatory approvals, commercialization of products, clinical trials, intellectual property, and company executives and personnel. Additionally, there are risk filings that outline emerging trends such as supply chain disruptions, Covid-19 pandemic, artificial intelligence use, cannabinoid (CBD) strategy, or environmental, social, and governance (ESG) reporting.
Present-day pharmaceutical companies are clearly facing more complex, multifaceted risk profiles than previously seen in the industry.
Companies Not Altering Their Risk Governance
Despite these increased risks in recent years, pharmaceutical companies are mostly relying on traditional governance models to manage them, an analysis of Form 10-K filings disclosing governance practices over the past year shows.
A Bloomberg Law EDGAR Advanced Search of Form 10-K, Item 10 filings in the 12-month period from Sept. 20, 2023 through Sept. 19, 2024, reveals how pharmaceutical companies structure their risk governance. Almost three-quarters of the 50 filings from the pharmaceutical companies disclosed that, at least in some capacity, the full board was responsible for their risk oversight.
Just under half of the companies disclosed that they delegated at least a portion of the risk oversight—mostly financial or accounting related—to their audit committee.
It’s somewhat surprising that, given the escalated corporate risks for pharmaceutical companies over time, there hasn’t been a resultant evolution of risk management strategy.
Such a strategy might involve senior management, or the delegation of specific risk oversight to a committee, such as a nominating & governance or a compensation committee. But only a handful of these companies chose this route, based on the 10-K data.
Also, only two of the 50 pharmaceutical companies chose to establish a separate risk management committee, which has been a long-standing recommendation in the health care industry.
Pharma companies that choose not to recalibrate their risk governance while also filing more extensive risk factor disclosures may be increasing their susceptibility to shareholder or government scrutiny.
Other pharma industry analyses featured in report cover medicare pricing litigation, Ozempic-related lawsuits, pharmacy benefit managers, biotech industry financing, cannabis rescheduling, and pharma industry M&A (Oct. 18).
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