Our Pharma and Life Sciences Technical Accounting Alerts address emerging and other key industry issues of interest. If you have questions about the material provided, please contact your local PwC partner or directly reach out to the contact names provided in each alert.
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Buyer’s accounting for royalties and milestones payable to seller in a business combination
A common theme in acquisitions is that part of the purchase consideration may be in the form of future payments, such as royalties (i.e., the buyer has an obligation to make future royalty payments to the seller) or milestones. Payments related to these contingent obligations are often triggered by regulatory approval of in-process research and development (IPR&D) projects, or based on future performance measures, such as a percentage of sales. There are various complex accounting judgments to consider under US GAAP and IFRS when a company purchases a compound or group of assets that meets the definition of a business and the consideration transferred includes an obligation to pay future royalties or milestone payments. This Alert outlines this topic, including potential issues to consider and ways to think through them.
Accounting for priority review vouchers
To encourage the development of drugs that treat certain rare diseases, the FDA can award a priority review voucher to companies upon submission of a product application for approval to treat those diseases. The priority review voucher entitles the holder to ask the FDA for priority review of any future drug application that would otherwise get a standard review. The holder can use the priority review voucher on one of its own applications or sell it to another company. This Alert provides guidance on the accounting for the purchase of a priority review voucher. Although sales of priority review vouchers have been limited, the price paid to acquire a voucher has been significant, ranging from $65 million to $250 million. This Alert includes both US GAAP and IFRS considerations.
Disposals – seller accounting for contingent consideration
Contingent consideration arrangements in acquisitions and disposals are common within the Pharmaceutical and Life Sciences industry as they can be a convenient way of validating a company’s value as well as sharing economic risk between the buyer and the seller. In the industry, many acquisitions and disposals involve compounds or devices that have not yet received regulatory approval, which inherently increases the risk that the degree of commercial success of what is acquired or sold may not be known at the date of acquisition.
Research and Development (R&D) Funding Arrangements
Over the past 20-30 years, there have been dramatic advances in medical and biological science. In many cases, promising compounds and new technologies fail to reach the market because companies lacked access to adequate financing sources or were forced to make difficult capital allocation decisions.
Change in timing for recording the Annual Pharmaceutical Fee
On July 28, 2014, the IRS issued final regulations that provide guidance on the annual fee imposed by the PPACA. The regulations include an example calculation of the pharmaceutical fee and other references, which differ in some respects from how companies believed the fee would be determined based on the colloquy from Senator Max Baucus from 2010 and temporary regulations issued in August 2011.
IPR&D acquired in a business combination – How many pieces?
Pharmaceutical, medical technology and biotech companies continue to use mergers and acquisitions as a way to bolster their pipelines and improve efficiencies. In-process research and development (IPR&D) can be one of the most significant assets acquired in these deals. As such, recognition and measurement of IPR&D is an important consideration in the acquisition accounting.
Potential impacts to pharma and life sciences companies of the new accounting definition of an 'investment company'
Pharmaceutical, biotech, medical device and other life sciences companies often invest through entities that are considered “investment funds.” Before ASU 2013-08, the definition of an investment company was broader under Topic 946 whereby more entities may have met that definition. The new ASU provides a revised definition of an investment company which may result in some investment funds no longer meeting the definition of an investment company. If the entity does not meet the definition of an investment company, then the company is at risk of consolidating the operating activities of the investment fund’s investee or accounting for them under the equity method of accounting. This Alert focuses on the key accounting considerations when assessing whether an entity is an investment company and also provides illustrative examples.
Distinguishing a Business from an Asset or a Group of Assets
Pharmaceutical, biotech, medical device and other life sciences companies frequently deal with the highly judgmental and complicated area of determining whether an acquisition, investment or license should be accounted for as a business combination or an asset acquisition. This distinction matters as the accounting for a business combination varies significantly from the accounting for an asset acquisition, particularly in the pharmaceutical and life sciences industry. This Alert focuses on the key accounting considerations when making this determination and provides illustrative examples.
Contingent Consideration in a Business Combination
This Pharmaceutical and Life Sciences Industry Alert provides guidance on the accounting for contingent consideration arrangements in business combinations. In a business combination, a buyer and seller may not agree on the total purchase price if there are significant uncertainties associated with the acquired business. Often times, the two parties may agree to an additional payment, or contingent consideration, based on the outcome of future events. Contingent consideration arrangements are common within the Pharmaceutical and Life Sciences industry as they can be a convenient way of sharing risks between the buyer and seller. This Alert focuses on the key accounting considerations for contingent consideration.
New tax law extends research & development tax credit
President Obama signed the American Taxpayer Relief Act of 2012 (the Act) into law on January 2, 2013. The Act permanently keeps tax rates from rising for certain individuals and retroactively reinstates certain business tax incentives that had expired. One of the key impacts of the Act for pharmaceutical and life sciences companies is the reinstatement of the research and development (R&D) tax credit. This Alert provides guidance on accounting for the retroactive reinstatement of the R&D tax credit.
Medical device excise tax (updated 28-March 2013)
The Health Care and Education Reconciliation Act of 2010 (the "Act") imposes a tax equal to 2.3% on the sales price of any taxable medical device by a medical device manufacturer, producer or importer of such device. The excise tax applies to sales after December 31, 2012. As such, medical device manufacturers will need to begin accounting for this tax for all sales, other than tax free sales, beginning January 1, 2013 and will need to consider the impact of this tax on their 2013 results.
Greece debt restructuring
In February 2012, the Greek government announced a debt restructuring which required holders of the bonds to exchange their two-year and three-year bonds, currently scheduled to mature in December 2012 and 2013, for new bonds having a face amount equal to 31.5% of the face amount of the original bonds, European Financial Stability Facility notes with a face amount equal to 15% of the face amount of the original bonds and detachable Greece GDP-linked securities. The debt restructuring allows Greece to reduce its debt obligation, but results in bond holders incurring losses due to the reduced redemption value of the new bonds. Pharmaceutical companies will need to evaluate the debt restructuring in order to properly assess the accounting impact of this event.
European Economic Environment — US GAAP Accounting Considerations
There continues to be significant economic problems in some European countries that are members of the single currency (the Euro zone) as well as potential uncertainty about the single currency itself. Austerity programs aimed at reducing debt levels in these countries have not eliminated the possibility that some European countries could default on sovereign debt and other governmental obligations.
Update on TRICARE recent court ruling
The PwC accounting alert discusses the impact of a recent court ruling on a pharmaceutical manufacturer's obligation to provide rebates on covered drug prescriptions dispensed to TRICARE beneficiaries.
Accounting for the Annual Pharmaceutical Fee
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). There are several provisions in the new health care law that impacted the accounting for companies in 2010. As we head into 2011, one of the more significant provisions of the law, the annual fee on pharmaceutical manufacturers, becomes effective.
Accounting for the Medicare Coverage Gap
Effective January 1, 2011, pharmaceutical manufacturers will be required to provide discounted products to applicable Medicare beneficiaries receiving covered Part D drugs while in the coverage gap. The discount on each covered Part D drug is 50% of the negotiated price, with negotiated price being the price the beneficiary would otherwise pay while they are in the coverage gap. There are a couple of issues that pharmaceutical companies will face when accounting for the Medicare coverage gap including estimating the amount of the coverage gap rebate and determining the timing for recognizing the related reduction in revenue. PwC clients that have questions about this Industry Alert should contact their engagement partners.
New Puerto Rico Tax Law Accounting Considerations
On October 25, 2010, Governor Luis G. Fortuño signed into law a new tax law effective for transactions occurring after December 31, 2010. The tax provision modifies the Puerto Rican tax law by adopting a new sourcing rule and imposing a temporary excise tax on intercompany purchases made through 2016. The new tax provisions are as follows:Income Source Rule and Excise Tax.
The key accounting question surrounding these new taxes is determining whether they are within the scope of ASC 740, Taxes, or other accounting guidance.
Therapeutic Discovery Project Tax Credit Accounting Considerations
The alert deals with the accounting considerations related to the Therapeutic Discovery Project Tax Credit. Over 5,000 project applications, requesting over $10 billion in credits, were submitted. On November 3, 2010, the IRS, in conjunction with the Department of Health and Human Services, announced that it had approved applications for a total amount of $1 billion for projects that showed significant potential to produce new and cost-saving therapies. This Alert highlights the key accounting and financial reporting implications that affected companies will need to consider when accounting for the credit.
Greece Fiscal Crisis Accounting Considerations
A number of companies in the Pharmaceutical and Life Sciences sector sell products within Greece that are ultimately paid for by the Greek government. Recently, the financial stability of the Greek economy has been challenged creating questions about whether these companies will receive payment for products sold to the Greek government. Two key accounting considerations from this announcement include implications for currently outstanding accounts receivables and what impact the announcement will have on the recognition of revenue for future sales of product to the Greek government. This technical alert provides considerations companies should review when determining the appropriate revenue recognition for sales to the Greek government.
Milestone Method of Revenue Recognition
The milestone method is one alternative to recognize revenue for the additional consideration under an arrangement that is received when a specified milestone or target is achieved. The methodology has developed in practice over time and has become a commonly used alternative in the pharmaceutical and life sciences industries. Under the milestone method, a vendor may recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period the milestone is achieved if the milestone is determined to be substantive. This alert provides background and frequently asked questions about the milestone method of revenue recognition.
Accounting for Funded Research & Development Arrangements
Pharmaceutical and life science (PLS) companies might enter into arrangements with various investors (who often times are financial investors/passive investors) to assist in the funding and to share the financial risks and rewards of the R&D. In these arrangements, the investor often does not actively participate in the operating activities, but rather provides funding for the development in return for a future revenue interest of the product. The PLS company is typically not obligated to reimburse the investor for the funding provided and any repayment or return to the investor is contingent on future revenue from the sale of the products under development. These arrangements are potentially within the scope of ASC 730-20, Research and Development Arrangements, and ASC 470-10-25, Sales of Future Revenues (formerly EITF 88-18). The purpose of this Alert is to discuss the accounting model for R&D funding received from a passive investor when repayment to the investor is contingent upon future events.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) that was passed by the Senate in December 2009 and by the House of Representatives in March 2010. In addition, the Senate and House of Representatives passed the Health Care and Education Reconciliation Act, which includes a number of changes to PPACA, in late March which was signed into law by President Obama on March 30, 2010. This alert addresses a number of provisions in the new health care law that will impact the accounting for many pharmaceutical and life sciences companies.
In recent years and particularly in Europe, pay-for-performance arrangements have become more common. Under these arrangements, the price paid for a given medicine is generally linked to the efficacy of a drug. Such arrangements can be complex to administer and present a number of accounting challenges.