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Pharmaceutical and Life Sciences Quarterly insights: Q2 2021

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.

Did you miss our Accounting Hot Topics webcast on May 25, 2021? Watch the webcast replay for SEC regulatory updates, accounting and financial reporting news, ESG, cyber considerations, and more impacting the pharmaceutical and life sciences industries.

Spotlight: Industry update

What companies might expect from the FDA and CMS

Broader use of accelerated drug reviews, participation from diverse populations in trials, and small drug pricing pilots are all possibilities as new leadership takes the reins at the FDA and CMS. How should companies get ready?

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:

  1. expectations about diverse populations in trials, and
  2. visibility into the medical products supply chain to reduce future shortages.

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.

We will also continue to strengthen our ties with communities through the most effective and innovative platforms

Rear Adm. Richardae Araojo, associate commissioner for minority health at the FDA

How should pharmaceutical companies prepare for changes at the FDA?

  • Companies should include a focus on increased diversity into their clinical trial strategies.
  • Companies should continue to think more long term about how to improve their supply chain and understand the opportunity that could exist with strategies such as dual sourcing. The FDA encourages companies to adopt advanced manufacturing processes, such as artificial intelligence and machine learning, that could shorten the pharmaceutical supply chain and create a more resilient and adaptable framework. This may involve large upfront investment but could make the supply chain less susceptible to future disruptions over the long term.
  • In therapeutic and/or disease areas where the agency may decide to adopt a more accelerated review process, companies may need to manage different facets of drug review simultaneously, including the potential for more real-time review of study results and the potential advanced analytics and cybersecurity capabilities that this may require. Analytics and cybersecurity are needed to integrate the supply chain and will likely require investment that could pay dividends, allowing manufacturers to avoid stockouts and shortages and deliver on the promise of the right treatment to the right patient at the right time in the right place.

How should pharmaceutical companies prepare for changes at CMS and 340B?

  • Companies should prepare for potential upfront costs associated with out of pocket savings programs, but this investment will likely provide long term revenue benefits through improved new patient starts, greater adherence over time, and overall uptake of medicines. Companies will need to ensure this is considered in their gross to net estimations and related assumptions, if implemented.
  • Companies with a greater mix of Part B drugs should anticipate the potential for minor shifts in revenues from pilot programs.
  • Better coordination with the FDA is an avenue for CMS to address cost reimbursement. To facilitate this, manufacturers should prepare to have more open discussions with payers such as CMS in parallel with late-stage trial planning, and integrate capabilities across commercial and R&D to facilitate those interactions. This will allow for the drug manufacturers to come to CMS sooner and have the data at launch to satisfy payer needs, hastening reimbursement decisions and giving CMS more visibility into the pipeline of new products.
  • Companies should expect 340B drug sales to continue to increase unless Congress acts to narrow eligibility or place limits on contract pharmacies.

Regulatory update

Updated SEC comment letter trends

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:

  • Comment letter trends within the Health Industries sector have remained relatively consistent overall; however, there has been movement within the top 10. Disclosure controls and ICFR has replaced revenue recognition as the top trend.
  •  There has been an increase in letters related to forms compliance and exhibits. A portion of these comments relate to redacted exhibits. In 2019, the SEC adopted new rules that allow registrants to file redacted material contracts without applying for confidential treatment if the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. As expected, and consistent with the SEC’s announcement upon issuance of the rule, in certain cases the staff has requested full exhibits to assess compliance.
  • The staff continues to ask about contingencies, specifically related to the timing of and amount of loss provisions, and disclosure of the possible loss, range of loss, or why an estimate cannot be made.
  • Although non-GAAP measures is ninth on the list for Health Industries, it is the top comment letter trend for all other industries. We are beginning to see an increase in SEC comments on this topic and encourage companies to review their non-GAAP measures for compliance with the SEC’s non-GAAP rules and interpretive guidance. 

Are you ready to adopt the SEC’s amendments to management’s discussion and analysis and other financial disclosures?

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:

  • the elimination of Item 301 (Selected Financial Data); and
  • replacement of the current Item 302(a) requirement for quarterly tabular disclosure with a principles-based requirement to disclose material retrospective changes.

Other changes, such as the following changes to Item 303 (MD&A), may take more preparation and review from various stakeholders: 

  • Addition of a new Item 303(b)(3), Critical accounting estimates, to clarify and codify SEC guidance on critical accounting estimates;
  • Replacement of current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A; and
  • Elimination of Item 303(a)(5), Tabular disclosure of contractual obligations and amended Item 303(b)(1), Liquidity and Capital Resources, to specifically require disclosure of material cash requirements from known contractual and other obligations as part of an enhanced liquidity and capital resources discussion.

It may be beneficial to prepare draft disclosures in advance of year end.

Accounting and financial reporting

On the Horizon: New standard for calendar year-end PLS Public Business Entities (PBEs) for 2022

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:

  • capitalized interest,
  • covenants and financial ratios
  • conversion vs. extinguishment
  • taxes, or
  • EPS

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).  

Generic drug manufacturer may deduct patent infringement litigation costs

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.

Contact us

Josh Herron

US Pharmaceutical & Life Sciences Assurance Leader, PwC US

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