The Group monitors a number of principal risks and uncertainties that may affect the business. These include financial, non-financial, internal and external concerns.
Risk management framework
The Directors are able to manage the business, and achieve its strategic objectives, due to an effective risk management framework which features multiple layers.
Managing risk is a key responsibility of the Board, who set a strong tone, in line with best practice corporate governance.
The Audit and Risk Committee oversees the effectiveness of the risk management processes.
The Remuneration Committee ensures incentives and reward are balanced and appropriate for achieving the strategy.
The Nomination Committee addresses the need for continuing strength at the senior levels of the Company and is responsible for succession planning.
The management team is responsible for identifying, assessing and mitigating the day-to-day operational risks.
Portfolio Company boards and independent assurance
The boards of our Portfolio Companies are responsible for ensuring they meet key commercial objectives, and in this they are typically supported by senior members of the Arix Bioscience team, who also sit on their boards.
Independent assurance is provided by industry experts when required. For example, Duff & Phelps is engaged to provide regulatory compliance support to the Board of Arix Capital Management, Arix Bioscience's FCA-regulated fund management subsidiary.
Sets the tone for corporate governance
Three committees oversee the effectiveness; they ensure balance and are responsible for succession
Day-to-day operational tasks
PORTFOLIO COMPANY BOARDS AND INDEPENDENT ASSURANCE
Principal risks and uncertainties
The principal risks to Arix have been robustly assessed in light of the current environment; these, along with the steps taken by Arix to manage such risks, are detailed below.
Arix's portfolio companies may not generate the financial returns that are anticipated
Arix's net assets increasingly comprise a range of portfolio companies; below-forecast performance from a portfolio company may adversely affect Arix's profitability and ability to generate positive cash flows from future realisations.
Arix has an experienced team responsible for identifying and developing portfolio companies, resulting in a high standard of due diligence before the commitment of any money. Post-investment, Arix typically has representatives on the company's board of directors, ensuring it is fully aware of business developments, and allowing for mitigation of possible issues as they arise.
Arix funds a range of portfolio companies and continues to develop its portfolio across a range of interests. As such, it will achieve a diverse portfolio, with financial performance not overly reliant on any one business.
Arix deploys capital to portfolio companies at all stages of a company's life cycle. Therefore, it is exposed not only to very early-stage businesses but also holds interests in more mature companies, where risk of failure is reduced.
Loss of key personnel to competitors, or from an external event
The financial performance of Arix depends on its ability to identify and develop outstanding portfolio companies and, as such, is reliant on its key personnel. Loss of key individuals could affect Arix's financial performance and future prospects.
Arix has a market-appropriate remuneration scheme for its senior employees. This includes share incentive schemes which reward personnel for long-term service and performance.
Arix has three senior management members making up the Executive Committee performing active day-to-day roles who are able to provide emergency cover for each other over a short period. The Investment team comprises five individuals who offer cross-team support in the event of an absence.
Therefore, the loss of a single key member of the investment or management team would be mitigated by the stature and experience of others within the organization.
Arix's Nomination Committee is responsible for appropriate succession planning.
Adverse market conditions may impact Arix's operational model
An economic downturn may reduce opportunities for Arix to realise capital from portfolio companies, affecting cash flow and financial performance if business valuations are reduced. The availability of capital for any external fundraising by Arix or its portfolio companies may also be affected.
Arix's strategy is to deploy capital into innovative businesses which have unique, high impact outcomes; Arix believes that such businesses are less susceptible to macroeconomic cycles.
Arix has funded portfolio companies across a range of geographies, including the UK, USA, Europe, Canada, Israel and Australia. As such, it is not overly reliant on a downturn or market shock in a single geography.
Arix monitors its availability of capital closely, ensuring sufficient balances are available for the continuing operation of the business throughout the period assessed in the viability statement.
Changes to government policy or regulation in the research, healthcare or life sciences industries
A change in government regulation (for example CFIUS in the United States) may adversely affect the profitability of the healthcare and life sciences industry, reducing possibly the number of investment opportunities, availability of external funding or potential exit opportunities.
Arix's portfolio is diversified by geography, with exposure to the UK, USA, Europe, Canada, Israel and Australia. As such, the portfolio is diversified against the adverse actions of any one government.
Brexit may have an impact beyond the risks described above in terms of by severity of a downturn or the nature of the impact
Specific impacts could include:
- a depressed UK capital market that does not support the raising of capital
- a reduction in government-funded research in biotech, leading to reduced investment opportunities
Arix has the ability to withstand a depressed capital market, including the ability to dispose of a portion of its listed investments; withhold funds that are reserved for the existing portfolio; the ability to issue up to 10% of share capital to a new investor; and the possibility to arrange loan finance secured on its balance sheet assets. Arix also holds cash reserves to cover two years of operating costs.
Arix's investment appetite is unconstrained globally resulting in a pipeline with a broad geographical spread. This means that a variation in the pipeline of opportunities coming from one country would not materially damage Arix's ability to continue its core business.
The Board has assessed the prospects of Arix over a period greater than 12 months. We have considered a period of three years from the balance sheet date, as the Board expects the majority of Arix's current commitments and new proceeds raised to be committed over the next three years.
The Board has carried out a rigorous assessment of the principal risks and their mitigants, noted above. The Board assessed Arix's business model, particularly its approach to future cash commitments to existing portfolio companies. One key area modelled is the ability to manage the risk of over-commitment to portfolio companies by reviewing cash flow projections, which included scenarios with differing impacts to the cash flow forecast inputs. Key judgements reflected how future cash requirements may change from restrictive regulations, and how availability of capital may be restricted from the loss of key personnel.
Based on its review, and the consideration of any changes that had occurred post year-end, the Board has a reasonable expectation that Arix will be able to continue in operation and meet its liabilities as they fall due over a three-year period from the date of this report and confirm that preparing the financial statements on a going concern basis is appropriate.
28 March 2019