Pharmaceutical Bio Medical
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Transcript of Pharmaceutical Bio Medical
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8/6/2019 Pharmaceutical Bio Medical
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Mallorca Marriott San Antem Hotel, 24-25 October 20051 2004 Deloitte & Touche LLP. Private and Confidential
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Mallorca Marriott San Antem Hotel, 24-25 October 20052 2004 Deloitte & Touche LLP. Private and Confidential
EMEA Transfer Pricing Partners DirectorsSenior Managers Workshop
Transfer pricing in the pharmaceutical & biomedicalindustry
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Mallorca Marriott San Antem Hotel, 24-25 October 20053 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 20054 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 20055 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 20056 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 20057 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 20058 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 20059 2004 Deloitte & Touche LLP. Private and Confidential
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)
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Mallorca Marriott San Antem Hotel, 24-25 October 200510 2004 Deloitte & Touche LLP. Private and Confidential
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).
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Mallorca Marriott San Antem Hotel, 24-25 October 200511 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 200512 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 200513 2004 Deloitte & Touche LLP. Private and Confidential
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.
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Mallorca Marriott San Antem Hotel, 24-25 October 200515 2004 Deloitte & Touche LLP. Private and Confidential
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?)
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Mallorca Marriott San Antem Hotel, 24-25 October 200516 2004 Deloitte & Touche LLP. Private and Confidential
Other Issues
IP Ownership Tax structuring
Valuation
Migration
Licensing
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Mallorca Marriott San Antem Hotel, 24-25 October 200517 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200518 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200519 2004 Deloitte & Touche LLP. Private and Confidential
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 )
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Mallorca Marriott San Antem Hotel, 24-25 October 200520 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200521 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200522 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200523 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200524 2004 Deloitte & Touche LLP. Private and Confidential
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
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Mallorca Marriott San Antem Hotel, 24-25 October 200525 2004 Deloitte & Touche LLP. Private and Confidential
Biomedical
Consignment Inventory Credit Facilities from hospitals etc. -> Low debtors
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Mallorca Marriott San Antem Hotel, 24-25 October 200526 2004 Deloitte & Touche LLP. Private and Confidential
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.
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