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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A number of PLS companies are considering early adoption of the FASB’s most recent guidance on liabilities and equity. To do so, calendar year-end SEC filers will need to adopt as of January 1, 2021. This In depth highlights key points to consider and potentially unexpected consequences of adopting and summarizes the standard’s transition provisions.
There are several other standards calendar year-end public companies need to adopt in the first quarter of 2021, such as ASU 2019-12 (Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes) and ASU 2020-01 (Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)). For a full list and more on guidance effective for 2021 and beyond, refer to the following link: Guidance effective after 2020 for calendar year-end public companies
Our analysis of SEC comment letters identifies the top ten comment letter trends, including examples. Health industries’ comment letter trends remained relatively consistent when compared to the prior quarter.
On August 26, 2020 the SEC amended its disclosure requirements relating to the description of the business, legal proceedings, and risk factors. The final rules require registrants to describe certain aspects of their human capital resources within the overall framework of principles-based disclosures. We reviewed 200 Form 10-Ks filed since the new rules became effective within the Health Industries sector. Some key findings include:
Regulation S-K states that companies should include “... a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business.” The following depicts the percentage of companies within the sector that disclosed topics related to human capital in their Form 10-K.
|99%||Employee demographics (employee headcount, geographical distribution, job function, education level, regular/part-time)|
|62%||Total rewards (employee compensation & benefits)
|59%||Employee lifecycle (hiring/recruitment, learning/development, mobility, retention, succession planning, turnover)|
|54%||Health & safety|
|51%||Labor relations (collective bargaining)|
|44%||Diversity and inclusion (gender, sexual orientation, ethnicity, veteran status, culture, strategy, age, religion)|
On February 24, 2021, SEC Acting Chair, Allison Lee, issued a statement on the review of climate-related disclosure in which she directed the Division of Corporation Finance to “enhance its focus on climate-related disclosure in public filings” and update the SEC’s guidance on disclosure related to climate change issued in 2010. Shortly after that announcement, the Division of Enforcement established a Climate and environmental, social, and governance (ESG) Task Force to scrutinize any material gaps or misstatements under the existing rules. And on March 15, Acting Chair Lee solicited input on 60 questions related how the Commission should address climate-change disclosures.
The importance of ESG metrics and disclosures, including those that are climate related, has been increasing. Companies are seeking to create value among a broader group of stakeholders while telling their story about the impact the company is making on the world. As with other disclosures, companies should have controls and processes related to these disclosures. Refer to PwC’s micro site, ESG reporting, for further resources.
In this year’s Top health industry issues report, PwC’s Health Research Institute (HRI) examines uncertainty expected in the healthcare industry in 2021. As we progress beyond the acute impacts of the pandemic, Pharmaceutical and life sciences (PLS) companies will need to be resilient and agile, consider changes in strategy, invest in innovation, and consider new business models.
Virtual health is becoming more common. PLS companies may have to determine where they can and should plug in, virtually. Providers will likely need to improve the patient experience and be careful not to create new disparities in the health system through lack of technology access. Payers may wrestle with how to negotiate rates for provider services and, in some cases, expect more virtual care services than in the past.
Using the data about members and populations they serve, payers and providers may be able to help PLS companies develop trial protocols that serve more diverse populations. These new protocols could decrease the burden on trial participants, for instance, by reducing the number of trips they have to make to a hospital or physician’s office. For trial investigators, a decentralized approach, with more virtual elements, could also increase participation.
Improving the clinician experience is a priority for many organizations as they enter 2021. Digital technology, if used smartly, could be the antidote to countless pain points that physicians encounter every day, leading to more efficient and satisfied doctors, happier patients, and more patient referrals. Healthcare organizations likely will begin to understand and then predict physicians’ behaviors and what influences their referral patterns. They are expected to invest in marketing technologies that can recommend targeted outreach strategies for use by physician liaisons, who can deploy them to strengthen relationships with doctors and create demand.
As some companies better understand the impact of COVID-19 on their business, they are expected to return to driving their pre-pandemic growth agendas. The shock of the pandemic has highlighted the need for many health organizations to diversify their capabilities and revenue streams to be more resilient, readying for impactful court decisions over pricing, increased focus on pricing and price transparency, and the unknown. The Pharmaceutical sector will likely refocus to some extent on pre-pandemic growth agendas, but the post-pandemic agendas will offer opportunities not considered in the past, such as the potential for quicker FDA approvals, amongst other things.
A health industry that found itself fighting in the dark during the opening waves of the pandemic will need a forecasting system that provides a lens for the uncertainty ahead. Healthcare organizations can no longer rely on historical trends; they need real-time insights to create a forecasting system to alert them to the shifting fronts that may have a major impact on their business.
The pandemic saw the rippling costs of supply chain disruptions. We expect the health industry in 2021 to start to reconstruct the supply chain to function more flexibly as it does in other industries, such as automotive or technology. Where possible, the health system is expected to begin to triangulate supply chain risks, knowing as much as possible about their suppliers’ suppliers and establishing new collaborations to secure the supply chain by diversifying geographies and sources of materials.
Tax policy may not have been the first order of business for the Biden administration, but most business executives anticipate a tax policy change this year. The new administration has proposed an increase in the federal corporate income tax rate (as high as 28%, which if enacted, would make the US combined federal and state rate once again the highest among Organisation for Economic Co-operation and Development countries) as well as changes to international tax regimes (e.g., GILTI). Although companies may consider various strategies to reduce the impact of some of the proposed changes, there are a number of other policy changes that may impact the PLS sector, including those that result from recent executive orders.
Deduction for prescription drug advertising
President Biden has proposed revenue-raising proposals that directly affect certain business sectors, including eliminating the deduction for prescription drug advertising, which will likely result in increased tax liability for PLS companies.
“Make it in America”
Additional business tax proposals intended to “end outsourcing” and promote US domestic manufacturing and job creation include:
In addition, President Biden has stated that one of his goals is to encourage PLS companies and other businesses to make critical products in the United States.
These domestic and international tax policy events could have critical and unexpected implications on PLS companies. Now is the time — before legislation is drafted — for PLS companies to model the effects of tax policy proposals, consider other possible scenarios, and discuss with lawmakers their impact on headcount, job growth, and domestic investment.
In addition to potential tax policy changes, other provisions from the 2017 Tax Reform Act are slated to take effect automatically in 2022, including the capitalization and amortization of research and experimental expenditures, which are currently expensed, as well as a more restrictive interest limitation. PLS companies, including those that increased borrowings as a result of the current recession, are likely to be restricted in their interest deductions starting in 2022.
PwC’s 2021 Tax Policy Outlook helps you navigate these and other potential effects of changing policies in the US and around the world.