More Related Content Similar to Risks Overview In Pharma Sector (20) Risks Overview In Pharma Sector1. An Overview of Risk
and Disclosure in the
Global Pharmaceutical
and Life Sciences
Industry
April 2012
kpmg.com
KPMG INTERNATIONAL
2. © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
3. Contents
Executive summary 2
Reported risk factors 4
Financial statement disclosures 13
Legal proceedings analysis 19
About KPMG’s Pharmaceutical &
Life Sciences Practice 25
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
4. 2 | An Overview of Risk and Disclosure
An overview of risk and disclosure
Executive summary
This is a summary report of risk • US healthcare reform, European staff qualified for employment in the
and disclosure by the major economic risk, and emerging market life sciences industry. We do not see
pharmaceutical and life sciences risk are new risks disclosed by more the issue of scientific risk yet being
companies. The pharmaceutical than 15 percent of filers for the embraced: companies’ disclosure
industry is now experiencing the long- first time. is, in general, limited, and the
expected and much-discussed patent governance of R&D merits a higher
• Six companies with more than
cliff. During the 2011-14 period, patent profile.
30 percent of sales from the
protection covering US$120 billion
European Union (EU) did not The pharmaceutical companies’
in sales is expected to be lost1. This
disclose specific EU risk. behaviors that have created the
is impacting individual company and
perception that they put their
market growth rates, exacerbated by • Emerging market risk was disclosed
commercial goals above the interests
economic crises, European austerity by less than a quarter of the
of governments, payors, prescribers
measures, pricing pressures and companies.
and patients are at the heart of the
continuing healthcare reform in the
• Disclosure of R&D pipelines remains loss of trust of these stakeholders.
US. Emerging markets that have
relatively limited, influenced by We sense that the beginning of the
been engines of both growth and
the problems and lack of success cultural change that is essential to
shifts in global market dynamics have
of recent years, and competitive rebuilding trust is underway. However,
not been immune to some negative
pressures. Only one company comparison of the profile given to
trends, particularly price reductions,
estimates its return on R&D corporate social responsibility in the
although the extraordinary volume
spending. annual reports of US and European
growth opportunity acts as a strong
companies, which is modest at
counterbalance. To a greater or lesser • We observed no meaningful trend in
best, with that of their Japanese
extent, these factors are disclosed as disclosure related to M&A activity.
counterparts, which is expansive,
risks by the industry, together with
• Contingent legal liabilities are is interesting to note.
many other well-known and some
dominated by product liabilities ahead
newly emerging factors. The industry is faced with some
of sales and marketing and patent
real opportunities to counterbalance
Key findings are: litigation liabilities.
these risks. The most important of
• US companies and foreign companies In our recent report on the industry,2 these is innovation. True innovation
filing with the US Securities and we identified rising legal, political, is still valued highly, particularly in
Exchange Commission (SEC) disclose personnel and scientific risk, the US and in Japan. Delivery of
broadly twice as many risks as combined with a loss of trust as one innovative products is rewarded by
non-US filers. of five key challenges for the industry. commensurate returns even in the
We see companies taking steps to face of the multiple reforms in both
• Overall, there was a 13 percent
reduce legal risk. It is perhaps too these markets, although it is harder
increase in the aggregate total
early to see a decline but the absence to say the same is true, in general,
number of risks disclosed by the
of significant increase in contingent of Europe. Many of the opportunities
sample of companies we reviewed.
legal liabilities relating to sales and for innovation are in more specialist
• Pricing, patent-related risks and marketing practice is a positive markets.
generic competition dominate sign. Political risk is understood and
In-house research and development
disclosure tables. disclosed, at least partially, for US and
may not be capable of delivering
EU markets. For emerging markets it
• Political instability, natural disasters the requisite innovation that should
is much less well-disclosed. Emerging
and the risk posed by use of result in more collaboration and
markets also carry significant
information technology show the also more mergers and acquisitions
personnel risk driven by a shortage of
greatest increase in disclosure. (M&A), especially involving small
1
IMS Institute for Healthcare Informatics: The Global Use of Medicines: Outlook Through 2015, May 2011
2
Future Pharma: Five Strategies to Accelerate the Transformation of the Pharmaceutical Industry by 2020, KPMG 2011, p.16
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
5. An Overview of Risk and Disclosure | 3
and medium-sized companies. More
collaboration will mean more royalty
payments and a potential long-term
increase in the cost of sales. It is also
possible that collaborating companies
will focus more on selling, marketing
and branding and other activities
characteristic of consumer markets.
Large-scale M&A is expected to be
more challenging as most of the large
companies are already the product
of a significant acquisition and are
working toward rationalizing excess
capacity and resources.
In any case, M&A and alliances
should involve careful examination
of the risks of fully developing the
compound and bringing it to market
as part of effective due diligence on
behalf of the acquirer. We observed
no meaningful trend in disclosure
related to M&A, although two of
the smaller companies noted that
provisions in agreements with third-
parties might discourage a third
party from acquiring them. This is a
good illustration of the growing risks
associated with alliances, and also,
in these cases, that there is a risk of
M&A not occurring.
At the same time, the negative impact
of product profit sharing and royalties
on margins means greater efficiency
must be driven through the industry,
particularly the manufacturing and We do not see the issue of scientific
R&D processes. This is underway risk yet being embraced: companies’
at most major companies, but the
speed of implementation could be
disclosure is, in general, limited and
questioned. the governance of R&D merits a
higher profile.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
6. 4 | An Overview of Risk and Disclosure
Reported
risk factors
T
his report highlights the significant business risk factors disclosed
by leading pharmaceutical and other life sciences companies in their
2011 annual reports and financial statements. These risk factors serve
to alert shareholders or potential shareholders to those factors that could
materially alter a company’s performance and financial circumstances.
We have reviewed the most recent relevant filing of the 34 largest
pharmaceutical and other life sciences companies and considered their
quantitative and qualitative disclosures.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
7. An Overview of Risk and Disclosure | 5
Pharmaceutical and life sciences companies Foreign US filers’
We reviewed 34 companies as illustrated below: disclosures seem to be
• US filers – publicly traded US companies that file Form 10-K with the SEC more comprehensive
• Foreign US filers – non-US public companies that file Form 20-F with the SEC than US filers but the
• Non-US filers – public and private foreign companies that do not file with the SEC. approach to disclosure
in Form 20-F seems
Composition of company universe
more free-form than
traditional risk factor
disclosure as Item 1A
in a 10-K filing.
38% US Filers (15)
44%
Foreign US Filers (6)
Non-US Filers (13)
18%
Source: KPMG analysis of company findings, April 2012.
Average number of disclosures
Broadly, US filers and foreign US filers disclose more risks than non-US filers,
whether assessed on risks disclosed by more than 15 percent of all companies
or on total number of risks disclosed. Foreign US filers’ disclosures seem to be
more comprehensive than US filers but the approach to disclosure in Form 20-F
seems more free-form than traditional risk factor disclosure as Item 1A in a
10-K filing. US filers disclosed on average 28 risks, foreign US filers on average
31 risks and non-US filers on average 15 risks.
Average total number of disclosures*
35
31
30 28
25
20
15
15
10
5
18%
0
US Filers Foreign US Filers Non-US Filers
*Including all disclosures
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
8. 6 | An Overview of Risk and Disclosure
Risk frequency
2011 marked the beginning of a four-year period during which patent protection
for products with US$120bn in sales is being lost.3 Risks related to intellectual Risks related to
property protection and generic competition appear most frequently. Patent life intellectual property
also drives the need for R&D organizations to deliver sufficient products with
potential to replace the revenue being lost to generic competition in the face of
protection and
increasingly stringent regulatory requirements, which may result in failure. The generic competition
worldwide pressure on pharmaceutical pricing in the face of tough economic appear most
conditions features frequently.
frequently.
3
IMS Institute for Healthcare Informatics: The Global Use of Medicines: Outlook Through 2015 May 2011
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
9. An Overview of Risk and Disclosure | 7
Frequency of risk disclosure
Industry/generic competition 100%
Protection and expiration of intellectual property rights 94%
Pharmaceutical pricing: Competition, price controls and 91%
reimbursement reductions
Regulatory requirements 91%
R&D efforts may not be successful 91%
Interest rates/currency exposure/inflation 88%
Legal proceedings including adverse outcome of litigation and 88%
government investigations
Patent litigation 82%
Manufacturing processes/product supply/raw materials 79%
Global, political and economic conditions 79%
Unsuccessful strategic alliances/business combinations 74%
Product liability 71%
Environmental/health and safety liabilities 68%
Taxation 68%
Reliance on IT 65%
Reliance on third party manufacturing/providers or 62%
marketing suppliers
Disruption from natural disasters 62%
Delay in product launches 53%
US healthcare reform legislation 53%
Political instability 50%
Human resources/key personnel 44%
European economic exposure 44%
Reliance on key products 38%
Impairments/credit risk and bad debts 35%
Product safety issues 29%
Concentration of sales to key customers, e.g. wholesalers 26%
Failure or adverse impact of productivity initiatives/failure 24%
to implement business strategy
New or revised accounting standards 24%
Emerging market risk 24%
Business restrictions due to high debt ratios 21%
Liquidity risks/insufficient cash 21%
International business risks 18%
Anti-bribery and corruption legislation 15%
Counterfeit products 15%
Competition from biosimilars 15%
0% 20% 40% 60% 80% 100%
New risks reported by more than15 percent of companies
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
10. 8 | An Overview of Risk and Disclosure
Changes in risk frequency
Overall there was a 13 percent increase in the aggregate total number of risks
disclosed by the companies we reviewed in the 2011 filings vs. the 2010 filings
The rapid growth in
(573 vs. 506). the use and reliance
Against a background of political unrest in North Africa and the Middle East on information
over the past year, it is perhaps not surprising that the largest increase in risk technology raises
frequency was for political instability. Similarly, the East Japan earthquake was
no doubt a factor in a more than 100 percent increase in disclosure of risk from
a number of new
exposure to natural disaster. risks.
The rapid growth in the use of and reliance on information technology raises
a number of new risks. One company disclosed that social media/mobile
technologies could result in liabilities or security breaches. Overall there was a
more than 50 percent increase in disclosure of IT-related risk.
Social media risk
“While social media adoption provides the pharmaceutical and life sciences
industry great opportunities, there are also clear risks for companies that
use these channels, including threats to the control of confidential information
or intellectual property, increased levels of reputational risk (that develop
at viral speed), and the potential for regulatory infractions. If a social media
solution provider updates or changes its functionality policies, for instance,
companies can be left with less control over community commentary,
resulting in a reduced ability to maintain compliance in this rapidly expanding
marketing area.
In many cases, the success or failure of a social media program lies in its
ability to create a dialogue with the audience being addressed through
any selected channel, whether it be a product informational page on
Facebook, a Twitter stream dedicated to product launch, or instructional
training materials released through YouTube. In all of these examples, the
sponsoring organization must remain vigilant about the content and tone
of the messaging being generated by the audience in response to the
organization’s intended message. Consumers are more frequently turning
to these channels to comment on the effectiveness of a product, and this
could very likely develop into a mechanism for reporting adverse events.
Therefore, the sponsoring organization must remain involved in the ongoing
dialogue through carefully developed monitoring programs and moderation of
comments being publicly captured in these social media applications. ”
Source: David Blumberg and John Hair, KPMG LLP-US. Reproduced with permission from Life Sciences
Law & Industry Report, 5LSLR 981, 10/07/2011. Copyright© 2011 by The Bureau of National Affairs, Inc.
(800-372-1033) http://www.bna.com
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
11. An Overview of Risk and Disclosure | 9
There was a 30 percent increase in the disclosure of legal proceedings including
adverse outcome of litigation and government investigations.
The greatest reduction in risk frequency was 27 percent reduction in the failure of
productivity initiatives. Most companies have been restructuring for several years
and may well have a better perspective on delivery than in the past.
Change in risk frequency
Political instability 240%
Disruption from natural disasters 133%
Reliance on IT 57%
Human resources/key personnel 50%
Taxation 35%
Legal proceedings including adverse outcome of
30%
litigation and government investigations
Patent litigation 27%
Reliance on third party manufacturing/providers or
24%
marketing suppliers
New or revised accounting standards 14%
Industry/generic competition 13%
Environmental/health and safety liabilities 10%
Unsuccessful strategic alliances/business
9%
combinations
Reliance on key products 8%
Manufacturing processes/product supply/raw
8%
materials
Protection and expiration of 7%
intellectual property rights
Regulatory requirements 6%
R&D efforts may not be successful 3%
Pharmaceutical pricing:
3%
competition, price controls and reimbursement
Concentration of sales to key customers,
0%
e.g. wholesalers
Liquidity risks – insufficient cash 0%
Interest rates/currency exposure/inflation 0%
Product liability -3%
Global, political and economic conditions -4%
Impairments/credit risk and bad debts -10%
Business restrictions due to high debt ratios -13%
Failure or adverse impact of productivity
-27%
initiatives/failure to implement business strategy
-50% 0% 50% 100% 150% 200% 250%
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
12. 10 | An Overview of Risk and Disclosure
Analysis of newly disclosed risks The Eurozone crisis
We identified eight risks reported by more than 15 percent of companies for may also influence
the first time: exchange rates
• US healthcare reform legislation, i.e. the Patient Protection and Affordable and the translation
Care Act of 2010
of overseas sales
• European economic risk
into the reporting
• Emerging market risk
currency.
• Product safety
• International business risk
• Anti-bribery and corruption legislation
• Counterfeit products
• Competition from biosimilars
US Patient Protection and Affordable Care Act of 2010
Eighty-seven percent of US filers and 83 percent of Foreign US Filers specifically
identified the impact of the US Patient Protection and Affordable Care Act of 2010
as a risk to their businesses, although the language varied from the exact wording
of the Act to “US healthcare reform in 2010” “increased rebates, “mandated
, ”
contribution taxes, and “other contributions to close the Medicare Part D coverage
”
gap” were all cited.
European economic risk
The Eurozone crisis and severe economic difficulties experienced in some Southern
European countries such as Spain, Portugal, Italy and Greece in the past year, have
raised the profile of potential financial impact on many companies. This includes
the extended time taken to collect trade receivables, sovereign debt issues that
could increase collection risk given the high proportion of sales in these countries
to publicly-owned customers, and the impact of austerity measures introduced to
reduce government spending on pharmaceutical reimbursement prices.
The Eurozone crisis may also influence exchange rates and the translation
of overseas sales into the reporting currency. Wholesalers and third-party
manufacturers based in the EU may also be affected by the economic downturn
with particular impact on the larger pharmaceutical and life sciences companies. The
effects of the EU economic crisis extend to its influence on consumer spending.
While self-evident for those life science companies with diversified business
models including over-the-counter (OTC) medicines or other consumer products,
the increasing use of patient co-pays by governments means a cut in consumer
spending has an impact on pharmaceutical sales and is a growing risk. Three
companies specifically identified consumer spending as a risk to their business.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
13. An Overview of Risk and Disclosure | 11
Given that fewer than 50 percent of filers disclosed European economic risk, We were surprised
we investigated the relationship between percentage of sales from the EU and
disclosure. We were surprised that six companies with more than 30 percent of that six companies
revenue from the EU chose not to highlight this risk in an explicit manner.4 Passing with more than
reference to tough economic conditions in a business description section was
deemed a retrospective comment and not a risk factor disclosure for shareholders
30 percent of
or potential shareholders. Some companies with approximately 20 percent of revenues from the
revenue from the EU chose to disclose the risk: this seems prudent to us give the
continuing uncertainty in these markets.
EU chose not to
highlight this risk in
an explicit manner.
Disclosure of European economic risk vs. percentage of sales in the EU
50% 49%
40% 40%
40%
37% 37%
34%
33%
32% 32% 32%
Percentage of sales from EU
31% 31%
30%
30% 29% 29% 29%
27%
26%
25% 25%
22% 22%
20% 20%
20%
17%
12%
10% 9%
6%
2%
0%
Companies that disclose EU risk Companies that do not disclose EU risk
Source: KPMG analysis of 2011 company filings, April 2012.
4
We have had to make judgments about where non-US filers disclose risks; we concluded that if these were not included with other risks to the business or
under risk factors in management’s review of the year, then this was not an explicit disclosure.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
14. 12 | An Overview of Risk and Disclosure
Emerging market risk Many companies do
Slightly less than a quarter of filing companies disclosed risks associated with not explicitly disclose
strong growth from emerging markets. These risks included: emerging market
• The strong, often double-digit growth rates experienced in recent years may not sales and, when they
continue.
do, the definition of
• Some developing countries have reduced (or threatened to reduce) the duration
of patent protection to facilitate early generic competition.
emerging markets
• Companies may not be able to realize the expected benefits of significant
can vary from
investments in emerging growth markets. company to company.
• There may be a relatively limited number of people with the skills and training
suitable for employment in life science enterprises.
• Companies may be required to rely on third-party agents, which may put them at
risk of liability.
• Many emerging countries have currencies that fluctuate substantially and should
these currencies devalue without it being possible to offset the devaluations with
price increases, products may become less profitable.
Many companies do not explicitly disclose emerging market sales and, when
they do, the definition of emerging markets can vary from company to company.
We compared the number of companies that disclose emerging market risk with
the percentage of sales from non-US and non-European sources. This includes
Japan, but again, not all companies disclose Japanese sales (where it is disclosed,
the range of sales from Japan is 6 to 19 percent). As illustrated below, there is a
substantial proportion of companies with significant sales outside the traditional
Western markets and Japan that do not disclose emerging market risk. We see this
as a potentially important area for review.
Disclosure of emerging market risk vs. percentage of ex-US, ex-EU sales
50%
43%
42%
40%
36%
33%
31%
30%
30%
27%
26% 26%
25%
24%
23%
22%
21% 21%
20% 18%
26%
12%
11% 11% 11%
10% 10%
10% 9% 9%
8% 8%
6% 6%
4% 5%
3% 3%
0%
0%
Companies that disclose Emerging Market risk Companies that do not disclose Emerging Market risk
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
15. An Overview of Risk and Disclosure | 13
Financial
statement disclosures
T
he top five critical accounting policies are the same as we reported in 2010,
when we reviewed 12 major US and European pharmaceutical companies.
This year the order has changed, reflecting a broader population of companies
reviewed. Critical accounting policies and frequency of disclosure are shown
below. Only six policies were disclosed as critical by more than 50 percent of the
companies.
Critical accounting policies – percentage reported
Income/deferred/contingent taxes 91%
Revenue recognition 76%
Intangible assets/impairment 76%
Pension/retirement benefits 61%
Contingent liabilities and litigation 61%
Property, plant and equipment/impairments 61%
Inventory valuation 47%
Goodwill 44%
R&D costs 44%
Consolidation 38%
Acquisitions/business combinations 35%
Financial instruments 35%
Foreign currency translation 35%
Cash, cash equivalents and investments 32%
Share-based compensation 29%
Leases 29%
New accounting standards 18%
Use of estimates 15%
Earnings per share 15%
Allowance for doubtful accounts 12%
0% 20% 40% 60% 80% 100%
Risks reported by more than 15 percent of companies for the first time
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
16. 14 | An Overview of Risk and Disclosure
Taxes were the most-disclosed critical accounting policy, disclosed by 90 percent of
these companies. This is consistent with their global supply chains and movements
Assessing
of intellectual property across borders. Additionally, many of the companies have impairment in
effective tax rates below or well below expected statutory rates. Recently, tax developmental
authorities have been very focused on the amount of profit recorded in and outside
of their country. These factors clearly highlight the critical nature of the judgments technology can be
utilized to record the appropriate tax provision and reserves. extremely subjective
The next most-disclosed critical policies were revenue recognition and intangible especially for early
asset impairments. Gross revenue for most pharmaceutical companies is not
very subjective. The critical nature of revenue recognition is judgment regarding
technology that may
gross to net adjustments for rebates, governmental fees and returns (particularly be several years away
as patent expiration nears). We believe gross revenue recognition will become from an approval
more challenging in the future as pricing moves away from a fixed price to more
outcomes-based pricing that we are starting to see in Europe and in a more limited date.
way with US managed care organizations.
Intangible asset impairment is critical particularly with respect to in-process
research and development (IPRD) which results from acquisitions and is recorded
on the balance sheet and not subject to amortization until approved, meaning it
is subject to annual impairment testing. Assessing impairment in developmental
technology can be extremely subjective especially for early technology that may be
several years away from an approval date.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
17. An Overview of Risk and Disclosure | 15
Given the highly regulated nature of the industry, contingent liabilities and litigation A high degree of
have a high degree of uncertainty and are highly judgmental with respect to
outcomes. A high degree of judgment is necessary in assessing when to accrue, judgment is necessary
how much to accrue, and when and what should be disclosed. in assessing when
We noted that less than 15 percent of the companies disclosed allowance for to accrue, how much
doubtful receivables as critical. We found this surprising given the various European
government debt issues for a number of European countries.
to accrue, and when
and what should be
Topics discussed separately in Management’s Discussion and disclosed.
Analysis (MD&A), Operating and Financial Review (OFR) or
Equivalent
There is a wide variation in how companies choose to disclose certain topics
pertaining to their business. This is partly because non-US filers have a more free-
form approach to business description within their annual reports. For example,
strategy was only a specific MD&A/OFR topic in slightly more than half of the
cases; this is perhaps surprisingly low given the seismic shift in the business
environment combined with economic uncertainties.
Topics discussed separately in Management’s Discussion and Analysis
(MD&A), Operating and Financial Review (OFR) or equivalent
100%
100%
82%
79%
80%
71% 71%
65%
60% 56%
53%
50%
47%
41%
40%
29%
20% 15%
0%
Overall performance
Performance by region
Performance by key product
Performance by business
segment
Business environment
Product pipeline/R&D
Strategy
Finance risks
Product portfolio
Future perspectives, outlook
Business risks
Corporate social responsibility/
global citizenship
Performance by
therapeutic area
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
18. 16 | An Overview of Risk and Disclosure
Surprisingly, given the challenging business climate only 70 percent of the Some companies have
companies discussed the business environment and just 65 percent discussed
product pipeline/R&D. With the complex business environment and patent cliff moved away from any
pressures, greater disclosure here may aid an investor in understanding how a discussion of early stage
company is responding to these challenges. We note even fewer companies (45
percent) discussed their future prospects and outlook.
compounds, which
makes sense given that
R&D pipeline disclosures
early stage R&D has
The approach to disclosure on R&D pipelines varied widely. Some companies always had more failure
have moved away from any discussion of early stage compounds, which makes
sense given that early stage R&D has always had more failure than success, and than success.
that in the wake of a relatively disappointing decade for pharmaceutical R&D,
the external world has become skeptical of early promise turning into actual
revenue dollars. It seems that some of the industry is dealing with the rising risk
in R&D by choosing to disclose less detail about their pipelines. For instance the
mechanism of action of pipeline compounds is not readily revealed by a number
of major companies, including some US companies. Many investors would find
this information useful in assessing the relative attractiveness and competitive
positioning of a pipeline. This selective or restrictive approach to disclosure, driven
by concerns about competitive information, should be seen in the context of R&D
being the lifeblood of the industry and accounting for as much as a quarter of
annual costs.5
More than 80 percent of companies disclose the most recent pipeline information
in a formal link on their website. Those that do not disclose pipeline information are
some generic companies and foreign US filers.
5
Based on estimated 16 percent R&D/sales and 32 percent operating margins: See Future Pharma, KPMG 2011, p8.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
19. An Overview of Risk and Disclosure | 17
Tabular disclosures
R&D Pipeline on
Stage of development Name/ Therapy Expected Discontinued
review Indication Mechanism Formulation Partner website
P1 P2 P3 Filed Code area filing date projects
Abbott
Allergan
Amgen
Baxter
Biogen Idec
BMS1 N/A N/A N/A N/A
Celgene
Eli Lilly
Forest Lab
Gilead
J&J2
Merck & Co
Mylan
Pfizer 3
Watson
AstraZeneca
GSK
Novartis
Novo Nordisk
Sanofi
Teva
Astellas
Bayer
BI
Chugal
CSL
Daiichi Sankyo
Eisai
Merck KGaA
Mitsubishi Tanabe
Otsuka
Roche
Takeda
UCB SA
Count 32 23 26 28 26 28 30 28 18 7 7 9 11 28
Percentage 94% 68% 76% 82% 76% 82% 88% 82% 53% 21% 21% 26% 32% 82%
1
BMS disclosed the number of compounds in the respective development stages as defined by the company:
“Exploratory Development;” “Full Development;” “Marketed Product Development” .
2
Johnson & Johnson did not provide detailed pipeline data in addition to the narrative in the annual report. Phase
3 compound/device and filed compounds/devices were sourced from the pharmaceutical/medical devices and
diagnostics pipeline link on the company’s website.
3
Pfizer includes no specific compound discussion in its 10-K filing, giving only headline numbers of compounds.
The pipeline on the company’s website does not include a discussion of the pipeline.
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
20. 18 | An Overview of Risk and Disclosure
Disclosure of discontinued projects remains rare, with less than a quarter of
companies making this explicit. In a very highly scrutinized industry, success and
failure will be readily apparent to interested investors or shareholders; it should
enhance the reputation of companies to disclose failures.
Disclosure of the estimated return on R&D spending remains unique to
GlaxoSmithKline. There is an opportunity for other companies to be more
transparent with their R&D spend and help shareholders and potential investors
understand why the strategies being pursued will improve returns. We have
illustrated previously that returns on R&D have been falling steadily for the past
two decades.6 As evident below, average industry returns on R&D have been falling
since 1999 while R&D spend continues to grow.
Returns on R&D compared to R&D spending
50,000 15%
Illustrative post-tax return on R&D expenditure
40,000
Annual US industry R&D spend
12%
30,000
20,000
9%
10,000
0 6%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Future Pharma, KPMG 2011.
6
Future Pharma KPMG 2011, p13 and 14
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
21. An Overview of Risk and Disclosure | 19
Legal proceedings
analysis
P
harmaceutical companies are frequently involved in a number of legal
proceedings and the disclosures regarding the resulting contingent liabilities
vary from company to company. The majority of legal proceedings involve
actions by US state or federal government, or US patent disputes. Disclosure by
US filers and foreign filers is, therefore, typically substantially more lengthy than
that of foreign filers. We include seven Japanese companies, which have much
lower levels of exposure to the US market, in the foreign filers group.
Categories of contingent legal liabilities
14%
42%
18%
Product liability
Sales and marketing
26% Other
Patents
Source: KPMG analysis of 2011 company filings, April 2012.
There were two noteworthy agreements reached with the US government over
sales and marketing practices in late 2011. In November 2011 GlaxoSmithKline
agreed in principle to a US$3 billion settlement with the US government to conclude
its most significant ongoing Federal investigations, two of which were related to
sales and marketing practices: the investigation begun by the US Attorney’s office of
Colorado in 2004 and the Department of Justice’s investigation of the development
and marketing of Avandia. In December 2011 Merck agreed to pay US$950 million
to settle criminal and civil charges with the US Department of Justice related to
research, marketing and selling activities with respect to Vioxx.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
22. 20 | An Overview of Risk and Disclosure
Rising legal risk The industry needs to
In spite of extensive risk management input to board audit committees, there reverse these trends
has been a rise in the number of settlements for violations of a variety of laws to begin to win back
as exemplified by data from the US over the past 20 years with a very rapid
rise since 2003. Since 2005, the annual value of the settlements has exceeded confidence and trust
US$1billion reaching US$4.4 billion in 2009. from consumers and
governments alike.This
is no small task.
Source: Future Pharma,
KPMG 2011
Number of Pharmaceutical industry settlements with US state and federal
governments 1991–2010
40 38
35
32
30
27
25
20
15 14
10
10 9
8 8
5 3 3
2 2 2 2
1 1 1 1 1
0 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
23. An Overview of Risk and Disclosure | 21
Summary of significant contingent legal liabilities from 2011 disclosures
(or 2010 where 2011 was unavailable as of 31 March 2012)
Company USD $m Status Brief description
Abbott 1,845 Pending HUMIRA patent infringement with Centocor (part of Johnson & Johnson)
Abbott 1,630 Pending Depakote marketing Department of Justice (DOJ) investigation
Amgen 780 Pending Federal investigation of sales and marketing practices for erythropoietin
stimulating agents (ESAs)
AstraZeneca 135 Pending Seroquel product liability litigation and state attorney general investigation of
sales and marketing practices
Baxter 300 Pending Contaminated heparin
Bayer 125 In Appeal GM contaminated rice
Bayer 750 Pending GM contaminated rice
Bayer 133 Pending GM contaminated rice
Eli Lilly 245 Settled Zyprexa product liability ($230m 2009 $15m 2008)
Forest 313 Settled Celexa®, Lexapro and Levothroid
GSK 4,435 Pending Manufacturing, Paxil and Avandia product liability claims
Johnson & Johnson 593 In Appeal CYPHER stent patent infringement
Johnson & Johnson 330 In Appeal RISPERDAL promotion
Johnson & Johnson N/A RISPERDAL promotion - criminal settlement - media suggest more than $1bn
Merck 950 Pending DOJ investigation of Vioxx marketing
Novartis 1,059 Pending Environment – landfill
Novartis 66 Settled Average wholesaling pricing settlement
Novartis 150 Settled Average wholesaling pricing settlement
Novartis 53 Pending Average wholesaling pricing settlement
Novartis 78 Pending Average wholesaling pricing settlement
Novartis 30 Pending Average wholesaling pricing settlement
Novartis 25 Pending Average wholesaling pricing settlement
Novartis 99 Pending Wage and hour law violation for failure to pay overtime
Novartis 422 Settled Trileptal marketing
Otsuka 311 Pending Payment to Bristol-Myers Squibb if Abilify generics launched 2012-2015
Pfizer 790 Pending Hormone Replacement Therapy litigation
Sanofi 985 Pending Product liability risks
Sanofi 2,267 In Appeal Environmental liabilities
Teva 270 Pending Design, manufacture and sales of large vials of propofol
Source: KPMG analysis of 2011 company filings, April 2012.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.