2.(b)Description of the mechanisms how the risks affect the company valuation
The corresponding effects brought by risks is further depicted in detail. In this question, the mechanisms of CSL are described by which these risks may influence the valuation of the company. The reasons for manage risks are decrease probability of incurring bankruptcy or reorganization costs, reduce incidence of value-decreasing investment decisions, aviod costly external financing and hedge owner’s risk since they are ill-diversified (Chitakornkijsil 2009). Moreover, how the effects related to company valuation and explain the advantages and disadvantages of these risk arising.
ϖ Product liability risk
The Product liability risk in the technical perspective is due to the manufacturing defect,
design defect and a failure to warn (Ross 2006). Especially, CSL depends on a limited group
of companies that provide raw materials and supply and matain the equipment
(CSL 2015a, p.5). The quality of products cannot guaranteed since the choice of supplier is
limited and the competition between supplier is not furious. Therefore, the supplier will not
adjust the materials’ quality quickly and create updated raw materials instead which may
increase the risk.
Moreover, CSL (2015a, p.5) depends on plasa donors for the supply of plasma. Inefficient
management of the plasma will bring product liability risk and may also have reputational
consequences. Due to the concern of the risk, CSL responsibly sources plasma from donors
complying with voluntary and regulatory standards whcih ensure the comfort, health and
safety of donors. The risk of product liability decrease due to the standards setted and the
awareness of upcoming risk.
Nevertheless, technical failure is because of the product is unstable at devlopment phase
and may bring unexpected side effects.The occurance of adverse events will bring a big loss
and a negative impact on the CSL’s business and reputatio may result of operations. For
example, technical failure is due to high costs are imposed to the CSL in terms of reducing
data accuracy and viability, disrupting experiments and damage products to stored and
releasing faulty products. According to ‘Bundaberg Tragedy’ (Hobbins 2016) illustared
faulty products impose legal costs and have bad impacts on company’s good will.
Consequently, the company will lose the competitive edge and its value will decrease.
ϖ R&D outcome risk
The R&D outcome risk is a general term for activities in connection with company’s innovation. CSL’s future success depends on the ability of continous develop new products which invovles great challeges and uncertainty (CSL 2015a, p.5). In order to achieve the successful development, CSL have to use their own expenses to operate the early stage reseach and clinical trials. The expensive costs and difficult implement will take multiple years to complete and are uncertain as to outcome. R&D investments that give void return imposes a high cost on the CSL and the revenue will decrease.
Another aespect is that commercialisation requires effective transition of research and development activities to business operations (CSL 2015, P.5). However, the projects of CSL should be assessed at each stage of progression for relevance and profitability. Therefore, CSL can avoid unnecessary R&D expenses in order to provide the better investment and distribute more profit to the investors.
ϖ Currency risk
In the currency risk, particularly relate to the foreign exchange rate. Foreign exchange risks
raise due to the company’s global nature and manifest when assets and liabilities are in
different currencies and the operation of the international. Moreover, Currency alteration also
means risk to fluctuaing manufacturing cost and labour cost which will cause differing
product costs and prices. And the risks include future commercial transactions, assets and
liablities denominated in other currencies and net investment in foreign operations (CSL
2015, P.49). Therefore, the currency will influence CSL’s product competitiveness in various
countries and will lead to decrease in CSL’s value.
On the other hand, CSL has real assets and facilities established globally which will help the
company arbitrate the currency and foreign exchange risk (CSL 2016). Moreover, CSL can
impede the competition with other foreign companies.
ϖ Interest rate risk
The interest risk of CSL is exposed to interest rate risk throughout the cardinal assets and liabilities. And CSL engages in fixed interest rate borrowing from the outside party to cut down interest rate exposure and capital structure management (CSL 2016b, p.95). In CSL annual report (2015, p.50), indicated that a general movement of one percentage point to the fixed interest rate will bring change of $3.9m shortcut of the profit which is highly smaller than the $6.8m decrease when use floating rate. Therefore, the interest risk on borrowings primarly by entering into fixed rate arrangement and if necessary CSL should hedges interest rate risk by using derivative instruments.
ϖ Competition risk
The Competition risk is one of the Economic Perspective. The major competitors of the CSL are SANOFI and GRIFOLS SA. The existence of competitors will put pressure on CSL to continuously innovate and improve company’s value. Moreover, the risk of CSL being taken over is high possibaility due to the two competitors growing the capacity and market shares. According to Witcomb (2015) showed that the average growth rate of recent year will be difficult to sustain and likely to return to the industry average of 5-8% a year. Philo Capital fund manager Hugh Dive said : ‘If there are more competition CSL will be more powerful’ (Gardner 2015). Consequently, the competition risk may decrease the market share slightly but CSL will create more innovation to make attractive to the investors to expand its operations in the future.
Legal and Regulation Perspective:
ϖ Legal risk
It is vital for CSL to compliance to regulation changes as a multinational corporation. The imports and exports approval of regulations for pharmaceutical products is differ across countries. Therefore, CSL have to comply with intellectual property regulations in order to pledge the revenue stream from sales and licensing patents. Nevertheless, CSL will catch in the legal scandals which will damange the sales, reputation and subsequently affect the share price. In addition, there are 10 entities within CSL that are responsible for reporting risks through the operational risk process especially risk identification and assessment (Zolkos 2012). Hence, the patents are highly protected by the CSL and the risk of reverse engineering and an increase in competitors are low probability.
On the other hand, CSL has established the facilities in the Switzerland where is low in the tax. However, Switzerland may be facing the change of tax as well as European Union had change to the Apple Company and Ireland (Farrell and McDonald 2016). Consequently, the CSL will be impacted by the change of tax and have hugh impact on the shareholder’s value since the potential political instability in the European Union.
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