Question

Hi, i am writing a Financial statements briefing and analysis/ comprehensive report on Johnson and Johnson i need some help on key points for Risk Factors.I need to summarize 5 of the numerous risk factors stated in the report. Risk factors are standard requirement of each company’s report. I need to discuss risks’ impact on company and management.

Answer 1

1-Risks Related to Product Development, Market Success and Competition

Product development means new improved product to lure potential customer and keep intact the existing customer. Markets today are flooded with similar products and each company tries to out do others in this competitive market.

Product development is the key to a company’s survival and growth. However, such product developments are not free from uncertainty of clinical outcomes, then obtaining necessary regulatory approval. Challenges are not restricted to clinical outcomes, and regulatory approval. Major challenges come from competitor who come out with biosimilar product at a lesser price. Protecting patent and other intellectual property right is another major challenge for the company.

Impact-The impact of biosimilar product from competitor is loss of revenue and loss of market share. If such challenges are not tackled at appropriate level and time , it could impair the company’s finance permanently. Survival of the company will be at stake.

2- Risks Related to Product Liability, Litigation and Regulatory Activity

After introduction of new product, there is one major challenge , that is, such product is subject to scrutiny either on safety concern or product efficacy, and if the company fails such test it could lead to product recall, withdrawal, and might have to face regulatory action. Litigation is very common as it involves public health safety and environmental hazard. Adverse judgement will have a serious impact on company finance due to product recall, withdrawal and litigation expenses and significant civil and criminal penalties. Changes in domestic and international tax laws and regulations and issuance of new or revised accounting standards by the Financial Accounting Standards Board and regulations by the Securities and Exchange Commission poses a serious challenge and the company is exposed to additional tax liabilities potentially in excess of existing reserves.

Impact- The immediate impact is reputational damage, declining sales and rising litigation expenses and it carries the risk of significant civil and criminal penalties. Change in tax laws could lead to exposures to additional tax liabilities potentially in excess of existing reserves All these could affect the financial viability of the company in long run.

3- Risks Related to the Company’s Strategic Initiatives and Healthcare Market Trends

In today’s world, it is very challenging for the company to realise it’s strategic initiatives mainly due to pricing pressure from the government as there is a shift in healthcare market as government are increasingly reimbursing or are the primary payer of health care expenses, thereby exerting pressure on companies to reduce cost and sometimes putting a cap on maximum price.

Individual purchasers of health care products and services are getting restricted due to economic hardship and institutional and governmental are cutting expenses on healthcare due to budgetary constraints.

The Company’s ability to realize its strategy for growth through strategic acquisitions and marketing agreements may not be realized or may take longer to realize than expected.

Impact-Company’s strategic growth is not able to take off as expected. Cap on pricing medical product or service is putting pressure on company’s top line and bottom line growth. i.e. sales growth and on profitability.

4- Risks Related to Economic Conditions, Financial Markets and Operating Internationally.

Severe fluctuations in currency exchange rates, interest rates coupled with inflation mar the company’s growth rate. Changes to global climate, armed conflicts, cause disruptions in manufacturing and distribution networks and affect demand for the Company’s products.

Potential changes in trade laws, regulations and policies, including increased trade restrictions or tariffs and potential drug reimportation legislation affect demand for the Company’s products.

Impact- Rate fluctuation, inflation, climate change, armed conflicts affect the company’s financial health and sometimes it is impossible for the management to think of growth strategy in such uncertain environment where survival is difficult. Company’s actual results will differ materially from those expressed in forecast.

5- Risks Related to Supply Chain and Operations.

Difficulties and delays in manufacturing, disruption in company’s information technology systems and reliance on global supply chains and production and distribution processes that are subject to increasing regulatory requirements could adversely affect supply of the company’s products. In such a situation, it is not possible to predict or identify all such factors , so as to take precautionary steps.

Impact- Uncertainty will lead to uncertainty of income , profit margin. The management will not able to provide future guidance on growth, profitability, and on operating margin.