Risk management

Four key risks

Investment in Össur’s shares involves various risks where the business, financial conditions, and results of operations going forward rest upon certain assumptions and could be negatively affected if any of the factors described in this chapter occur. Össur has chosen to highlight four key risks which are currently considered most relevant. Össur cannot ensure that given assumptions for the description of the risk is correct. Furthermore, additional risks and uncertainties which are listed on Össur’s corporate website, or not presently known to Össur, or that the Company currently deems immaterial, may adversely affect its business operations and financial results, to an even greater extent, than the four risks identified here.

Changes in reimbursement
DescriptionPotential impactMitigative actions

Most of Össur’s products and services are reimbursed by third-party payers, including both government healthcare programs and private health insurance plans. All third-party payers continue to develop methods of controlling healthcare costs, including review of claims, selective contracting, and competitive bidding.

These cost-control methods may limit or even eliminate the coverage and the amount of payment for which third-party payers may be willing to pay on Össur‘s products and services. As a result, sales may decline significantly, and customers may reduce or eliminate purchases. Reviews of claims may lead to repayment of prior sales.

Össur only brings products to the market that have medical indication and are clinically validated. Össur applies its reimbursement knowledge from the earliest stages of product development to the post-sale education of customers. Össur also pursues several strategies to manage the reimbursement of its products and services.

Regulatory requirements
DescriptionPotential impactMitigative actions

Össur’s products are medical devices that are subject to extensive global regulations by the respective authorities in countries where Össur conducts its business. Such regulations can restrict virtually all aspects of a medical device’s design and testing, manufacturing, safety, labeling, storage, recordkeeping, reporting, clearance and approval, promotion, distribution, and services.

Failure to comply with the regulatory requirements of the applicable authority may subject Össur to sanctions ranging from warning letters to penalties and product withdrawal. Össur’s failure to comply with regulatory requirements or receive regulatory clearance and approval for its products or operations would adversely affect Össur’s sales and potential for future growth.

Össur maintains a robust global quality system that complies with international medical device standards and is an intrinsic part of the Company‘s internal processes. Furthermore, employees actively monitor the medical device regulation landscape and stay on top of changes to international and local regulations in the countries where Össur markets and sells medical devices.

Össur may be unable to develop or secure the use of new technologies
DescriptionPotential impactMitigative actions

Össur operates in markets that are characterized by rapid technological change, driven by extensive research that is carried out by market participants. Technological innovation takes place at various stages in Össur’s value chain and may include individual components, design, and functionalities of Össur products, and patient care.

The development by any suppliers or competitors of substitute products or components that better satisfy market demands could have a material adverse effect on Össur’s business and results of operations. A failure to develop new products or enhance existing products could also have a material adverse effect on Össur’s operations and potential for future growth.

Significant reinvestment into R&D and constant strive to find new technologies has resulted in a vast IP portfolio and enables a strong position to compete with potential new entries. External connections and appeal to universities, research institutes and investors provides the opportunity to stay informed and review emerging innovation as part of acquisitions or research cooperation initiatives.

Industry consolidation and forward integration
DescriptionPotential impactMitigative actions

Major shifts in Össur’s market place include the consolidation of prosthetics manufacturers in recent years and the additional momentum that forward integration is gaining in the industries where the Company operates. Given the nature of acquisitions, it is uncertain to what degree Össur will be able to participate in further consolidation and to what degree forward integration will affect Össur‘s operations.

The consolidation has been a material contributor to the growth of Össur in the past. If Össur were not to participate in further consolidation or forward integration, it might limit Össur‘s potential for future growth. In addition, these shifts may impact the competitive landscape of the industries and the associated market shares. Changes in the industry may furthermore impact Össur’s customers.

Össur continuously reviews value enhancing acquisition and investment opportunities in its business segments and keeps a good relationship with the relevant stakeholders in the industry. Össur furthermore operates its own clinics in certain regions and has partnership programs in place with patient care providers to offer end-users quality services.

Other relevant risk factors

Össur is exposed to a range of other risks that have not been discussed in the previous section. Below is a list of other risks that Össur considers relevant but they are not listed in order of priority and the list is not exhaustive.

Össur’s assumptions regarding market trends may prove incorrect.

Assumptions regarding demographic trends are important factors in Össur’s business decisions. The Company expects, for example, that the population of elderly will continue to grow, that an increasing proportion of this population will live an active lifestyle and that the number of people with diabetes will increase in the future. No assurance can be made that these assumptions will prove to be correct or that these demographic trends will result in a demand for the Company’s products and services.

Össur is subject to risks related to its international operations.

Headquartered in Reykjavík, Iceland, Össur has significant operations in the U.S. and Europe, as well as operations in Asia, Australia, Africa and South-America. Össur’s business and operations are therefore subject to various risks inherent to international operations. Such risks include, among others, recessionary trends, inflation, instability of financial markets, exposure to different legal standards and enforcement mechanisms, trade barriers, rules regarding the origins of products, labor unrest, foreign exchange controls, human rights, corruption and political and social instability.

Product liability claims could adversely impact Össur’s financial conditions, operations and reputation.

Össur is responsible for the safety and effectiveness of its products. Össur engages in internal quality control and product testing procedures to mitigate the risk and also carries insurance. However, the Company cannot guarantee that it won’t be found liable for a product liability claim in the future or that the insurance coverage is sufficient or will continue to be available on commercially reasonable terms.

Össur’s business is subject to healthcare industry reforms and legislative and regulatory changes.

Most of Össur’s products and services are reimbursed by third-party payers, including both government healthcare programs and private health insurance plans. All third-party payers have developed and continue to develop increasingly sophisticated or aggressive methods of controlling healthcare costs, including review of claims, selective contracting and competitive bidding. These cost-control methods also potentially limit, or even eliminate the coverage and the amount of payment for which third-party payers may be willing to pay for medical products and services. As such, the continuing efforts of both governmental and private payers of healthcare to contain or reduce costs could lead to patients being unable to obtain approval for payment from these third-party payers. If that were to occur, sales of Össur’s products and services may decline significantly and its customers may reduce or eliminate purchases. Reviews of claims may lead to repayment of prior sales. Future legislative or regulatory initiatives directed at reducing costs could be introduced. In addition, changing healthcare trends such as increasing premiums or deductibles for patients may have an adverse effect on Össur’s business. The Company cannot predict the impact of future legislative or regulatory initiatives on its business.

O&P clinics depend on publicly and/or privately funded patients.

Insurance coverage varies greatly between countries and considerable sales and profit in Össur’s O&P clinics are directly dependent on government contracts and tender business. Government contracts are subject to policy changes and subsequent loss in sales and profit. Tender contracts for O&P clinical services are regularly renewed and can be lost to competitors with a direct negative impact on the business.

Össur is required to comply with regulatory requirements and receive regulatory clearance and approval for its products or operations.

Össur’s products are medical devices that are subject to extensive global regulations by the respective authorities in countries where Össur conducts its business. Such regulation can restrict virtually all aspects of a medical device’s design and testing, manufacture, safety, labeling, storage, recordkeeping, reporting, clearance and approval, promotion, distribution and services. Failure to comply with the regulatory requirements of the applicable authority may subject a company to administrative or judicially imposed sanctions ranging from warning letters to criminal penalties or product withdrawal. Össur’s failure to comply with regulatory requirements or receive regulatory clearance and approval for its products or operations, including healthcare fraud and abuse laws and regulations, would adversely affect Össur’s sales and potential for future growth.

Össur’s assumptions regarding market trends may prove incorrect

Assumptions regarding demographic trends are important factors in Össur’s business decisions. The Company expects, for example, that the population of elderly will continue to grow, that an increasing proportion of this population will live an active lifestyle and that the number of people with diabetes will increase in the future. No assurance can be made that these assumptions will prove to be correct or that these demographic trends will result in a demand for the Company’s products and services.

Össur is subject to risks related to its international operations

Össur has operations all around the world and the Company’s business and operations are therefore subject to various risks inherent to international operations. Such risks include, among others, recessionary trends, inflation, instability of financial markets, exposure to different legal standards and enforcement mechanisms, trade barriers, rules regarding the origins of products, labor unrest, foreign exchange controls, human rights, corruption, and political and social instability.

Product liability claims could adversely impact Össur’s financial conditions, operations, and reputation

Össur is responsible for the safety and effectiveness of its products. Össur engages in internal quality control and product testing procedures to mitigate the risk and carries insurance. However, the Company cannot guarantee that it won’t be found liable for a product liability claim in the future or that the insurance coverage is sufficient or will continue to be available on commercially reasonable terms.

O&P clinics depend on publicly and/or privately funded patients

Insurance coverage varies greatly between countries and considerable sales and profit in Össur’s O&P clinics are directly dependent on government contracts and tender business. Government contracts are subject to policy changes and subsequent loss in sales and profit. Tender contracts for O&P clinical services are regularly renewed and can be lost to competitors with a direct negative impact on the business.

Össur is exposed to litigation from international investors

Össur has an international shareholder base and is therefore exposed to risk of litigation from international investors.

Össur needs to attract and retain qualified and competent human resources

Össur continuously works to attract and retain qualified and competent employees to maintain Össur’s innovative edge and financial success. Failing to attract and retain key employees, managers, and experts, or not developing them adequately, puts the Company at risk.

Össur is exposed to employee litigation, regulatory sanctions and strikes

Össur is exposed to risk of litigation and regulatory sanctions for employment practices. The Company mitigates these risks by adhering to relevant policies and procedures, educating managers on best practices, monitoring changes to employment legislation and carrying insurance. However, the Company cannot guarantee that it will not be found liable in the future or that insurance coverage is sufficient or will continue to be available on commercially reasonable terms. Össur is also exposed to risk related to strikes.

Risk relating to acquisitions

A substantial proportion of Össur’s growth in recent years has been driven by acquisitions. No assurance can be given that Össur will be successful in identifying appropriate acquisition targets in the key markets in which the Company operates or desires to operate. Acquisitions involve several risks, including diversion of management resources and management focus, integration risk, unexpected or high integration costs, failure to retain key employees of the acquired business and failure to realize expected synergies. To mitigate risk, Össur conducts due diligence on the operations of acquisition targets and seeks protection through representations and warranties from the sellers.

Össur is exposed to financing risks and instability within financial markets

As a global business Össur is exposed to various risk factors originating in the international financial markets, among which are liquidity risk, interest rate risk, foreign exchange risk, credit risk and counterparty risk on cash held with financial institutions. These risk factors are managed according to internal rules that are outlined in the Company’s treasury policy.

Össur is exposed to fluctuations in major operational currencies

Össur’s functional and reporting currency is the U.S. dollar, hence fluctuations in local currencies can have an impact on the operations of the Company. Fluctuation in the exchange rates between the U.S. dollar, Euro, Icelandic krona, and other currencies where Össur operates can have a significant impact on the financial condition and results of Össur’s operations. In 2017 Össur entered into forward contract covering approximately half of the estimated ISK costs in 2017. However, even with the hedge, the profitability of Össur can be significantly impacted.

Össur’s financing and tax structure are subject to laws and governmental approvals

Össur is committed to complying with tax rules and paying all legally required taxes. At the same time, the Company has a responsibility to the shareholders to legally minimize costs and maximize earnings. Össur’s tax strategy is to strive for optimizing taxes. The goal is to balance benefits against risks and costs while at the same time meeting reporting obligations, compliance obligations and corporate social responsibilities. Össur recognizes that some areas are not free from doubt and that differing legal interpretations may be possible, meaning that from time to time, tax authorities may not share or question Össur’s interpretation. Also, relevant laws and regulations may change, resulting in higher taxes or requiring the company to change the tax and legal structure.

Össur is dependent on IT systems

Össur’s business is supported by several systems. The systems that are classified as mission critical are the ERP, warehouse, phone, and email systems, as well as infrastructure like servers, networks, databases, and storage systems. Failure in these systems can have a serious impact on the business, such as reduced or lost ability to receive orders, complete deliveries, or manufacture products. To improve business continuity, Össur consolidated its IT systems into two reliable datacenters in EMEA and the U.S. that both serve as primary and disaster recovery sites where mission critical systems and data is replicated between centers.

Össur’s activities are subject to privacy laws, which could have an impact on its operations

Data privacy laws and regulations, including the General Data Protection Regulation in Europe and the Health Insurance Portability and Accountability Act in the U.S. regulate the processing, transmission, maintenance, use and disclosure of personally identifiable information, including protected health information. There are costs and administrative burdens associated with ongoing compliance with these data privacy laws and any failure to comply with current and applicable future requirements could lead to significant fines and severely damage Össur’s reputation.

Össur may be adversely affected by developments in medicine

Össur’s main products are intended to improve the quality of life for individuals suffering the effects of injuries, amputations, or illnesses. No assurance can be given that Össur’s target market will not be materially diminished by advances in medical science or that Össur will be able to generate comparable sales from alternative market segments.

Össur is subject to risks relating to the protection of intellectual property rights

Össur relies on a combination of patents, trademarks, trade secrets and non-disclosure and non-competition agreements to protect its intellectual property, and will continue to do so. While Össur intends to defend itself against any threats to its intellectual property, there can be no assurance that these patents, trademarks, trade secrets or other agreements will adequately protect Össur. Although Össur’s product design process has mechanisms in place to create, to the best possible extent, IPR freedom for the commercial exploitation of new products, the Company may be exposed to accusations of intellectual property rights infringement.

Össur relies on agents and third-party distributors regarding the sale and distribution of its products

Third-party agents and distributors sell a portion of Össur’s products. The Company’s largest wholesale customer accounted for 5% of the Company’s net sales at yearend 2017. Other distributors accounted for less than 2% of net sales for the same period. These agents and distributors are not employees of Össur and Össur may be unable to influence their actions and performance.

Össur relies on healthcare professionals and other agents regarding the sale and distribution of its products

Össur’s sales depend primarily on the prescriptions and recommendations of its products by healthcare professionals. The Company has developed and maintained close relationships with several orthopaedic and prosthetic (O&P) clinics that support and recommend the Company’s products. A failure to maintain the support of such orthopaedic professionals and O&P clinics, or a failure to develop relationships with new healthcare professionals and O&P clinics, could adversely affect Össur’s business and results of operations.

Össur is vulnerable to disruptions to its production and distribution facilities

Össur’s production and distribution facilities may be adversely affected by man-made or natural disasters. Össur has worked on certain risk ranking programs in all its main manufacturing and distribution facilities, and successfully reduced the level of risk and increased awareness among employees. However, a disruption of Össur’s production facilities could adversely affect the Company’s production output, which, in turn, would impair the Company’s ability to fulfill customer orders. This could lead to a decline in sales and increased costs due to necessary shift in production within the Company and the possible need to outsource some production. The Company maintains insurance to cover such losses. No assurance can be given, however, that insurance payments would be sufficient to cover the full loss resulting from a disruption in Össur’s production or that Össur’s insurance would cover the event that causes the disruption.

Össur is dependent on certain critical product suppliers and certain raw materials

Össur is dependent on suppliers that manufacture products for the Company. Failure to deliver products could adversely affect the financial results of the Company. To mitigate this risk Össur audits its critical suppliers on a regular basis and carries safety stock of all products. Össur’s products furthermore require silicone, carbon fibers, metals, and other raw materials. Failure of supply of critical raw materials could adversely affect the financial results of the Company. To mitigate this risk Össur carefully selects suppliers of critical raw materials and carries safety stock of the raw materials.