PwC’s Pharmaceutical and Life Sciences Quarterly offers insights into today’s accounting and financial reporting news with an emphasis on the impact to pharmaceutical, life sciences and med device organizations.
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With a new administration and a narrow Democratic majority in Congress, many of the most significant near-term actions for pharmaceutical companies will likely come from the Food and Drug Administration (FDA) and Centers for Medicare and Medicaid Services (CMS). PwC’s Health Research Institute (HRI) has identified the key issues likely to top the agenda at each of these agencies and how they could affect the pharmaceutical and life sciences industry.
The FDA has played a central role in the pandemic response, expediting the approval of numerous medical products, including diagnostics, therapeutics, and vaccines. The FDA is likely to seek to standardize policies implemented in response to the pandemic, including broader use of expedited reviews.
“The innovative approaches and increased regulatory flexibility that the FDA used during COVID-19 to review these products could potentially be adopted and integrated into existing regulatory review pathways while continuing to uphold the evidentiary standards of safety and efficacy,” Lucy Vereshchagina, vice president of science and regulatory advocacy at the Pharmaceutical Research and Manufacturers of America (PhRMA), told HRI.
In addition, experience during the pandemic highlighted new areas of near-term focus for the FDA, including:
Drug pricing is a key pillar of President Joe Biden’s healthcare agenda, but with Congress so narrowly divided, CMS could be the administration’s best chance to implement piecemeal actions on drug pricing. Additionally, CMS could seek to reinvigorate the parallel review process, coordinating with the FDA on regulatory actions related to medical devices and high cost therapies.
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How should pharmaceutical companies prepare for changes at the FDA?
How should pharmaceutical companies prepare for changes at CMS and 340B?
Our analysis of SEC comment letters identifies the top ten health industry comment letter trends, including examples. The treemap below depicts the approximate portion of comments for each trend relative to the total comments issued related to the top ten trends.
Observations from the data:
The SEC’s amendments to management’s discussion and analysis (MD&A) and other financial disclosures could have been early adopted in Q1, but are mandatory beginning with fiscal years ending on or after August 9, 2021. Many companies in the Health Industry sector did not early adopt the recent amendments to Items 301, 302 and 303 of Regulation SK. Some amendments may be easier to adopt than others, such as:
Other changes, such as the following changes to Item 303 (MD&A), may take more preparation and review from various stakeholders:
It may be beneficial to prepare draft disclosures in advance of year end.
The FASB’s most recent guidance on liabilities and equity is effective in calendar year-end 2022 for PBEs and could have a significant impact for PLS companies. Early adoption was possible, but only in the first quarter of 2021.
Under previous guidance, when a company evaluated a security, there may have been certain terms that clearly precluded equity classification and, once determined, no further evaluation may have been necessary. Now companies may have to review all of the terms, including ones that were not previously evaluated, to see if those terms impact the accounting for the instrument.
For certain situations, some or all of the discount on the security will be reduced, lowering the amount of interest expense associated with the instrument.
It is important to consider what else could be impacted, such as:
The adoption of this standard requires judgment and additional analysis and there could be unexpected consequences. Check out some key points and learnings of companies that early adopted. Additionally, for those that did not early adopt, keep in mind the need to disclose the impact of recently released but not yet adopted standards (SAB 74 disclosures).
The Tax Court recently ruled that Mylan, a generic drug manufacturer, may deduct as ordinary and necessary business expenses legal fees incurred to defend patent infringement lawsuits brought by branded drug companies, rejecting the IRS’s position that the legal fees must be capitalized. The court reasoned that the litigation was not a step in the FDA approval process. The court also found that, under the origin of the claim test, Mylan’s patent litigation expenses should be treated as ordinary and necessary business expenses and that the IRS failed to show that the substance of the underlying claim arose out of the acquisition, ownership, or improvement of property.
However, the Tax Court agreed with the IRS’s position that Mylan’s legal fees for preparing, assembling, and transmitting notices to branded drug patent holders of its abbreviated new drug application (ANDA) filing must be capitalized because the notification is a required step for obtaining FDA approval and the related costs constitute amounts incurred to facilitate the creation of an FDA-approved ANDA — a government-granted right and thus a capitalizable intangible under the tax code.
Generic drug manufacturers should consider: (1) deducting legal fees incurred to defend such patent infringement lawsuits going forward; and (2) determining whether this decision provides them with an opportunity to claim refunds for open tax years when such costs were capitalized. Note that obtaining such a refund may require the consent of the IRS for the drug manufacturer to change its method of accounting. These manufacturers should track patent infringement legal fees separately from legal fees associated with the creation of an intangible asset.
See our insight Tax Court holds generic drug manufacturer may deduct patent defense litigation expenses for more information.