Risks and risk management

Internal control and risk management in Biotie

Internal control is a process effected by the Board of Directors, management and all levels of personnel in the Group.

The aim of internal control framework in Biotie Group is to ensure that:

- operations are managed effectively and effi ciently as well as aligned with the Company’s strategy,
- financial reporting and management information are reliable, complete and timely, and
- all Group companies are in compliance with all applicable laws and regulations.

Enterprise risk management in Biotie is a continuous process. It is integrated in the Group’s strategy setting process, operative planning, daily decision making and monitoring of its operations. As such, it is also part of the Company’s internal control environment.

Moreover, risk management is an integral part of the Group’s management monitoring and reporting systems. Regular reporting and monitoring is performed both at the Group and local company levels. The Board of Directors approves the risk management policy and objectives. It guides and monitors the planning and implementation of risk management.

The Group management holds the highest operational responsibility for the implementation of risk management policy. The Group management is responsible for organization and the planning, implementation, development, coordination and monitoring of riskmanagement policies as approved and implemented by the Board of Directors.

Main features of the internal control and risk management systems pertaining to the fi nancial reporting process

Internal control and risk management systems in relation to the fi nancial reporting process are a part of the Group’s overall internal control and risk management framework. Systems are designed to provide reasonable assurance of the reliability of fi nancial reporting and the preparation of fi nancial statements in accordance with applicable laws and regulations, generally accepted accounting principles and other requirements concerning listed companies.

Board of Directors is ultimately responsible for the appropriate arrangement of the control of the Company accounts and fi nances, whereas the Audit Committee’s duties include the overseeing of the accounting and fi nancial reporting process, monitoring the fi nancial reporting (fi nancial statements, interim reports), and review of internal control procedures. Audit Committee is also responsible for the communication with the Company’s auditors.

The Managing Director is responsible for the implementation of internal control and risk management processes and ensuring their operational effectiveness. The Managing Director is also responsible for ensuring that the Group’s accounting practices comply with the law and that fi nancial matters are handled in reliable manner.

Biotie has a Management Team consisting of the Managing Director acting as the President of the Management Team, Chief Financial Offi cer, Chief Scientifi c Offi cer, Chief Medical Offi cer, and Chief Business Offi cer. The Management Team handles the issues that concern managing of the Group, such as issues related to strategy, budget, interim reports and issues related to drug development programs.

Group’s management assigns responsibility for the establishment of more specifi c internal control policies and procedures to personnel responsible for the units´ functions. Management and employees are assigned with appropriate levels of authority and responsibility to facilitate effective internal control over fi nancial reporting.

Separate internal audit assignments may be initiated by the Board, Audit Committee or the Management as deemed necessary. The scope and frequency of separate audits depend primarily on the assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control defi ciencies are reported upstream, with serious matters reported to management and the Board of Directors.

Biotie applies IFRS standards to its consolidated fi nancial statementsand follows the standards and regulations set by NASDAQ OMX Helsinki Stock Exchange and Finnish Supervisory Authority. The Company’s fi nancial reporting complies with the Finnish Securities Markets Act and Limited Liability Companies Act. The fi nancial statements of the parent company are prepared in accordance with Finnish Accounting Act and opinions and ordinances on Finnish Accounting Board.

Biotie has established objectives for reliable fi nancial reporting in order to identify fi nancial reporting risks. The Group has an integrated risk management process which is a part of the Group’s management, monitoring and reporting systems. Regular reporting and monitoring is performed both at the Group and single Company level. The identifi cation of risks and preparations for them is primarily carried out in the fi nance and administration unit. Risk management procedures cover the identifi cation and assessment of the risks that may arise in different levels of the fi nancial reporting process. Risk identifi cation and assessment is continual, meaning that the assessment is updated on a continuous basis through taking into account the changes in the business environment and in the operation of the corporation.

The monitoring and follow-up of internal control systems is conducted to ensure that the fi nancial information is reliable, complete and timely for the decision making and that internal control is operating effi ciently. Control activities are linked to risk assessment and specifi c actions are taken to address risks to the achievement of fi nancial reporting objectives. The identifi ed risks related to fi nancial reporting are managed through control activities that are set throughout the organisation, at all levels and in all functions. In fi nancial reporting, the Group Finance assists the Single Companies in setting up adequate control activities such as approvals, authorizations, verifi cations, reconciliations, reviews of operating performance, safeguarding of assets and segregation of duties. Board of Directors are ultimately responsible for ensuring that external fi nancial reporting is correct, timely and in compliance with applicable regulations.

The local companies report the results on monthly, quarterly and yearly basis to the Parent Company that is responsible for preparing the consolidated fi nancial statements and monitoring the performance of the operation at consolidated level. In Biotie, the monitoring has been embedded in the work performed by the Board of Directors, Managing Director and group management. The monitoring contains analysing the monthly, quarterly and annual performance of the Company at the various levels of the organisation as well as reviews and procedures.

In 2009, Biotie identifi ed the key controls that aim to respond the fi nancial reporting risks identifi ed in the risk assessment process. Through the control activities, a reasonable assurance can be reached to make sure that the fi nancial reporting of the Group is accurate, timely and complete. These common control descriptions contain a number of activities such as reconciliations, authorizations, approvals, verifi cations, segregation of duties and safeguarding the assets.

In 2010, the identifi ed common controls will be implemented at Group and Unit level. The focus will also be on follow-up of the adequacy and effectiveness of control activities.

Short-term risks and uncertainties

Biotie's strategic risks are predominantly related to the technical success of the drug development programs, regulatory issues, strategic decisions of its commercial partners, ability to obtain and maintain intellectual property rights for its products, launch of competitive products and the development of the sales of its products. The development and success of Biotie's products depends to a large extent on third parties. Any adverse circumstance in relation to any of its R&D programs might impair the value of the asset and thus, represent a severe risk to the company. Such adverse events could happen on a short term notice and are not possible to foresee.

The key operational risks of Biotie's activities include the dependency on key personnel, assets (especially in relation to intellectual property rights) and dependency on its license partners' decisions.

Furthermore, significant financial resources are required to advance the drug development programs into commercialized pharmaceutical products. To fund the operations, Biotie relies on financing from two major sources: income from its license partners and raising equity financing in the capital markets.

The company relies on capital markets to raise equity financing from time to time. There can be no assurance that sufficient funds can be secured in order to permit the company to carry out its planned activities. Current capital market conditions are very volatile. While after the reporting period, in March 2011, the company was able to raise a significant amount of cash from a share issue to fund its operations in the mid-term future, there can be no assurance that the company can secure equity financing in the future if and when it needs it.

Although Biotie has currently active license agreements in place, the termination of any such agreement would have a negative effect on the short to medium term access to liquidity for the company. While income generated from commercial agreements with third parties relating to its clinical programs might significantly improve Biotie's financial position, a forecast on possible income from future licensing arrangements cannot be provided reliably. Therefore it is possible that Biotie will need to secure additional financing from share issues in the future.
The group can influence the amount of capital used in its operations by adapting its cost base according to the financing available. The restructuring measures announced in Q4 2010 highlight such an approach. Management monitors the capital and liquidity on the basis of the amount of equity and cash funds. These are reported to the Board on a monthly basis.

Updated April 19, 2011