doing business in the us (pharma-medical device)

© 2012 Schiff Hardin LLP. All rights reserved.

The Structural and Legal ‘Need-to-Knows’ for French and European Pharmaceutical and

Medical Device Companies

The Essentials for Pharmaceutical and Medical Device Companies Desiring to

Enter the U.S. Market

Philippe C.M. Manteau

The Background

• A businessperson in the pharmaceutical/medical device industry wants to enter the U.S. market

• Overall concern: ensure that activities are appropriately structured in a manner most beneficial for his or her company and shareholders

• Specific concerns:

2 © 2012 Schiff Hardin LLP. All rights reserved.

– FDA – Products Liability – Distributor vs. Agent – Intellectual Property – Key Provisions in the Contract – A Representative U.S. Office

– LLC Structure – Corporate Structure – Employment Issues – U.S. Equity Incentives – Immigration – M&A Considerations

Consideration #1: Working with the FDA The Food and Drug Administration (FDA) is the U.S. agency responsible for protecting and promoting public health through the regulation and supervision of, among other things, pharmaceuticals, medical devices, dietary supplements and cosmetics

FDA Regulation of Medical Devices

● “Medical devices” is defined broadly and includes such things as hospital and laboratory equipment, cosmetic devices and surgical devices

● Approval Process - The FDA classifies medical devices into three categories –Class I, II and III (III being the riskiest). The class determines which approval process a marketer must undergo.

– 510(k) Pre-market Notification – 99% of medical devices enter the U.S. market through this process (e.g., Class I and Class II)

– Premarket Approval Application (PMA) – approval process for Class III devices

FDA Regulation of Pharmaceuticals

● New Drug Application (NDA) ● Abbreviated New Drug Application (ANDA) ● Companies need to adhere to drug labeling and manufacturing standards


Consideration #1: FDA and Medical Devices: the 510(k) Process 510(k): An entity that wants to market a device for human use in the United States must

submit a 510(k) notification to the FDA at least 90 days before marketing, unless such entity is exempt or goes through the more onerous PMA process (described on the next page). The notification must demonstrate that the proposed device is safe and effective, by showing that the device is “substantially equivalent” to a “legally marketed device” (the “SE test”).

● A “legally marketed device” includes a device that was legally marketed before May 28, 1976 (hence, grandfathered into the current regulations), a device for which a more onerous PMA is not required, as well as devices that were previously classified as Class III, but have been reclassified to a less risky class (i.e., Class I or II).

● Once submitted, the marketer must wait for an order from the FDA declaring that the device has met the SE test. Once received, marketing may begin.

● Note that, although the 510(k) process is a notification, the marketer must still wait for a communication from the FDA before marketing can begin.

Recently, the 510(k) process has been criticized for being too relaxed and many critics have pushed for stronger oversight. As such, it would not be surprising for the FDA to re-evaluate the 510(k) procedure in the near future.


Consideration #1: FDA and Medical Devices: Premarket Approval PMA) • PMA: An application submitted to the FDA to request approval to

market Class III devices. Class III devices include those that sustain human life or pose the greatest risk. As such, they face this most stringent type of device marketing application required by the FDA

• Unlike a 510(k), PMA is based on a determination by the FDA that the PMA contains sufficient valid scientific evidence that provides reasonable assurance that the device is safe and effective for its intended use

• Timeline – Within 45 days of receiving the PMA, the FDA notifies the applicant

that the PMA has been received – The FDA then has 180 days to review the PMA (but generally, the

review time is longer than this)


Consideration #1: FDA and Pharmaceuticals

New Drug Application (NDA): ● Process by which drug companies formally propose that the FDA approve a new

pharmaceutical for sale and marketing in the United States ● The purpose of a NDA is to provide enough information to permit the FDA to

determine:

– Whether the drug is safe in its proposed use(s), and whether the benefits of the drug outweigh the risks

– Whether the drug's proposed labeling (package insert) is appropriate and what it should contain

– Whether the methods used in manufacturing the drug and the controls used to maintain the drug's quality are adequate to preserve the drug's identity, strength, quality, and purity

Abbreviated New Drug Application (ANDA) - FDA review and ultimate approval of a generic drug product


Consideration #1: Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) All “Covered Entities” are subject to HIPAA

● A Covered Entity is a health care provider, a health plan, or a clearinghouse that submits bills electronically

● Business associates of the Covered Entity (i.e., those that use or access patient information on the Covered Entity’s behalf) are also subject to HIPAA

● A reseller to a Covered Entity may be considered a “business associate”: try to protect such reseller in the contract with such Covered Entity

Pursuant to HIPAA’s Privacy Rule, a Covered Entity must protect the following health information about a patient:

● sent or stored in any form (written, verbal, electronic); ● that identifies the patient or can be used to identify the patient; and ● that generally is about a patient’s past, present and/or future

treatment and payment of services.


Consideration #1: Corporate Officer Liability for FDA Violations ● In 2011, the FDA issued prosecution guidelines that stated that

corporate officers could be criminally liable for violations of the Food, Drug and Cosmetic Act (the act which gives the FDA its authority) based solely on their position with the company

● This means a corporate officer could be liable even if he or she had no knowledge of the illegal conduct

● This is known as the “Park Doctrine”

● Possible penalties – large fines, prohibition from providing any services to a regulated company, probation and/or jail time

● Minimize risk of possible violations by instituting a comprehensive compliance program


Consideration #2: Products Liability

● If a person is injured by a defective product that is unreasonably dangerous or unsafe, the injured person may have a claim or cause of action against the company that designed, manufactured, sold, distributed, leased, or furnished the product

● The “product” includes medical devices and pharmaceuticals. The “defect” can be a design defect, a manufacturing defect or a warning defect (including a failure to warn)

● Product liability laws are determined at the state level and vary from state to state

● Parties cannot exclude liability for product defects altogether (i.e., in a contract) but there are ways to reduce the risk: – Insurance – one party asks another to list it as an additional insured – Shift or apportion the risk to another party through an indemnification provision

in the contract - Note, however, this option does not provide protection against third parties (i.e., end-user customers)

● It is important to consult with your legal counsel so that you can

effectively limit your products liability exposure


How do most companies enter the United States?

Entry into the United States—3 typical ways: – Direct sales into the United States

– Establishing a subsidiary in the United

States

– Acquisitions in the United States


Direct sales into the United States

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Many non-U.S. companies take this approach by licensing the product to a U.S. company. The benefit of this approach is that the non-U.S. company can take advantage of the U.S. company’s existing market knowledge. The downside is that returns will be limited as revenue will be shared.


Consideration #3: Distinguishing between distributors and agents

Distributor – think “buy-sell”: ● Distributor obtains title to products from principal ● Principal invoices distributor for products ● Distributor sets resale prices for products and is subject to

risks and rewards associated with resale (e.g., loss/gain of profit, risks of delivery)

Agent: ● Agent never obtains title to products ● Agent invoices principal for services rendered ● No “resale price maintenance” problem But in both cases – set up objectives (easier to terminate)


Consideration #4: Protecting intellectual property (IP)

● Common law rights to trademarks exist

● Additional layer of protection by registering IP at the United States Patent and Trademark Office

● Many companies overlook the concept of patenting their software

● Check your IP before you expand into the United States


From the Oregonian, July 9, 2009:

“Chinese startup based in Eugene wants to sell inexpensive solar panels in U.S. A Chinese startup vying for a piece of the U.S. solar market has landed in Eugene, hoping to become a national player in the state’s growing photovoltaic industry. . . Centron Solar, whose Web site went live Thursday morning, is moving fast to sell and distribute bargain-priced solar panels made in China to the U.S. market, expected to be the world’s next big solar player. . .”


From the Portland Business Journal, October 8, 2009:

“Centron Solar changes name to Grape Solar Centron Solar once said it wants to be the Wal-Mart of solar energy. That may still be true. But now the company is trying to sound a little more like Apple Computers. . . Despite the fruit-themed logic, combined with the notion that grapes grow with the help of solar energy, the real cause of the name change is rooted in a lawsuit filed Sept. 28 in the U.S. District Court in Arizona. CentroSolar Group AG, a $440 million German solar products manufacturer, filed the trademark infringement lawsuit claiming Centron Solar was intentionally trying to confuse customers.”


Consideration #5: Key provisions in commercial contracts ● Keep it U.S. law governed – EU protections not helpful if there is a litigation in the

United States

● Think first of an “exit strategy” – one-year contracts automatically renewable unless terminated by either party, with or without reason, upon 60- or 90-days notice are common

● Craft IP sections carefully to ensure that IP is not “assigned”; draft know-how sections tightly to make sure know-how is only licensed in a limited manner, for a limited purpose, and is kept confidential (remember, only confidential know-how is protected IP)

● Watch out for warranty, liability and indemnification provisions: – Warranty: software, products or services should be sold “as is” but for the very limited

warranty set forth in the contract (contracts should carve-out implied warranty of merchantability or warranty of fitness for a particular purpose)

– Liability: contract should exclude consequential or incidental damages, and limit liability to only reimbursement of money received under the contract

– Indemnification by product supplier, software publisher or service provider: contract should restrict indemnification to a limited IP infringement, while control over litigation should be retained


Consideration #6: Having a “representative office” may be problematic

● Beware that an agent or branch in the United States, of a foreign principal, may subject such principal to U.S. tax on its revenues generated in the United States

● In reality, not frequently done but in some cases you can have a limited agency agreement to perform ministerial tasks for the parent

● When there is such a need, consider establishing a subsidiary


Establishing a subsidiary in the United States

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After initiating direct sales into the United States… consider setting-up a foothold there.


Consideration #7: Do you really need an LLC?

● What is an LLC? Google will tell you.

● What Google will not tell you: one generally should not form an LLC when the majority shareholder (a “member”) is a French corporation

– French parent subject to U.S. income tax – Branch profit dividend tax: tax on “deemed

distributed” dividends – Law not as developed - liability issues?

● LLCs are more commonly used “downstream” in order to bring in U.S. partners


Consideration #8: Try a corporation first ● Easy to form

● Easy to maintain

● Capitalization easy to manage:

– Remember to keep debt-to-equity ratio at a maximum of 1.5:1 – Augmentation of capital by way of “accrued paid in capital” – Disconnect between number of shares and amount of capital

● If a shareholder is not a 100% owner, consider the need for a shareholders agreement

● If a shareholder is a minority shareholder, remember to receive “tag-along” rights


Consideration #9: Labor and employment law

● The concept of “at-will” employment

● The concept of discrimination

● If you have an executive, you will want an employment contract to avoid disputes over: – compensation issues – termination issues – non-competition issues

● Beware of 401(k) and other benefit issues upon any

merger or acquisition in the United States


Consideration #10: U.S. Stock as incentives? ● Usually part of an “equity incentive plan” to encourage employees

to work to maximize a company’s profits and share in the future of a company

● Companies with U.S. stock option plans must comply with federal tax and securities rules

● Establishing a French stock option plan in the United States renders the incentive package more complicated to manage due to the requisite French vs. U.S. law analysis, but it avoids the inclusion of minority shareholders in a company’s subsidiary

● A U.S. stock option plan with a U.S. subsidiary is feasible and potential workarounds exist such as providing phantom rights (or profit-only interest in an LLC formed as an indirect subsidiary)

● Beware of valuation issues and consider shareholders agreements


Consideration #11: Immigration

● “Do it yourself” is not usually sufficient

● Strongly advise hiring an immigration lawyer

● Understand the differences among visas: L1 (intracompany transferee), H1B (professional worker) and E2 (foreign investor)

● Discuss future plans with an attorney to avoid pitfalls (e.g., E2 is easy to obtain but conversion to a green card is difficult)


Consideration #12: Acquisitions in the United States

● Managing your external growth in the United States…

● Or using acquisitions as a first step to penetrate the U.S. market (if you do so, think of creating a U.S. subsidiary as an SPV for the U.S. acquisition).

● One example – in 2008, Ipsen, a specialty pharmaceutical company based out of Paris, acquired three U.S. companies for $450 million – Vernalis Inc., Tercica, Inc. and Octagen Corp. in an effort to build what it called a “fully-fledged North American presence.”


Consideration #12: M&A – asset vs. stock acquisitions ● Stock Acquisition (or joint venture) – will you acquire all or a control

portion of the equity of target? – Watch for “change of control” issues – If buying at premium you do not get to reduce taxes

● Asset Acquisition:

– Select the specific assets and liabilities to purchase or not purchase – “Cherry-pick” employees (no statutory obligation to transfer employees)

● Asset and Stock Acquisitions:

– “Representations and Warranties” of seller are key – Escrow accounts are frequently used – Negotiate any earn-out payments – Do not forget non-compete/non-solicit provisions

● Tax Trick: The 338(h)(10) election under federal and many state laws to treat

the stock deal as an asset deal – Step-up your tax basis and amortize your goodwill over 15 years


General Trends in the Pharmaceutical Industry ● Researchers expect to see:

– Significant growth in licensing – Increase in the number of mergers and consolidations

● Currently, the global pharmaceutical market is dominated by the United States – U.S. accounted for 29% of global pharmaceutical sales in 2009 – U.S. projected to remain the single largest pharmaceutical

market, with sales of $320-330 billion in 2011

● Growth in the generic drug industry as more patents begin to expire – In the U.S., generic drug sales are projected to reach $129.3 billion by 2014


About Schiff Hardin LLP

Schiff Hardin LLP was founded in 1864. Since then we have expanded with offices in Chicago and Lake Forest, Illinois; New York, New York; Washington, D.C.; Atlanta, Georgia; San Francisco, California; Boston, Massachusetts; Ann Arbor, Michigan; and Charlotte, North Carolina. As a general practice firm with local, regional, national, and international clients, Schiff Hardin has significant experience in most areas of the law.


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In 1991, Schiff Hardin established an office in New York in response to a client's request and needs. Since that time, we have developed significant capabilities in complex general litigation, reinsurance, intellectual property, corporate and securities, real estate transactions and finance, estate planning and administration, labor and employment, international transactions, restructuring and bankruptcy, and an increasing array of other key legal services. Our New York office also serves as a focal point for our representation of overseas clients.


Philippe C.M. Manteau

[email protected] U.S. Direct: (212) 745-0856 U.S. Cell: (646) 251-9204

PRACTICE AREAS Corporate and Securities International Intellectual Property Litigation BAR ADMISSIONS New York Paris, France

Partner – Avocat aux Barreaux de New York et de Paris

Philippe Manteau’s practice focuses on growth and mid-cap companies, governmental organizations, and individuals in the United States and abroad in the areas of corporate and business law, as well as technology transactions. The core of his practice consists of assisting French and other international private companies in their U.S. investments and cross-border transactions and litigation.

Mr. Manteau’s training and international experience allow him to identify, analyze, and resolve issues arising in cross-border transactions for European and U.S. clients. Mr. Manteau is fluent in English, French and German.

● Fordham University School of Law (LL.M., Corporate Law and Finance, cum laude, 2006)

● Université Paris X - Nanterre (D.E.S.S., European Business Law, with honors, 1996)

● Université Paris X - Nanterre (J.D., French, German and European Business Law, 1995)

● Institut d'Études Politiques de Paris (M.B.A., Economics and Finance Section, 1993)



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