Risks Overview In Pharma Sector
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Transcript of Risks Overview In Pharma Sector
An Overview of Risk and Disclosure in the
Global Pharmaceutical and Life Sciences
Industry
April 2012
kpmg.com
KPMG INTERNATIONAL
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Contents
Executive summary 2
Reported risk factors 4
Financial statement disclosures 13
Legal proceedings analysis 19
About KPMG’s Pharmaceutical & Life Sciences Practice 25
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
An overview of risk and disclosure
Executive summaryThis is a summary report of risk and disclosure by the major pharmaceutical and life sciences companies. The pharmaceutical industry is now experiencing the long-expected and much-discussed patent cliff. During the 2011-14 period, patent protection covering US$120 billion in sales is expected to be lost1. This is impacting individual company and market growth rates, exacerbated by economic crises, European austerity measures, pricing pressures and continuing healthcare reform in the US. Emerging markets that have been engines of both growth and shifts in global market dynamics have not been immune to some negative trends, particularly price reductions, although the extraordinary volume growth opportunity acts as a strong counterbalance. To a greater or lesser extent, these factors are disclosed as risks by the industry, together with many other well-known and some newly emerging factors.
Key findings are:
• UScompaniesandforeigncompaniesfiling with the US Securities and Exchange Commission (SEC) disclose broadly twice as many risks as non-US filers.
• Overall,therewasa13percentincrease in the aggregate total number of risks disclosed by the sample of companies we reviewed.
• Pricing,patent-relatedrisksandgeneric competition dominate disclosure tables.
• Politicalinstability,naturaldisastersand the risk posed by use of information technology show the greatest increase in disclosure.
• UShealthcarereform,Europeaneconomic risk, and emerging market risk are new risks disclosed by more than 15 percent of filers for the first time.
• Sixcompanieswithmorethan30 percentofsalesfromtheEuropean Union (EU) did not disclose specific EU risk.
• Emergingmarketriskwasdisclosedby less than a quarter of the companies.
• DisclosureofR&Dpipelinesremainsrelatively limited, influenced by the problems and lack of success of recent years, and competitive pressures. Only one company estimatesitsreturnonR&Dspending.
• WeobservednomeaningfultrendindisclosurerelatedtoM&Aactivity.
• Contingentlegalliabilitiesaredominated by product liabilities ahead of sales and marketing and patent litigation liabilities.
In our recent report on the industry,2 we identified rising legal, political, personnel and scientific risk, combined with a loss of trust as one of five key challenges for the industry. Weseecompaniestakingstepstoreduce legal risk. It is perhaps too early to see a decline but the absence of significant increase in contingent legal liabilities relating to sales and marketing practice is a positive sign. Political risk is understood and disclosed, at least partially, for US and EU markets. For emerging markets it is much less well-disclosed. Emerging markets also carry significant personnel risk driven by a shortage of
staff qualified for employment in the lifesciencesindustry.Wedonotseethe issue of scientific risk yet being embraced: companies’ disclosure is, in general, limited, and the governanceofR&Dmeritsahigherprofile.
The pharmaceutical companies’ behaviors that have created the perception that they put their commercial goals above the interests of governments, payors, prescribers and patients are at the heart of the loss of trust of these stakeholders. Wesensethatthebeginningofthecultural change that is essential to rebuilding trust is underway. However, comparison of the profile given to corporate social responsibility in the annual reports of US and European companies, which is modest at best, with that of their Japanese counterparts, which is expansive, is interesting to note.
The industry is faced with some real opportunities to counterbalance these risks. The most important of these is innovation. True innovation is still valued highly, particularly in the US and in Japan. Delivery of innovative products is rewarded by commensurate returns even in the face of the multiple reforms in both these markets, although it is harder to say the same is true, in general, of Europe. Many of the opportunities for innovation are in more specialist markets.
In-house research and development may not be capable of delivering the requisite innovation that should result in more collaboration and also more mergers and acquisitions (M&A),especiallyinvolvingsmall
1 IMS Institute for Healthcare Informatics: The Global Use of Medicines: Outlook Through 2015, May 20112 Future Pharma: Five Strategies to Accelerate the Transformation of the Pharmaceutical Industry by 2020, KPMG 2011, p.16
2 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
We do not see the issue of scientific risk yet being embraced: companies’ disclosure is, in general, limited and the governance of R&D merits a higher profile.
and medium-sized companies. More collaboration will mean more royalty payments and a potential long-term increase in the cost of sales. It is also possible that collaborating companies will focus more on selling, marketing and branding and other activities characteristic of consumer markets. Large-scaleM&Aisexpectedtobemore challenging as most of the large companies are already the product of a significant acquisition and are working toward rationalizing excess capacity and resources.
Inanycase,M&Aandalliancesshould involve careful examination of the risks of fully developing the compound and bringing it to market as part of effective due diligence on behalfoftheacquirer.Weobservedno meaningful trend in disclosure relatedtoM&A,althoughtwoofthe smaller companies noted that provisions in agreements with third-parties might discourage a third party from acquiring them. This is a good illustration of the growing risks associated with alliances, and also, in these cases, that there is a risk of M&Anotoccurring.
At the same time, the negative impact of product profit sharing and royalties on margins means greater efficiency must be driven through the industry, particularly the manufacturing and R&Dprocesses.Thisisunderwayat most major companies, but the speed of implementation could be questioned.
An Overview of Risk and Disclosure | 3
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Reportedrisk factors
This report highlights the significant business risk factors disclosed by leading pharmaceutical and other life sciences companies in their 2011 annual reports and financial statements. These risk factors serve
to alert shareholders or potential shareholders to those factors that could materially alter a company’s performance and financial circumstances. Wehavereviewedthemostrecentrelevantfilingofthe34largestpharmaceutical and other life sciences companies and considered their quantitative and qualitative disclosures.
4 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Pharmaceutical and life sciences companies
Wereviewed34companiesasillustratedbelow:
• USfilers–publiclytradedUScompaniesthatfileForm10-KwiththeSEC
• ForeignUSfilers–non-USpubliccompaniesthatfileForm20-FwiththeSEC
• Non-USfilers–publicandprivateforeigncompaniesthatdonotfilewiththeSEC.
Composition of company universe
38%44%
18%
US Filers (15)
Foreign US Filers (6)
Non-US Filers (13)
Source: KPMG analysis of company findings, April 2012.
Average number of disclosures
Broadly, US filers and foreign US filers disclose more risks than non-US filers, whether assessed on risks disclosed by more than 15 percent of all companies or on total number of risks disclosed. Foreign US filers’ disclosures seem to be more comprehensive than US filers but the approach to disclosure in Form 20-F seems more free-form than traditional risk factor disclosure as Item 1A in a 10-K filing. US filers disclosed on average 28 risks, foreign US filers on average 31risksandnon-USfilersonaverage15risks.
Average total number of disclosures*
18%
US Filers
*Including all disclosures
0
5
10
15
20
25
30
35
Non-US FilersForeign US Filers
28
31
15
Source: KPMG analysis of 2011 company filings, April 2012.
Foreign US filers’ disclosures seem to be more comprehensive than US filers but the approach to disclosure in Form 20-F seems more free-form than traditional risk factor disclosure as Item 1A in a 10-K filing.
An Overview of Risk and Disclosure | 5
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Risk frequency
2011 marked the beginning of a four-year period during which patent protection for products with US$120bn in sales is being lost.3 Risks related to intellectual property protection and generic competition appear most frequently. Patent life alsodrivestheneedforR&Dorganizationstodeliversufficientproductswithpotential to replace the revenue being lost to generic competition in the face of increasingly stringent regulatory requirements, which may result in failure. The worldwide pressure on pharmaceutical pricing in the face of tough economic conditions features frequently.
3 IMS Institute for Healthcare Informatics: The Global Use of Medicines: Outlook Through 2015 May 2011
Risks related to intellectual property protection and generic competition appear most frequently.
6 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
US healthcare reform legislation
0% 20% 40% 60% 80% 100%
Competition from biosimilars
Counterfeit products
Anti-bribery and corruption legislation
International business risks
Liquidity risks/insufficient cash
Business restrictions due to high debt ratios
Emerging market risk
New or revised accounting standards
Failure or adverse impact of productivity initiatives/failureto implement business strategy
Concentration of sales to key customers, e.g. wholesalers
Product safety issues
Impairments/credit risk and bad debts
Reliance on key products
European economic exposure
Human resources/key personnel
Political instability
Delay in product launches
Disruption from natural disasters
Reliance on third party manufacturing/providers ormarketing suppliers
Reliance on IT
Taxation
Environmental/health and safety liabilities
Product liability
Unsuccessful strategic alliances/business combinations
Global, political and economic conditions
Manufacturing processes/product supply/raw materials
Patent litigation
Legal proceedings including adverse outcome of litigation andgovernment investigations
Interest rates/currency exposure/inflation
R&D efforts may not be successful
Regulatory requirements
Pharmaceutical pricing: Competition, price controls andreimbursement reductions
Protection and expiration of intellectual property rights
Industry/generic competition 100%
94%
91%
91%
91%
88%
88%
82%
79%
79%
74%
71%
68%
68%
65%
62%
62%
53%
53%
50%
44%
44%
38%
35%
29%
26%
24%
24%
24%
21%
21%
18%
15%
15%
15%
New risks reported by more than15 percent of companies
Frequency of risk disclosure
Source: KPMG analysis of 2011 company filings, April 2012.
An Overview of Risk and Disclosure | 7
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Changes in risk frequency
Overalltherewasa13percentincreaseintheaggregatetotalnumberofrisksdisclosed by the companies we reviewed in the 2011 filings vs. the 2010 filings (573vs.506).
Against a background of political unrest in North Africa and the Middle East over the past year, it is perhaps not surprising that the largest increase in risk frequency was for political instability. Similarly, the East Japan earthquake was no doubt a factor in a more than 100 percent increase in disclosure of risk from exposure to natural disaster.
The rapid growth in the use of and reliance on information technology raises a number of new risks. One company disclosed that social media/mobile technologies could result in liabilities or security breaches. Overall there was a more than 50 percent increase in disclosure of IT-related risk.
“Whilesocialmediaadoptionprovidesthepharmaceuticalandlifesciencesindustry great opportunities, there are also clear risks for companies that use these channels, including threats to the control of confidential information or intellectual property, increased levels of reputational risk (that develop at viral speed), and the potential for regulatory infractions. If a social media solution provider updates or changes its functionality policies, for instance, companies can be left with less control over community commentary, resulting in a reduced ability to maintain compliance in this rapidly expanding marketing area.
In many cases, the success or failure of a social media program lies in its ability to create a dialogue with the audience being addressed through any selected channel, whether it be a product informational page on Facebook, a Twitter stream dedicated to product launch, or instructional training materials released through YouTube. In all of these examples, the sponsoring organization must remain vigilant about the content and tone of the messaging being generated by the audience in response to the organization’s intended message. Consumers are more frequently turning to these channels to comment on the effectiveness of a product, and this could very likely develop into a mechanism for reporting adverse events. Therefore, the sponsoring organization must remain involved in the ongoing dialogue through carefully developed monitoring programs and moderation of comments being publicly captured in these social media applications.”
Source: David Blumberg and John Hair, KPMG LLP-US. Reproduced with permission from Life Sciences Law&IndustryReport,5LSLR981,10/07/2011.Copyright©2011byTheBureauofNationalAffairs,Inc.(800-372-1033)http://www.bna.com
The rapid growth in the use and reliance on information technology raises a number of new risks.
Social media risk
8 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Therewasa30percentincreaseinthedisclosureoflegalproceedingsincludingadverse outcome of litigation and government investigations.
The greatest reduction in risk frequency was 27 percent reduction in the failure of productivity initiatives. Most companies have been restructuring for several years and may well have a better perspective on delivery than in the past.
Change in risk frequency
Political instability
Disruption from natural disasters
Reliance on IT
Human resources/key personnel
Taxation
Legal proceedings including adverse outcome of litigation and government investigations
Patent litigation
Reliance on third party manufacturing/providers or marketing suppliers
New or revised accounting standards
Industry/generic competition
Environmental/health and safety liabilities
Unsuccessful strategic alliances/business combinations
Reliance on key products
Manufacturing processes/product supply/raw materials
Protection and expiration of intellectual property rights
Regulatory requirements
R&D efforts may not be successful
Pharmaceutical pricing: competition, price controls and reimbursement
Concentration of sales to key customers,e.g. wholesalers
Liquidity risks – insufficient cash
Interest rates/currency exposure/inflation
Product liability
Global, political and economic conditions
Impairments/credit risk and bad debts
Business restrictions due to high debt ratios
Failure or adverse impact of productivity initiatives/failure to implement business strategy
-50% 0% 50% 100% 150% 200% 250%
240%
133%
57%
50%
35%
30%
27%
24%
14%
13%
10%
9%
8%
8%
7%
6%
3%
3%
0%
0%
0%
-3%
-4%
-10%
-13%
-27%
Source: KPMG analysis of 2011 company filings, April 2012.
An Overview of Risk and Disclosure | 9
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Analysis of newly disclosed risks
Weidentifiedeightrisksreportedbymorethan15percentofcompaniesfor the first time:
• UShealthcarereformlegislation,i.e.thePatientProtectionandAffordable Care Act of 2010
• Europeaneconomicrisk
• Emergingmarketrisk
• Productsafety
• Internationalbusinessrisk
• Anti-briberyandcorruptionlegislation
• Counterfeitproducts
• Competitionfrombiosimilars
US Patient Protection and Affordable Care Act of 2010
Eighty-sevenpercentofUSfilersand83percentofForeignUSFilersspecificallyidentified the impact of the US Patient Protection and Affordable Care Act of 2010 as a risk to their businesses, although the language varied from the exact wording of the Act to “US healthcare reform in 2010”, “increased rebates,” “mandated contribution taxes,” and “other contributions to close the Medicare Part D coverage gap” were all cited.
European economic risk
The Eurozone crisis and severe economic difficulties experienced in some Southern European countries such as Spain, Portugal, Italy and Greece in the past year, have raised the profile of potential financial impact on many companies. This includes the extended time taken to collect trade receivables, sovereign debt issues that could increase collection risk given the high proportion of sales in these countries to publicly-owned customers, and the impact of austerity measures introduced to reduce government spending on pharmaceutical reimbursement prices.
The Eurozone crisis may also influence exchange rates and the translation ofoverseassalesintothereportingcurrency.Wholesalersandthird-partymanufacturers based in the EU may also be affected by the economic downturn with particular impact on the larger pharmaceutical and life sciences companies. The effects of the EU economic crisis extend to its influence on consumer spending. Whileself-evidentforthoselifesciencecompanieswithdiversifiedbusinessmodels including over-the-counter (OTC) medicines or other consumer products, the increasing use of patient co-pays by governments means a cut in consumer spending has an impact on pharmaceutical sales and is a growing risk. Three companies specifically identified consumer spending as a risk to their business.
The Eurozone crisis may also influence exchange rates and the translation of overseas sales into the reporting currency.
10 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Given that fewer than 50 percent of filers disclosed European economic risk, we investigated the relationship between percentage of sales from the EU and disclosure.Weweresurprisedthatsixcompanieswithmorethan30percentofrevenue from the EU chose not to highlight this risk in an explicit manner.4 Passing reference to tough economic conditions in a business description section was deemed a retrospective comment and not a risk factor disclosure for shareholders or potential shareholders. Some companies with approximately 20 percent of revenue from the EU chose to disclose the risk: this seems prudent to us give the continuing uncertainty in these markets.
We were surprised that six companies with more than 30 percent of revenues from the EU chose not to highlight this risk in an explicit manner.
Companies that disclose EU risk
Perc
enta
ge o
f sal
es fr
om E
U
Companies that do not disclose EU risk
40%
Disclosure of European economic risk vs. percentage of sales in the EU
Source: KPMG analysis of 2011 company filings, April 2012.
37% 37%
32% 32% 31% 30% 29% 29%27%
25%
29%
22% 22%
49%
40%
34% 33% 32% 31%
26% 25%
20% 20%
17%
12%
9%
6%
2%
0%
10%
20%
30%
40%
50%
4 We have had to make judgments about where non-US filers disclose risks; we concluded that if these were not included with other risks to the business or under risk factors in management’s review of the year, then this was not an explicit disclosure.
An Overview of Risk and Disclosure | 11
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Emerging market risk
Slightly less than a quarter of filing companies disclosed risks associated with strong growth from emerging markets. These risks included:
• Thestrong,oftendouble-digitgrowthratesexperiencedinrecentyearsmaynotcontinue.
• Somedevelopingcountrieshavereduced(orthreatenedtoreduce)thedurationof patent protection to facilitate early generic competition.
• Companiesmaynotbeabletorealizetheexpectedbenefitsofsignificantinvestments in emerging growth markets.
• Theremaybearelativelylimitednumberofpeoplewiththeskillsandtrainingsuitable for employment in life science enterprises.
• Companiesmayberequiredtorelyonthird-partyagents,whichmayputthematrisk of liability.
• Manyemergingcountrieshavecurrenciesthatfluctuatesubstantiallyandshouldthese currencies devalue without it being possible to offset the devaluations with price increases, products may become less profitable.
Many companies do not explicitly disclose emerging market sales and, when they do, the definition of emerging markets can vary from company to company. Wecomparedthenumberofcompaniesthatdiscloseemergingmarketriskwiththe percentage of sales from non-US and non-European sources. This includes Japan, but again, not all companies disclose Japanese sales (where it is disclosed, therangeofsalesfromJapanis6to19percent).Asillustratedbelow,thereisasubstantial proportion of companies with significant sales outside the traditional WesternmarketsandJapanthatdonotdiscloseemergingmarketrisk.Weseethisas a potentially important area for review.
Companies that disclose Emerging Market risk Companies that do not disclose Emerging Market risk
43%
33%
30%
26%24%
22%
18%
4%
42%
36%
31%
27% 26% 25%23%
21% 21%
26%
12% 11% 11% 11% 10% 10% 9% 9% 8% 8%6% 6%
5% 3% 3%
0%0%
10%
20%
30%
40%
50%
Many companies do not explicitly disclose emerging market sales and, when they do, the definition of emerging markets can vary from company to company.
12 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Disclosure of emerging market risk vs. percentage of ex-US, ex-EU sales
Source: KPMG analysis of 2011 company filings, April 2012.
Financialstatement disclosures
The top five critical accounting policies are the same as we reported in 2010, when we reviewed 12 major US and European pharmaceutical companies. This year the order has changed, reflecting a broader population of companies
reviewed. Critical accounting policies and frequency of disclosure are shown below. Only six policies were disclosed as critical by more than 50 percent of the companies.
91%
76%
76%
61%
61%
61%
47%
44%
44%
38%
35%
35%
35%
32%
29%
29%
18%
15%
15%
12%
0% 20% 40% 60% 80% 100%
Allowance for doubtful accounts
Earnings per share
Use of estimates
New accounting standards
Leases
Share-based compensation
Cash, cash equivalents and investments
Foreign currency translation
Financial instruments
Acquisitions/business combinations
Consolidation
R&D costs
Goodwill
Inventory valuation
Property, plant and equipment/impairments
Contingent liabilities and litigation
Pension/retirement benefits
Intangible assets/impairment
Revenue recognition
Income/deferred/contingent taxes
Risks reported by more than 15 percent of companies for the first time
Critical accounting policies – percentage reported
Source: KPMG analysis of 2011 company filings, April 2012.
An Overview of Risk and Disclosure | 13
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Taxeswerethemost-disclosedcriticalaccountingpolicy,disclosedby90percentofthese companies. This is consistent with their global supply chains and movements of intellectual property across borders. Additionally, many of the companies have effective tax rates below or well below expected statutory rates. Recently, tax authorities have been very focused on the amount of profit recorded in and outside of their country. These factors clearly highlight the critical nature of the judgments utilized to record the appropriate tax provision and reserves.
The next most-disclosed critical policies were revenue recognition and intangible asset impairments. Gross revenue for most pharmaceutical companies is not very subjective. The critical nature of revenue recognition is judgment regarding gross to net adjustments for rebates, governmental fees and returns (particularly aspatentexpirationnears).Webelievegrossrevenuerecognitionwillbecomemore challenging in the future as pricing moves away from a fixed price to more outcomes-based pricing that we are starting to see in Europe and in a more limited way with US managed care organizations.
Intangible asset impairment is critical particularly with respect to in-process research and development (IPRD) which results from acquisitions and is recorded on the balance sheet and not subject to amortization until approved, meaning it is subject to annual impairment testing. Assessing impairment in developmental technology can be extremely subjective especially for early technology that may be several years away from an approval date.
Assessing impairment in developmental technology can be extremely subjective especially for early technology that may be several years away from an approval date.
14 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Given the highly regulated nature of the industry, contingent liabilities and litigation have a high degree of uncertainty and are highly judgmental with respect to outcomes. A high degree of judgment is necessary in assessing when to accrue, how much to accrue, and when and what should be disclosed.
Wenotedthatlessthan15percentofthecompaniesdisclosedallowancefordoubtfulreceivablesascritical.WefoundthissurprisinggiventhevariousEuropeangovernment debt issues for a number of European countries.
Topics discussed separately in Management’s Discussion and Analysis (MD&A), Operating and Financial Review (OFR) or Equivalent
There is a wide variation in how companies choose to disclose certain topics pertaining to their business. This is partly because non-US filers have a more free-form approach to business description within their annual reports. For example, strategywasonlyaspecificMD&A/OFRtopicinslightlymorethanhalfofthecases; this is perhaps surprisingly low given the seismic shift in the business environment combined with economic uncertainties.
0%
20%
40%
60%
80%
100%100%
82%79%
71% 71%65%
56%53%
50%47%
41%
29%
15%
Busi
ness
env
ironm
ent
Over
all p
erfo
rman
ce
Perfo
rman
ce b
y re
gion
Perfo
rman
ce b
y bu
sine
ssse
gmen
t
Prod
uct p
ipel
ine/
R&D
Stra
tegy
Prod
uct p
ortfo
lio
Busi
ness
risk
s
Perfo
rman
ce b
yth
erap
eutic
are
a
Fina
nce
risks
Futu
re p
ersp
ectiv
es, o
utlo
ok
Corp
orat
e so
cial
resp
onsi
bilit
y/gl
obal
citi
zens
hip
Perfo
rman
ce b
y ke
y pr
oduc
t
Topics discussed separately in Management’s Discussion and Analysis (MD&A), Operating and Financial Review (OFR) or equivalent
Source: KPMG analysis of 2011 company filings, April 2012.
A high degree of judgment is necessary in assessing when to accrue, how much to accrue, and when and what should be disclosed.
An Overview of Risk and Disclosure | 15
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Surprisingly, given the challenging business climate only 70 percent of the companiesdiscussedthebusinessenvironmentandjust65percentdiscussedproductpipeline/R&D.Withthecomplexbusinessenvironmentandpatentcliffpressures, greater disclosure here may aid an investor in understanding how a companyisrespondingtothesechallenges.Wenoteevenfewercompanies(45percent) discussed their future prospects and outlook.
R&D pipeline disclosures
TheapproachtodisclosureonR&Dpipelinesvariedwidely.Somecompanieshave moved away from any discussion of early stage compounds, which makes sensegiventhatearlystageR&Dhasalwayshadmorefailurethansuccess,andthatinthewakeofarelativelydisappointingdecadeforpharmaceuticalR&D,the external world has become skeptical of early promise turning into actual revenue dollars. It seems that some of the industry is dealing with the rising risk inR&Dbychoosingtodiscloselessdetailabouttheirpipelines.Forinstancethemechanism of action of pipeline compounds is not readily revealed by a number of major companies, including some US companies. Many investors would find this information useful in assessing the relative attractiveness and competitive positioning of a pipeline. This selective or restrictive approach to disclosure, driven byconcernsaboutcompetitiveinformation,shouldbeseeninthecontextofR&Dbeing the lifeblood of the industry and accounting for as much as a quarter of annual costs.5
More than 80 percent of companies disclose the most recent pipeline information in a formal link on their website. Those that do not disclose pipeline information are some generic companies and foreign US filers.
Some companies have moved away from any discussion of early stage compounds, which makes sense given that early stage R&D has always had more failure than success.
5 Based on estimated 16 percent R&D/sales and 32 percent operating margins: See Future Pharma, KPMG 2011, p8.
16 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
R&D review
Tabular disclosuresPipeline on
websiteStage of development Name/
CodeTherapy
areaIndication Mechanism
Expected filing date
Discontinued projects
Formulation PartnerP1 P2 P3 Filed
Abbott
Allergan
Amgen
Baxter
Biogen Idec
BMS1 N/A N/A N/A N/A
Celgene
Eli Lilly
Forest Lab
Gilead
J&J2
Merck & Co
Mylan
Pfizer3
Watson
AstraZeneca
GSK
Novartis
Novo Nordisk
Sanofi
Teva
Astellas
Bayer
BI
Chugal
CSL
Daiichi Sankyo
Eisai
Merck KGaA
Mitsubishi Tanabe
Otsuka
Roche
Takeda
UCB SA
Count 32 23 26 28 26 28 30 28 18 7 7 9 11 28
Percentage 94% 68% 76% 82% 76% 82% 88% 82% 53% 21% 21% 26% 32% 82%
An Overview of Risk and Disclosure | 17
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
1 BMS disclosed the number of compounds in the respective development stages as defined by the company: “Exploratory Development;” “Full Development;” “Marketed Product Development”.
2 Johnson & Johnson did not provide detailed pipeline data in addition to the narrative in the annual report. Phase 3 compound/device and filed compounds/devices were sourced from the pharmaceutical/medical devices and diagnostics pipeline link on the company’s website.
3 Pfizer includes no specific compound discussion in its 10-K filing, giving only headline numbers of compounds. The pipeline on the company’s website does not include a discussion of the pipeline.
Source: KPMG analysis of 2011 company filings, April 2012.
Disclosure of discontinued projects remains rare, with less than a quarter of companies making this explicit. In a very highly scrutinized industry, success and failure will be readily apparent to interested investors or shareholders; it should enhance the reputation of companies to disclose failures.
Disclosure of the estimated return on R&D spending remains unique to GlaxoSmithKline. There is an opportunity for other companies to be more transparent with their R&D spend and help shareholders and potential investors understand why the strategies being pursued will improve returns. We have illustrated previously that returns on R&D have been falling steadily for the past two decades.6 As evident below, average industry returns on R&D have been falling since 1999 while R&D spend continues to grow.
0
10,000
20,000
30,000
40,000
50,000
1999 20102009200820072006200520042003200220012000
Ann
ual U
S in
dust
ry R
&D
spe
nd
Illus
trat
ive
post
-tax
ret
urn
on R
&D
exp
endi
ture
0 6%
9%
12%
15%
Returns on R&D compared to R&D spending
Source: Future Pharma, KPMG 2011.
6 Future Pharma KPMG 2011, p13 and 14
18 | An Overview of Risk and Disclosure
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Legal proceedingsanalysis
Pharmaceutical companies are frequently involved in a number of legal proceedings and the disclosures regarding the resulting contingent liabilities vary from company to company. The majority of legal proceedings involve
actions by US state or federal government, or US patent disputes. Disclosure by US filers and foreign filers is, therefore, typically substantially more lengthy than thatofforeignfilers.WeincludesevenJapanesecompanies,whichhavemuchlower levels of exposure to the US market, in the foreign filers group.
18%
26%
42%
Product liability
Sales and marketing
Other
Patents
14%
Categories of contingent legal liabilities
Source: KPMG analysis of 2011 company filings, April 2012.
An Overview of Risk and Disclosure | 19
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
There were two noteworthy agreements reached with the US government over sales and marketing practices in late 2011. In November 2011 GlaxoSmithKline agreedinprincipletoaUS$3billionsettlementwiththeUSgovernmenttoconcludeits most significant ongoing Federal investigations, two of which were related to sales and marketing practices: the investigation begun by the US Attorney’s office of Colorado in 2004 and the Department of Justice’s investigation of the development andmarketingofAvandia.InDecember2011MerckagreedtopayUS$950millionto settle criminal and civil charges with the US Department of Justice related to research, marketing and selling activities with respect to Vioxx.
Rising legal risk
In spite of extensive risk management input to board audit committees, there has been a rise in the number of settlements for violations of a variety of laws as exemplified by data from the US over the past 20 years with a very rapid risesince2003.Since2005,theannualvalueofthesettlementshasexceededUS$1billionreachingUS$4.4billionin2009.
40
35
30
25
20
15
10
5
01
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 10
2 31 1
3 2 2 2
98 8
10
14
27
38
32
Number of Pharmaceutical industry settlements with US state and federal governments 1991–2010
Source: KPMG analysis of 2011 company filings, April 2012.
The industry needs to reverse these trends to begin to win back confidence and trust from consumers and governments alike. This is no small task.
Source: Future Pharma, KPMG 2011
20 | An Overview of Risk and Disclosure
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Summary of significant contingent legal liabilities from 2011 disclosures (or 2010 where 2011 was unavailable as of 31 March 2012)
Company USD $m Status Brief description
Abbott 1,845 Pending HUMIRApatentinfringementwithCentocor(partofJohnson&Johnson)
Abbott 1,630 Pending Depakote marketing Department of Justice (DOJ) investigation
Amgen 780 Pending Federal investigation of sales and marketing practices for erythropoietin stimulating agents (ESAs)
AstraZeneca 135 Pending Seroquel product liability litigation and state attorney general investigation of sales and marketing practices
Baxter 300 Pending Contaminated heparin
Bayer 125 In Appeal GM contaminated rice
Bayer 750 Pending GM contaminated rice
Bayer 133 Pending GM contaminated rice
Eli Lilly 245 Settled Zyprexaproductliability($230m2009$15m2008)
Forest 313 Settled Celexa®, Lexapro and Levothroid
GSK 4,435 Pending Manufacturing, Paxil and Avandia product liability claims
Johnson&Johnson 593 In Appeal CYPHER stent patent infringement
Johnson&Johnson 330 In Appeal RISPERDAL promotion
Johnson&Johnson N/A RISPERDAL promotion - criminal settlement - media suggest more than $1bn
Merck 950 Pending DOJ investigation of Vioxx marketing
Novartis 1,059 Pending Environment–landfill
Novartis 66 Settled Average wholesaling pricing settlement
Novartis 150 Settled Average wholesaling pricing settlement
Novartis 53 Pending Average wholesaling pricing settlement
Novartis 78 Pending Average wholesaling pricing settlement
Novartis 30 Pending Average wholesaling pricing settlement
Novartis 25 Pending Average wholesaling pricing settlement
Novartis 99 Pending Wageandhourlawviolationforfailuretopayovertime
Novartis 422 Settled Trileptal marketing
Otsuka 311 Pending Payment to Bristol-Myers Squibb if Abilify generics launched 2012-2015
Pfizer 790 Pending Hormone Replacement Therapy litigation
Sanofi 985 Pending Product liability risks
Sanofi 2,267 In Appeal Environmental liabilities
Teva 270 Pending Design, manufacture and sales of large vials of propofol
Source: KPMG analysis of 2011 company filings, April 2012.
An Overview of Risk and Disclosure | 21
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
Risk factor raw data
Risk Factor
US Filers Foreign US Filers Non-US Filers
CountAbbott Allergan Amgen
Inc. Baxter Biogen Idec
Bristol Myers Squibb
Celgene Eli Lilly
Forest Lab Gilead
Johnson &
Johnson
Merck & Co. Mylan Pfizer Watson
PharmaAstra
Zeneca
Glaxo SmithKline
plc.
Novartis AG
Novo Nordisk Sanofi
Teva Pharma-ceuticals
Bayer AG
Boehringer Ingelheim CSL Merck
KGaA Roche UCB SA
Astellas Pharma
Chugai Pharma-ceuticals
Daiichi Sankyo Eisal Mitsubishi
Tanabe
Otsuka Holding
Co.
Takeda Pharma-ceuticals
Industry/Generic competition 34Protection and expiration of intellectual property rights 32
Pharmaceutical pricing: Competition, price controls and reimbursement reductions
31
Regulatory requirements 31R&D efforts may not be successful 31
Interest rates/Currency exposure/Inflation 30
Legal proceedings including adverse outcome of litigation and government investigations
30
Patent litigation 28Manufacturing processes/Prod-uct supply/Raw materials 27
Global, political and economic conditions 27
Unsuccessful strategic alliances/Business combinations
25
Product liability 24Environmental/Health and safety liabilities 23
Taxation 23Reliance on IT 22Reliance on third party manufacturing/Providers or marketing suppliers
21
Disruption from natural disasters 21
Delay in product launches 18Political instability 17Human resources/Key personnel 15European economic exposure* 15Reliance on key products 13US healthcare reform legislations* 13
Impairements/Credit risk and bad debts 12
Product safety issues* 10Concentration of sales to key customers, e.g. wholesalers 9
Initiatives/Failure to implement business strategy 8
New or revised accounting standards 8
Emerging market risk* 8Business restrictions due to high debt ratios 7
Liquid risks/insufficient cash 7International business risks* 6Anti-bribery and corruption legislations* 5
Counterfeit products* 5Competition from biosimilars* 5Total number of risks 25 21 21 24 27 23 25 15 13 25 18 28 32 28 26 26 29 27 24 28 27 16 7 13 16 18 14 10 11 15 19 15 17 10 34
Source: KPMG analysis of 2011 company filings, April 2012.
22 | An Overview of Risk and Disclosure
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Risk factor raw data
Risk Factor
US Filers Foreign US FilersGlaxo Novartis SmithKline AGplc.
Novo Nordisk Sanofi
Teva Pharma-ceuticals
Bayer AG
Boehringer Ingelheim CSL Merck
KGaA Roche UCB SA
Non-US FilersChugai Astellas Pharma-Pharma ceuticals
Daiichi Sankyo Eisal Mitsubishi
Tanabe
Otsuka Holding
Co.
Takeda Pharma-ceuticals
Count
34
32
31
31
31
30
30
28
27
27
25
24
23
23
22
21
21
18
17
15
15
13
13
12
10
9
8
8
8
7
7
6
5
5
529 27 24 28 27 16 7 13 16 18 14 10 11 15 19 15 17 10 34
Abbott Allergan Amgen Inc. Baxter Biogen
Idec
Bristol Myers Squibb
Celgene Eli Lilly
Forest Lab Gilead
Johnson &
Johnson
Merck & Co. Mylan Pfizer Watson
PharmaAstra
Zeneca
Industry/Generic competition Protection and expiration of intellectual property rights
Pharmaceutical pricing: Competition, price controls and reimbursement reductions
Regulatory requirements R&D efforts may not be successful
Interest rates/Currency exposure/Inflation
Legal proceedings including adverse outcome of litigation and government investigations
Patent litigation Manufacturing processes/Prod-uct supply/Raw materials
Global, political and economic conditions
Unsuccessful strategic alliances/Business combinations
Product liability Environmental/Health and safety liabilities
Taxation
Reliance on IT Reliance on third party manufacturing/Providers or marketing suppliers
Disruption from natural disasters
Delay in product launches
Political instability
Human resources/Key personnel
European economic exposure*
Reliance on key products US healthcare reform legislations*
Impairements/Credit risk and bad debts
Product safety issues* Concentration of sales to key customers, e.g. wholesalers
Initiatives/Failure to implement business strategy
New or revised accounting standards
Emerging market risk* Business restrictions due to high debt ratios
Liquid risks/insufficient cash
International business risks* Anti-bribery and corruption legislations*
Counterfeit products*
Competition from biosimilars* Total number of risks 25 21 21 24 27 23 25 15 13 25 18 28 32 28 26 26
An Overview of Risk and Disclosure | 23
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
We would like to thank Kevin Wilson, Managing Director of Jovin Healthcare, for his invaluable contribution to this project, and we look forward to your feedback on this report.
Ed Giniat GlobalLeader–Pharmaceuticals USLeader–Healthcare&Pharmaceuticals
Chris Stirling EuropeanLeader– Chemicals&Pharmaceuticals
Norbert Meyring AsiaPacificLeader –Chemicals&Pharmaceuticals
24 | An Overview of Risk and Disclosure
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
About KPMG’s Pharmaceuticals & Life Sciences Practice
KPMG offers a broad range of audit, tax and advisory services to pharmaceuticals and other life sciences clients, ranging in size from biotechnology start-ups to multinational pharmaceutical companies. As a global leader in serving this evolving industry, KPMG is committed to helping our member firm clients stay abreast of emerging market trends, regulatory and legislative changes, leading practices and effective approaches to managing their business.
KPMG is a global network of professional firms providing audit, tax and advisory services.Wehave145,000outstandingprofessionalsworkingtogethertodelivervaluein153countriesworldwide.Throughitsmemberfirms,KPMGhasinvestedextensively in developing a highly experienced pharmaceuticals and other life sciences team. KPMG’s understanding of the industry is both current and forward looking, thanks to member firms’ global experience, knowledge sharing, industry training, and the involvement of professionals with direct experience in the pharmaceutical industry.
Through its member firms, KPMG has invested extensively in developing a highly experienced pharmaceuticals and other life sciences team.
An Overview of Risk and Disclosure | 25
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
For more information, contact
Ed GiniatGlobal Leader – PharmaceuticalsUS Leader – Healthcare & PharmaceuticalsT:+13126652073E: [email protected]
Chris StirlingEuropean Leader – Chemicals & PharmaceuticalsT:+442073181512E: [email protected]
Norbert MeyringAsia Pacific Leader – Chemicals & PharmaceuticalsT:+862122122707E: [email protected]
David BlumbergGlobal and US Advisory Sector Leader – PharmaceuticalsT:+12672563270E: [email protected]
Mark DrozdowskiUS Audit Sector Leader – PharmaceuticalsT:+19739126640E: [email protected]
Frank MatteiGlobal and US Tax Leader – Chemicals & PharmaceuticalsT:+12672561910E: [email protected]
Melissa StahlGlobal Executive & Knowledge Manager – PharmaceuticalsT:+16095245608E: [email protected]
Adrienne RivlinEuropean Executive – Chemicals & PharmaceuticalsT:+442076941992E: [email protected]
Candice ZhangAsia Pacific Executive – Chemicals & PharmaceuticalsT:+862122124085E: [email protected]
kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
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Publication name: An Overview of Risk and Disclosure in the Global Pharmaceutical and Life Science Industry
Publicationnumber:120437
Publication date: April 2012