Four Key Risks
An investment in Össur involves various risks as the business, financial conditions, and operational results rest upon certain assumptions and could be negatively affected if any of the factors described in this chapter occur. Even though the long-term prospects and underlying fundamental drivers of our markets are not expected to change, Össur highlights four key risks which are currently considered the most relevant. In addition to these risks, Össur faces a range of other risks described on our corporate website.
Össur cannot ensure that the given assumptions for the description of any of these risks are correct. Additional risks and uncertainties, as well as risks that Össur currently deems immaterial or are not presently known to us, may adversely affect our business, financial conditions, and operational results.
I. Reimbursement Landscape
Most of Össur’s products and services are reimbursed by third-party payers, including both government healthcare programs and private health insurance plans. Third-party payers continue to develop methods of controlling healthcare costs, including reviews of claims, selective contracting, and competitive bidding. Our business depends on understanding and adapting to reimbursement and insurance plans in all markets where we conduct our business.
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 for Össur products and services. As a result, customers may reduce or eliminate purchases and sales may decline significantly. Reviews of claims may lead to repayment of prior sales. Finally, failing to understand and adapt to changes in reimbursement systems, may affect Össur’s license to operate and thus affect our sales.
Össur only brings products and services to the market that address medical indications, and which are clinically validated. In addition, we apply our reimbursement knowledge from the earliest stages of product development to the post-sale education of customers. Finally, we monitor and analyze changes to the reimbursement landscape in the markets where we operate and we adapt our reimbursement strategy accordingly.
II. Regulatory Requirements
Össur’s products and services are subject to global and local regulations. Such regulations can restrict practically all aspects of a medical device’s design and testing, manufacturing, safety, labeling, storage, record-keeping, reporting, clearance and approval, promotion, distribution, and services. In our interactions with government officials, healthcare professionals, business partners, we must comply with relevant third-party regulatory requirements as well. Finally, our footprint is growing in new emerging markets which are characterized by complex regulations, business volatility and unpredictability.
Failure to comply with the regulatory requirements of the applicable authority may subject Össur to fines, penalties, sanctions, or product withdrawals. If we would fail to receive regulatory clearance and approval for our products and services it could adversely affect our sales and potential for future growth, threaten our license to operate in the respective market, and affect our brand and reputation.
Össur maintains a robust global quality system that complies with international medical device standards, and which forms an intrinsic part of internal processes. Össur also has a global regulatory compliance program, including a Code of Conduct, in which our employees identify, assess, manage, and report potential risks from international and local regulations in the countries where we market and sell our products and services. Finally, tracking and analyzing regulatory requirements of new markets forms a part of our market access strategy.
III. New Technologies
Össur operates in markets that are characterized by rapid technological change, driven by extensive research that is conducted by market participants. Technological innovation takes place at various stages in our value chain and may include individual components, design, and functionalities of our products and services.
The development by 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 our operations and potential for future growth.
Össur’s significant investment in research and development and constant strive to finding innovative technologies, has resulted in a vast IP portfolio and a strong position to compete with potential new entries. External connections with universities, research institutes and investors, provide us with the opportunity to stay informed and review emerging innovation as part of acquisitions or research cooperation initiatives.
IV. Industry Consolidation and Forward Integration
Major shifts in Össur’s marketplace include the consolidation of orthotics and prosthetics (O&P) manufacturers and forward integration, which involves acquiring service providers in the O&P industry. It remains uncertain to what degree we will be able to participate in further consolidation and forward integration and how it will affect our operations. Industry consolidation and forward integration can lead to increased challenges and complexity and our success depends in part on our ability to effectively operate in this changing marketplace.
The consolidation has been a material contributor to the external growth of Össur in the past. If we were not to participate in further consolidation or forward integration, it might limit our potential for future growth. In addition, these market trends may impact the competitive landscape of the industries and the associated market shares. Finally, these changes in the marketplace may impact our customers, CPOs and end-users, and interactions with them.
It is at the core of our strategy to operate effectively in this changing marketplace. Össur continuously reviews value enhancing acquisitions and investment opportunities in our business segments and keeps a good relationship with the relevant stakeholders in the industry. We operate our own clinics in certain regions and have partnership programs in place with healthcare providers to offer customers quality products and services in the interest of our end-users.
Other relevant risks
Össur is exposed to other risks that have not been discussed in the previous section. Below is a list of risks that Össur considers relevant, grouped in strategic, operational, financial and compliance risks, in line with our Enterprise Risk Register 2022. The list is not exhaustive.
Össur’s assumptions regarding market trends may prove incorrect
Assumptions regarding demographic trends are key factors in Össur’s business decisions. Össur 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 Össur’s products and services.
O&P clinics depend on publicly and/or privately funded patients
Insurance coverage varies 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 can be lost to competitors negatively impacting the business.
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 Össur 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 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, Össur may be exposed to accusations of intellectual property rights infringement.
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 relies on healthcare professionals
Össur’s sales depend primarily on the prescriptions and recommendations of its products by healthcare professionals. Össur has developed and maintained close relationships with several orthopedic and prosthetic (O&P) clinics that support and recommend Össur’s products. A failure to maintain the support of such healthcare 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 subject to risks related to its international operations
Headquartered in Reykjavík, Iceland, Össur has significant operations in the US 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, energy prices, human rights, corruption, and political and social instability.
Össur is dependent on IT systems
Össur information security governance and risk management framework has been established using the ISO 27001 standard. Based on the risk assessment results, Össur has identified several systems being critical for the business operation. The systems are the ERP, warehouse, communication system, and email systems, including underlying infrastructure. 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 has migrated the IT infrastructure from two on-premises datacenters to a global cloud environment hosted by Microsoft and all new applications are implemented based on a cloud first strategy.
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, Össur cannot guarantee that it will not 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 needs to attract, retain, and engage qualified and competent human resources
Össur continuously works to attract and retain qualified and competent employees to maintain Össur’s innovative edge and success. Failing to attract and retain key employees, managers, and experts, or not developing them, puts Össur at risk. In addition, the COVID-19 pandemic has resulted in different ways of working, from home, in the office or in hybrid form. Össur must ensure engagement and development of employees, and find new, and creative ways of working together to maintain health and safety, and boost employee morale.
Össur relies on third parties for the supply, sale, and distribution of its products
Suppliers, distributors, agents, contractors and other third parties are involved in the manufacturing, distribution, marketing, and sale of Össur’s products. These third parties are not employees of Össur, yet we rely on these third parties and must ensure that they comply with the same laws and regulations, and uphold the same standards of care, safety, and quality that we do. Össur may be unable to influence third party actions and performance.
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 Össur’s production output, which, in turn, would impair Össur’s ability to fulfill customer orders. This could lead to a decline in sales and increased costs due to a necessary shift in production within Össur and the possible need to outsource some production. Össur 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 components for Össur. Failure to deliver raw materials and components could adversely affect the financial results of Össur. To mitigate this risk, Össur audits its critical suppliers on a regular basis and carries safety stock of all products. Furthermore, Össur’s products require silicone, carbon fibers, metals, and other raw materials. Failure to supply critical raw materials could adversely affect the financial results of Össur. To mitigate this risk, Össur carries safety stock of raw materials, and carefully selects and onboards suppliers of critical raw materials.
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 Össur’s treasury policy.
Össur is exposed to fluctuations in major operational currencies
Össur’s functional and reporting currency is the US dollar, hence fluctuations in local currencies can have an impact on the operations of Össur. Fluctuation in the exchange rates between the US 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.
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, Össur has a responsibility to create shareholder value. 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 Össur to change the tax and legal structure.
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 our 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. Össur cannot predict the impact of future legislative or regulatory initiatives on its business.
Össur is required to comply with regulatory requirements and receive regulatory clearance and approval for its products and 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 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, Össur 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.
Össur’s activities are subject to privacy laws, which could have an impact on its operations
Data protection laws and regulations, including the General Data Protection Regulation in Europe and the Health Insurance Portability and Accountability Act in the US regulate the processing, transmission, maintenance, use and disclosure of personal data, including protected health information. There are costs and administrative burdens associated with ongoing compliance with these laws and any failure to comply with current and applicable future requirements could severely damage Össur’s reputation and possibly lead to significant fines.