Pharmaceutical Bio Medical

8/6/2019 Pharmaceutical Bio Medical

1/27

Mallorca Marriott San Antem Hotel, 24-25 October 20051 2004 Deloitte & Touche LLP. Private and Confidential


2/27


EMEA Transfer Pricing Partners DirectorsSenior Managers Workshop

Transfer pricing in the pharmaceutical & biomedicalindustry


3/27


Contents Overview of the value chain Intercompany transactions (two models) Focus on marketing and sales

Issues: Issue #1: Government regulation

Issue #2: Research & Development Issue #3: Marketing & Sales Issue #4: Product liability Issue #5: TNMM analysis Issue #6: Consideration of CUPs

Other Issues Local Experiences Conclusion and Recommendation


4/27


Overview of the value chainResearch & development

Phase I, II, IIIManufacturing

Sales

MarketingPhase IV R&D

Registration

(After sales)

Marketing

Phase IV R&D

Launch of new products

Country AHQ, R&D,

Corporatemarketing

Country BManufacturing

Country CSales,Marketing,Registration

A B C


5/27


Overview of the value chain (contd)

Sales

MarketingPhase IV R&D

Registration

(After sales)

C Marketing includes visiting trade shows, visitingdoctors, maintain relationships with pharmacies,medical shops and hospitals, and organising PhaseIV tests. Phase IV tests are clinical tests with thepurpose of getting products registered, or formarketing purposes.

Registration implies the administration procedure of registering the product with the relevant registrationoffice, to allow the sale of products in a country.

Sales may be demand or supply based. Someproducts require active involvement by field accountmanagers, while for other products (including over-

the-counter products), sales activities are more of an administrative type.

Pharma distributors customers include hospitals,pharmacies, medical shops, doctors; and drugswholesalers, retail chains and shops for over-the-

counter products and animal health products.


6/27


Intercompany transactions (I)HQ, R&D,Corporatemarketing

ManufacturingSales,

Marketing,Registration

A B C

I II

IIIIV

1. Under manufacturing license agreement,manufacturer pays license fee to headquarters;

2. Sales & marketing companies purchase products from manufacturer;3. Headquarters reimburses certain expenses, such as launch costs to

sales & marketing companies;4. Headquarters may charge out management services

to other group companies.


7/27


Intercompany transactions (II)

HQ, R&D,Corporatemarketing

ManufacturingSales,

Marketing,Registration

A B C

I

II

IIIIV

1. Under contract / consignment manufacturing agreement,manufacturer produces for headquarters;

2. Sales & marketing companies purchase products from keyentrepreneurial risk taker;

3. Key entrepreneurial risk taker reimburses certain expenses, such aslaunch costs to sales & marketing companies;

4. Local sales Agreement between regional K.E.R.T & K.E.R.T originalregion;

5. World wide headquarters may charge out management servicesto other group companies.

WorldwideHQ &

K.E.R.TOther

regions

RegionalKey

Entrepreneurialrisk taker


8/27


Focus on marketing and sales

In general, transfer pricing for pharmaceuticaldistribution companies is similar to transfer pricingfor companies in general, i.e. focus on functions,responsibilities, risks, and intangible assets. Also,pharma distribution companies are generallyexpected to be remunerated according to a resaleprice or TNMM-type price setting method.

However, pharmaceutical sales activities give rise tocertain industry-specific transfer pricing issues.


9/27


Issue #1: Government Regulations In most European countries, pharmaceutical industry is to a

certain extent regulated by the government; Regulations may apply to consumer prices, distributor prices,

profit margins, R&D and marketing expenses, and/orgovernment reimbursements;

Deloitte UK has initiated a review on European PharmaceuticalPricing Regulations. see next slide;

From a TP perspective, regulations may directly influencetransfer pricing by setting restrictions on prices or margins(e.g. UK); for other countries, regulations provide indirect

influence, on the risk profile of local group companies (e.g. NL)


10/27


European survey on pharma regulations

Country Pricing restrictions

Distributor profit

margin target

Expense allowance

cappingUK X X XIreland X - -France X - -Germany X - -Sweden X - -Switzerland X - -

Hungary - X -Italy X X XPoland X X -Czech Republic X X -Netherlands X - -

Price restrictions may see to prices at consumer level orpharmacy buy-in level, and usually only refer to products reimbursedby health insurance. Also, may depend on type of products (e.g.specialised drugs vs. over-the-counter products OTC).


11/27


Issue #2: R & D Research & development of pharmaceutical drugs and

over-the-counter (OTC) products can be categorised inmultiple phases;

Phases 1 to 3 commonly refer to laboratory development,initial testing, and final testing and formal productionapproval;

Phase 4 refers to further clinical testing and research, fortwo specific purposes: Publication in trade magazines, for marketing purposes; Registration of products for sale in individual countries.

Phase 4 R&D is done mostly for commercial purposes,and could be regarded as a marketing function, integralto the business of a distributor.


12/27


Issue #3: Added value of marketing & sales

Depending on the type of products, a distributors marketing andsales functions may range from value-added sales activities, toadministrative order processing. OTC products are typically low-added value products, requiring

active sales efforts by the distributor, but no specific knowledgeby the sales force. Distributors functionality may be compared towholesaler;

Most specialised drugs are sold using doctors visits/detailling bycompany representatives and phase IV marketing. Mostdistributors employ specialised sales engineers, who have specificknowledge of product characteristics. Sometimes, representativesare hired specialists with a sales background, without specificknowledge;

Certain specialised drugs (Blockbuster drugs) require hardly anylocal marketing effort, since they are already well known amongthe target audience (e.g. doctors and users) well before theproducts are actually introduced. Example: Viagra.


13/27


Issue #4: Product liability

Product liability is a major issue amongpharmaceutical companies. Often billions are setaside annually for litigation and settlementprocedures;

Usually, distributors do not bear any of theassociated risks. In case a liability issue occurs,headquarters decides on the appropriate measuresand reimburse the distributors, if required;

While the market risk associated with companyimage remains at the distributor, this risk may notbe very relevant. Company image is not a primarysales driver for pharmaceutical products.


14/27


15/27


Issue #6: Consideration of CUPs

Existence of co-promotion and co-marketingagreements need to be considered as potential CUPs

Issues: Detailing organization of co-promoter has a different value

IP/Trademark component for co-marketer Local co-promotion agreement need to be seen in global context

(global set-off?)


16/27


Other Issues

IP Ownership Tax structuring

Valuation

Migration

Licensing


17/27


Panel Local ExperiencesUK Ger France NL Other

Gov Regs PPRS Market isregulated

R & D Local IP

Arguments forlowering mark-up

Alternativevaluationmethods

Yet notdiscussed intax audits,tendency notto considerphase IV asIP

Discussions oncharacterisation of Phase IIIb

Ph IV creating localR&D intangible

Marketing & Sales

Subsidies vs.specific actions(e.g. marketingsubsidies, pricenegotiations, etc)

Marketingintangibles

Special rulesfor so calledmiddlecompanies(companieswithincreasedfunctions andrisks)

Tax on marketingexpenses (includingdetailing)

=> Impacts OM

1) Difference inproducts should beaddressed

2) Allocation of launchcosts might createlocal marketing IP

ProductliabilityShould notaffectprofitability of distributor

Not an issue in thepast May not effect localprofitability


18/27


Panel Local ExperiencesUK Ger France NL Other

Documentation

/ TNMManalysis

Considergross marginby (key)products

Limitedcomparables

Planning datashould beused

FTAs method of choice

Should address differentproducts

US: profitsplit;functionalanalysis andimpact of productliabilityoncharacterizati

on of entities Other issues Sales of rights

of potentialblockbusters(Puerto Rico+ Singapore)

Try to applyCUP

Parallel trade Implementation modelkey


19/27


Local Experiences: Poland

2005 value of the Polish Pharma market = USD 4.6 billion or 121 USDper capita .

Main pharmaceutical companies operating in Poland (by turnover): GSK Pharma Polpharma (Polish company) Servier

Aventis Novartis Pharma Roche Lek KRKA Sanofi Synthelabo

AstraZeneca Janssen Cilag Adamed (Polish company) Novo Nordisk Pliva Krakw

Source: Poland Pharmaceutical Report, Intellinews Internet Securities Inc., February 2005

Polish Pharma Industry - Grow

2,412,78 3,02

3,50

4,41 4,61

2000 2001 2002 2003 2004 2005F

Year

S a

l e s

( b n

U S D )


20/27


Local Experiences: Poland

State owned companies Importers / Distributors Polish companies

manufacturing

generic products

former state-owned companiesprivatised(Pliva, GlaxoSmithKline, ICN)

import/ distribution

monitoringof clinical trials

innovative products(Pfizer,Novartis,Servier)

genericproducts(Lek,Krka)

Wholesalers

Pharmacies / Mass market (OTC only)

1st levelof the market

2nd levelof the market

3rd levelof the market


21/27


Local Experiences: PolandFinancing of local distribution traditional approach

importer / distributor (full functions)

financing model based on system of rebates / premiums proportional tothe value of sale (RX products)

valuation model for distribution transactions: R- or TNMM (OTCproducts)

valuation method for monitoring of clinical research services: C+

A Sp. z o.o.

deliveryof

products

rebates/

premiums

mon

itoringofclinical

trials(originaldrugs)

Relatedsuppliers

Related R&Dcompany

Poland

Abroad

Servicefee


22/27


Local Experiences: PolandRegulatory system

Reimbursement of selected RX products (list of MoH)

Recommended margin in the chain set by MoH 8,91%(reimbursed RX)

OTC or other RX no limitations

The traditional system of financing local distributorschallenged by tax authorities (reimbursed RX products)

pricing-margin disputes

development of new structures


23/27


importer / distributor (limited functions: orders,logistics, warehousing, customer service)

profitability level refers to limited functions, risksborne and assets employed

ISSUES:

comparable data PLI

exchange risk

marketing company involved in provision of services

optionally provision of additional servicese.g. monitoring of clinical trials

cost-plus method

APAs available from Januray 1st, 2005ISSUES:

human and business problems resultingfrom split of activities

Abroad

Abroad

provisionof

marketing

services

monitoringof

clinicaltrials

Related entity Related entity

Poland

Poland

deliveryof

products

Related supplier

A Sp. z o.o. B S.A.

Local Experiences: PolandFinancing of local distribution new structures


24/27


Local Experiences: PolandMajor Pharma TP clients

Altana Pharma AstraZeneca

GlaxoSmithKline

Ivax Pharma

Janssen-Cilag

KRKA

Lek / Hexal

Lundbeck Polska

Novartis

Pfizer

Pharmacia Polska

Pierre Fabre

Pliva

Schering AG


25/27


Biomedical

Consignment Inventory Credit Facilities from hospitals etc. -> Low debtors


26/27


Conclusion & Recommendation

Local pricing regulations should not be a problem forpan-European TNMM analysis;

Product range (wholesaler, traditional or blockbuster)of pharma distributor needs to be investigated todetermine added value of marketing function;

Pan-European TNMM often only provides for lowadded value wholesalers;

Wholesalers analysis combined with marketing serviceproviders might result in effective defence;

Profit Split approach should be evaluated taking intoaccount litigation and liability reservations.


27/27

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. Member of Deloitte Touche Tohmatsu

Date post:	07-Apr-2018
Category:	Documents
Upload:	arpita-roy
View:	225 times
Download:	0 times

Pharmaceutical Bio Medical

Documents