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In the case of pharmaceuticals, the World Health Organization estimates that the market will be worth $400 billion within
three years, up from $300 billion today. But as the industry expands internationally and as competition heightens, so does the potential for fraudulent activity, corrupt practices and compliance concerns.
For pharmaceutical companies, the Foreign Corrupt Practices Act (FCPA) is another layer
of compliance and regulation that needs to be addressed. The FCPA, which prohibits corrupt payments and offers of payment to foreign officials for the purpose of obtaining or retaining business, has had an enormous impact on the way American pharmaceutical firms operate internationally. Without adhering to stringent compliance protocol and employee education regulations, companies can face significant fines. Household names like Johnson & Johnson and Pfizer have already
The RIghT PRescRIPTIon foR The foReIgn coRRuPT PRacTIces acT In The PhaRmaceuTIcal IndusTRyBrian J. Mich and Ryan Starkes
an IncReasIngly global maRkeTPlace Is allowIng foR TRemendous gRowTh In The lIfe scIences IndusTRy.
dId you know...
According to the BDO PErspective Study, private equity fund managers see the manufacturing industry (28 percent) and healthcare/biotech (21 percent) industry as the greatest opportunities for new investments in 2013.
Cleantech companies around the globe raised $6.46 billion of venture capital across 704 rounds, representing a return to 2009 levels after strong years in 2010 and 2011, according to the Cleantech Group.
According to BDO’s Biotech Briefing Report, biotechnology companies spent $50 million on R&D in 2011, up from just over $47 million invested in 2010.
Worldwide Big Data technology and services markets are expected to grow at a 31.7 percent compound annual growth rate (CAGR) with revenues reaching $23.8 billion in 2016, according to research firm IDC.
Gartner expects that worldwide IT spending will total $3.7 trillion in 2013, a 4.2 percent increase from 2012 spending of $3.6 trillion.
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THe NeWsleTTer OF THe BDO TeCHNOlOgy & liFe sCieNCes PrACTiCe
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members of your organization, which means it is your company’s responsibility to ensure that they are also following compliance regulations. it is more important than ever to make participating in training programs and agreeing to follow anti-corruption compliance programs mandatory for all employees.
sTePs To allevIaTIng RIskAs mitigating risk and gaining a stronger hold on compliance guidelines become a more frequent occurrence, companies are going to need to implement dynamic policies that will keep up with a changing global landscape.
Part of this process involves adopting a regional focus on compliance. A ‘one-size-fits-all’ compliance policy for foreign subsidiaries will not be sufficient in accounting for the innate cultural differences of each region where they practice business. it was a lack of a regional compliance focus that placed Johnson & Johnson in the spotlight in March 2011. The securities and exchange Commission (seC) accused Johnson & Johnson of bribing public doctors in several european countries to win contracts for their products. As a result, the company agreed to pay financial penalties exceeding $70 million.
To maintain control and alleviate risk factors, companies must also be vigilant in filtering acquisition targets and subsidiaries. such is the nature of the industry that companies are often looking to expand their global footprint and jockey for market shares in new regions through the acquisition of smaller targets and subsidiaries. if these acquired companies are not properly screened for corrupt practices, parent companies are wholly at risk under the FCPA. This was exactly how Pfizer, and its subsidiary Wyeth, came under the seC’s microscope earlier this year. Pfizer was charged with making improper payments to government officials, including publicly employed regulators and health care professionals, in a number of eastern european countries because it did not closely monitor some corruption actions performed by Wyeth. As a result, Pfizer was liable for $60 million in fines and disgorgement.
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business in this country without the threat of compliance violations. The sales team needs to ensure proper protocol is followed since they will be speaking directly with medical professionals who, in the context of universal healthcare, are government agents.
How closely regulated is my industry? it’s important to know that the extent to which a company is subjected to greater regulatory oversight increases the opportunities for corporate corruption. The anti-bribery provisions of the FCPA apply to the government contracting situation as well as any payments or offers of payment to a foreign official that gives the company a competitive advantage. With the regulatory environment becoming increasingly competitive around the globe, bribes for fast-tracking approvals or for opening a new facility in a foreign country are more often being considered as FCPA violations.
Is our company relying on third parties and intermediaries? expansion into new markets is often aided through work with third parties and intermediaries. Under FCPA guidelines, these individuals are acting as
paid hefty fines for failing to comply with FCPA regulations, but your organization does not need to do the same.
PlannIng foR InTeRnaTIonal busInessin order to create and maintain a strong anti-corruption compliance program, it is important to fully understand the potential risks of non-compliance. The program should be customized to address those risks, such as assessing the possibility of foreign corruption given the size of a company’s international footprint. However, there are three key questions that each pharmaceutical company should ask when evaluating exposure:
What is the inherent risk of doing business in a new market? every country presents its own unique set of concerns, but it is your organization’s responsibility to clearly understand how to do business in that particular region. For instance, if you are looking to expand into a country with universal healthcare like Australia or Japan, you need to ensure that your sales team is educated on how to properly conduct
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However, private equity funds are not the only ones looking to increase investments in the sector. Big pharmaceutical companies – under immense pressure to fill gaps in their production pipelines – are increasingly seeking strategic M&A opportunities to drive innovation and growth. And despite slower revenue growth, these companies are not without cash. in fact, the five largest U.s. drug-makers ended the third quarter with $70 billion in cash, near cash and short-term investments3.
With strategic buyers fiercely competing for companies to invest in, where will private equity funds look to build their portfolios in 2013?
Big pharma divestituresPharma companies looking to increase cash flow and refine their strategic focus will likely consider divesting non-strategic assets, with private equity potentially serving as a viable acquirer.
Emerging marketsPrivate equity investments in india’s life sciences sector grew more than 130 percent in 20124 and are likely to continue, particularly in the area of bioinformatics. Other developing countries will also be attractive, as more companies capitalize on opportunities to serve their growing populations and rising middle class.
ConsolidationConsolidation opportunities in the sector continue to exist. As such, private equity funds invested in the sector will have opportunities to grow their existing portfolios, particularly through add-on acquisitions.
Compete for core assetsPrivate equity funds will compete with the other funds and strategic buyers for core assets and opportunities, potentially driving up purchase multiples.
PErspective in Life Sciences is a feature examining the role of private equity in the life sciences industry.
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Brian J. Mich, JD, CAMS is a managing director and the chair of BDO’s U.S. Anti-Corruption Compliance & Investigations practice. He can be reached at [email protected].
Ryan Starkes, CPA, is partner and group practice leader of the Life Sciences industry group at BDO. He can be reached at [email protected].
sources 1 PitchBook2 Prequin3 Bloomberg4 Venture intelligence
TRaInIng Is youR besT defenseyour employees, specifically your sales team, are potentially walking into FCPA violations on a daily basis. regular trainings for employees around violations awareness will aid in limiting penalties if fraud occurs. recently, financial services provider Morgan stanley was able to avoid culpability under FCPA regulations for the corrupt actions of one of its relatively high-level management employees because it had a robust anti-corruption compliance program which included a persistent training regimen for employees.
Most FCPA penalties result from incidents that occur outside the direct oversight of corporate leadership. Thus, companies should constantly be asking:
• Are employees aware of how seriously this company takes compliance?
• Have we correctly assessed our corruption risks?
• Do we proactively and regularly check policies to ensure they are adapted for an evolving business environment?
• is the company confident that the third parties we work with are pursuing our best interests?
• Do we take steps to encourage a culture of compliance internally and externally?
• Do we conduct sufficient testing and monitoring to ensure that our procedures are effective in mitigating corruption risk?
Creating a culture of compliance is the best defense against FCPA violations. From the board of directors to entry-level staffers, keeping compliance top-of-mind for all employees will limit the threat of corrupt practices.
This article first appeared in Pharmaceutical Compliance Monitor in January 2013.
Perspective in Life Sciences
Private equity investments in the pharmaceuticals and biotechnology sector seem to have ended 2012 on a high note after increasing to 18 percent of healthcare-related deal flow
in the third quarter1, and 9 percent in the fourth quarter, up from a mere 2 percent during the second quarter. And with 103 private equity vehicles worldwide publicly seeking capital to gain exposure in the life sciences sector2, it appears the appetite for deals in the industry will continue to rise in the coming year.
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buIldIng a sTRong Tax foundaTIon In lIfe scIences sTaRT-uP comPanIesBy Chris Bard, Matthew Dyment, Maureen McGetrick, Marla Miller and Robert C. Pedersen
with all of the business challenges life sciences startup companies are faced with, it is little wonder that
the tax function often remains at the back of the line. However, there are many reasons why a life sciences company should assign focus to the tax side of the business sooner rather than later. By reprioritizing the tax function now, companies can avoid significant consulting fees and reduce stress on already strained internal resources down the road. The tax function has so many significant moving parts that it is highly possible that indifference, or a “wait and see” approach, can often trigger or possibly increase a company’s tax exposure.
integrating the tax function into the company’s day-to-day strategic planning is one of the only ways to drive a low, effective tax rate in the future. in discussions with various CFOs over the years, one common message arises: we should have begun addressing the tax function and its related controls a year or two earlier.
Often the payment of a significant milestone can result in significant issues with financial reporting and tax filings. What should have been a celebratory time turns into corporate self-reflection. But reflection should lead to practical improvements. There are various everyday tax matters that a company should be building processes and procedures around now, to avoid the heartburn later:
Quantify and Track Net Operating Losses Can you imagine tracking down 15 years worth of federal and state tax returns from an off-site data storage facility in order to determine the net operating losses available to use in a year? Actually having the returns in storage would be a long shot. Most life sciences companies don’t put much stock in this exercise because the company is typically losing money. However, thought through rationally, would a company be in business if it did not plan on making a profit eventually? Why wait for a milestone event
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to be triggered, resulting in taxable income in tens of millions of dollars before determining whether or not to offset the income with a net operating loss (NOl)? Begin tracking net operating losses now so when success knocks on your door you know how to account for it.
Confirm net operating losses are not limited under IRC Section 382After establishing the NOl carry forward amount, determining how to actually use the NOls is just the beginning. in the same context of tracking the NOls, imagine the effort to determine whether an ownership change has occurred in a company’s stock over the prior 15 years. The computations required to determine whether an ownership change has occurred under section 382 are highly complex and heavily fact-based. Trying to obtain stockholder records from 15 years ago is not an easy task. in addition, accessing information from any acquired companies is often difficult if not done immediately during the transition period. Furthermore, current
tracking of the 382 ownership analysis may allow the company to make valuable elections, such as the “closing of the books” election which may allow the company to preserve more of its NOls following an ownership change or, more importantly, to prevent an ownership change from occurring.
Identify whether the limit determined under IRC Section 382 can be increased Net unrealized built-in gains (NUBig) can result in a significant increase to the amount of NOls that can be utilized in any given year. This analysis typically involves valuation work that can require substantial time for external consultants to determine how to value property, the value of which is not readily ascertainable. Again, conducting a valuation of assets several years after an event has occurred can be a difficult exercise. More importantly, once this exercise is complete, a company seeking to increase the amount of
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the NOl limitation may need to provide its auditors with a formal report from a reputable valuation firm to confirm its conclusions.
Quantify and Track Research and Development CreditsKeeping up with your company’s past and current r&D credits is important—even if you’re not paying taxes and can’t use the credits now. Currently, r&D credits can be carried forward from as far back as 1998, even if they weren’t identified until this year. in addition, the credit can be calculated in different ways, each of which can produce significantly different credit amounts. For some companies, one calculation method can produce zero credits while another produces millions, ultimately impacting taxpayers who must choose their calculation method every year. Unfortunately, companies do not have the opportunity to amend the selection later. if not reviewed annually for optimal credit, companies may find out later that they’re committed to a method that generates comparatively little or no credit.
it’s important to establish a process both for identifying eligible research expenses and gathering information and documentation about qualified research activities. As with NOls, sifting through financial records and activity reports from a decade ago can be a difficult, if not impossible, exercise. Oftentimes, the company has changed its financial reporting platforms or, worse, may have expunged data and documentation pursuant to its internal document retention policies. The lack of information can make it impossible to determine and support the company’s qualified expenses. ideally, a process to identify and document qualified expenses and activities will follow the stages of the standard development process of a life sciences company, namely, Discovery and Preclinical, Clinical Trials, regulatory review, and Post Approval. Adopting this approach will help a company take advantage of guidance that the internal revenue service published in December 2012 on r&D credits in the pharma industry.
Migration of Intellectual PropertyTax directors of multinational life science companies are typically not tasked with managing business change. yet, the individual
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responsible for the company’s tax function is responsible for managing the effective tax rate. Tax directors who do not make timely recommendations for structuring ownership of intellectual property of a business in the international context will find it difficult to manage the company’s effective tax rate in later years.
Proactively managing the company’s intellectual property allows it to efficiently transfer technology from the location where the technology was developed to a location where it is actually used. Proactive iP planning is especially critical in cases where a substantial portion of a company’s business is anticipated to come from sources outside its home country. Absent of proper planning, the routine sharing of knowledge and use of intellectual property within a company could yield unexpected tax costs, such as toll charges, gain recognition, transfer pricing adjustments and withholding taxes.
Accounting Method Changes and Cost Segregation Studies in times when life science companies look for ways to cut expenses and bring cash in the door, a comprehensive review of tax accounting methods—identifying ways to defer revenue recognition and accelerate deductions—can be just what is needed. Treating capital costs for tax normally follows the book treatment—but not always. expenditures that could be deducted currently are often incorrectly capitalized, for example as a repair expense under recently promulgated regulations. A cost segregation study is one way to identify these opportunities. By segregating building and land, which generally must be deducted over a 39-year period, land improvements and elements of personal property may be deducted over much shorter periods. Assets’ lives are significantly reduced as they are reclassified as personal property, which can result in an acceleration of the depreciation deduction.
life-science companies should consider other accounting opportunities, such as: the one-year deferral allowed for advance payments for use of intellectual property and services; current expensing or optional 10-year capitalization of research and experimentation expenditures (section 174); accounting
changes related to prepaid payment liabilities and patent infringement costs; capitalization of certain startup expenditures (section 195); accelerated deductions for domestic production activities (section 199); and certain transaction costs relating to mergers and acquisitions.
Credits and Incentiveslet’s face it, the states love pharmaceutical manufacturing jobs. Doesn’t it behoove a company to actively seek out and negotiate various incentives with a state to bring cash back into the company’s bank account? in my experience, we were able to negotiate a deal with a Midwestern state where $0.70 of every state tax dollar withheld from an employees paycheck was paid back to the company by agreeing to hire employees in the state, and invest in the expansion of the existing facility over the next five years. The resulting annual refund was in excess of $1 million a year post-expansion. As such, if a company knows it will increase hiring and/or has plans for a significant expansion, there is no time like the present to contact the state and see what incentives can be negotiated. remember, you lose your advantage of negotiation when the lease is already signed, or the shovel is already in the dirt.
As you can see, there are many processes and procedures that life sciences startups can strongly consider to get their tax house in order before a milestone moment forces them to.
Chris Bard, J.D. is a national leader, R&D Tax Credit Services, and national leader. He can be reached at [email protected]
Matthew J. Dyment, J.D., LL.M, is a senior director, Specialized Tax Services, State and Local Tax Services at BDO. He can be reached at [email protected]
Maureen McGetrick is a partner, National Tax Services. She can be reached at [email protected]
Marla Miller, J.D., CPA is a Tax senior director, Tax Accounting Methods practice. She can be reached at [email protected]
Robert Pedersen, J.D., LL.M, CPA is a partner, Specialized Tax Services, and International Tax Consulting practice leader. He can be reached at [email protected]
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The following is a list of upcoming conferences and seminars from the leading technology associations and business bureaus:
maRk youR calendaR…
maRch 2013March 6-7GlobalCon 2012Pennsylvania Convention CenterPhiladelphia, Pa.
March 8-10CEA Economic RetreatViceroy snowmasssnowmass, Colo.
March 18-21Enterprise Connect Conference & Expogaylord PalmsOrlando, Fla.
March 19-20Cleantech Forum Hyatt regency san Franciscosan Francisco, Calif.
aPRIl 2013April 2-5CloudConnectsanta Clara Convention Centersanta Clara, Calif.
April 4-5IEEE Green Technologies ConferenceHyatt regency Tech CenterDenver, Colo.
April 17CIO Perspectives New YorkNew york, N.y.
April 22-25Bio International ConferenceMcCormick Place Convention CenterChicago, ill.
may 2013May 12-16Biotech Conference & Expo 2013gaylord National HotelWashington D.C.
May 17-19TiEConsanta Clara Convention Centersanta Clara, Calif.
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TIM CLACkETTLos Angeles310-557-8201 / [email protected]
SLADE FESTERSilicon Valley408-352-1951 / [email protected]
HANk GALLIGANBoston617-422-7521 / [email protected]
AFTAB JAMILSilicon Valley408-352-1999 / [email protected]
BOB PEARLMANAtlanta404-979-7124 / [email protected]
RYAN STARkESWoodbridge732-734-1011 / [email protected]
MIkE WHITACRESouth404-688-6841 / [email protected]
DAVID YASukOCHIOrange County 714-913-2597 / [email protected]
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