Risk and Disclosure in The Global Pharmaceutical Industryv2

An Overview of Risk
and Disclosure in the

Global Pharmaceutical
and Life Sciences
Industry
A pril 2012
kpmg.com
KPM G IN TER N ATIO N A L
2012 KPM G International C ooperative (KPM G International), a Sw iss entity. M em ber rm s of the KPM G netw ork of independent rm s are af liated w ith KPM G International. KPM G International provides no client services. A ll rights reserved.
Contents
Executive summary 2
Reported risk factors 4
Financial statement disclosures 13
Legal proceedings analysis 19
About KPMGs Pharmaceutical &
Life Sciences Practice 25
An overview of risk and disclosure
Executive sum m ary
This is a sum m ary report of risk
and disclosure by the m ajor
pharm aceutical and life sciences
com panies. The pharm aceutical
industry is now experiencing the long-
expected and m uch-discussed patent
cliff. D uring the 2011-14 period, patent
protection covering U S$120 billion
in sales is expected to be lost
1
. This
is im pacting individual com pany and
m arket grow th rates, exacerbated by
econom ic crises, European austerity
m easures, pricing pressures and
continuing healthcare reform in the
U S. Em erging m arkets that have
been engines of both grow th and
shifts in global m arket dynam ics have
not been im m une to som e negative
trends, particularly price reductions,
although the extraordinary volum e
grow th opportunity acts as a strong
counterbalance. To a greater or lesser
extent, these factors are disclosed as
risks by the industry, together w ith
m any other w ell-know n and som e
new ly em erging factors.
Key ndings are:
US companies and foreign companies
ling w ith the U S Securities and
Exchange C om m ission (SEC ) disclose
broadly tw ice as m any risks as
non-U S lers.
Overall, there was a 13 percent
increase in the aggregate total
num ber of risks disclosed by the
sam ple of com panies w e review ed.
Pricing, patent-related risks and
generic com petition dom inate
disclosure tables.
Political instability, natural disasters
and the risk posed by use of
inform ation technology show the
greatest increase in disclosure.
US healthcare reform, European
econom ic risk, and em erging m arket
risk are new risks disclosed by m ore
than 15 percent of lers for the
rsttim e.
Six companies with more than
30percent of sales from the
European U nion (EU ) did not
disclose speci c EU risk.
Emerging market risk was disclosed
by less than a quarter of the
com panies.
Disclosure of R&D pipelines remains
relatively lim ited, in uenced by
the problem s and lack of success
of recent years, and com petitive
pressures. O nly one com pany
estimates its return on R&D
spending.
We observed no meaningful trend in
disclosure related to M&A activity.
Contingent legal liabilities are
dom inated by product liabilities ahead
of sales and m arketing and patent
litigation liabilities.
In our recent report on the industry,
2

w e identi ed rising legal, political,
personnel and scienti c risk,
com bined w ith a loss of trust as one
of ve key challenges for the industry.
We see companies taking steps to
reduce legal risk. It is perhaps too
early to see a decline but the absence
of signi cant increase in contingent
legal liabilities relating to sales and
m arketing practice is a positive
sign. Political risk is understood and
disclosed, at least partially, for U S and
EU m arkets. For em erging m arkets it
is m uch less w ell-disclosed. Em erging
m arkets also carry signi cant
personnel risk driven by a shortage of
staff quali ed for em ploym ent in the
life sciences industry. We do not see
the issue of scienti c risk yet being
em braced: com paniesdisclosure
is, in general, lim ited, and the
governance of R&D merits a higher
pro le.
The pharm aceutical com panies
behaviors that have created the
perception that they put their
com m ercial goals above the interests
of governm ents, payors, prescribers
and patients are at the heart of the
loss of trust of these stakeholders.
We sense that the beginning of the
cultural change that is essential to
rebuilding trust is underw ay. H ow ever,
com parison of the pro le given to
corporate social responsibility in the
annual reports of U S and European
com panies, w hich is m odest at
best, w ith that of their Japanese
counterparts, w hich is expansive,
is interesting to note.
The industry is faced w ith som e
real opportunities to counterbalance
these risks. The m ost im portant of
these is innovation. True innovation
is still valued highly, particularly in
the U S and in Japan. D elivery of
innovative products is rew arded by
com m ensurate returns even in the
face of the m ultiple reform s in both
these m arkets, although it is harder
to say the sam e is true, in general,
ofEurope. M any of the opportunities
for innovation are in m ore specialist
m arkets.
In-house research and developm ent
m ay not be capable of delivering
the requisite innovation that should
result in m ore collaboration and
also m ore m ergers and acquisitions
(M&A), especially involving small
1
IM S Institute for H ealthcare Inform atics: The G lobal U se of M edicines: O utlook Through 2015, M ay 2011
2
Future Pharm a: Five Strategies to Accelerate the Transform ation of the Pharm aceutical Industry by 2020, KPM G 2011, p.16
2 | A n O verview of R isk and D isclosure
W e do not see the issue of scientic
risk yet being em braced: com panies
disclosure is, in general, lim ited and
the governance of R&D merits a
higher prole.
and m edium -sized com panies. M ore
collaboration w ill m ean m ore royalty
paym ents and a potential long-term
increase in the cost of sales. It is also
possible that collaborating com panies
w ill focus m ore on selling, m arketing
and branding and other activities
characteristic of consum er m arkets.
Large-scale M&A is expected to be
m ore challenging as m ost of the large
com panies are already the product
of a signi cant acquisition and are
w orking tow ard rationalizing excess
capacity and resources.
In any case, M&A and alliances
should involve careful exam ination
of the risks of fully developing the
com pound and bringing it to m arket
as part of effective due diligence on
behalf of the acquirer. We observed
no m eaningful trend in disclosure
related to M&A, although two of
the sm aller com panies noted that
provisions in agreem ents w ith third-
parties m ight discourage a third
party from acquiring them . This is a
good illustration of the grow ing risks
associated w ith alliances, and also,
in these cases, that there is a risk of
M&A not occurring.
A t the sam e tim e, the negative im pact
of product pro t sharing and royalties
on m argins m eans greater ef ciency
m ust be driven through the industry,
particularly the m anufacturing and
R&D processes. This is underway
at m ost m ajor com panies, but the
speed of im plem entation could be
questioned.
A n O verview of R isk and D isclosure | 3
Reported
risk factors
T
his report highlights the signi cant business risk factors disclosed
by leading pharm aceutical and other life sciences com panies in their
2011 annual reports and nancial statem ents. These risk factors serve
to alert shareholders or potential shareholders to those factors that could
m aterially alter a com panys perform ance and nancial circum stances.
We have reviewed the most recent relevant fling of the 34 largest
pharm aceutical and other life sciences com panies and considered their
quantitative and qualitative disclosures.
Pharmaceutical and life sciences companies
We reviewed 34 companies as illustrated below:
US flers publicly traded US companies that fle Form 10-K with the SEC
Foreign US flers non-US public companies that fle Form 20-F with the SEC
Non-US flers public and private foreign companies that do not fle with the SEC.
Composition of company universe
38%
44%
18%
U S Filers (15)
Foreign U S Filers (6)
N on-U S Filers (13)
Source: KPM G analysis of com pany ndings, A pril 2012.
Average number of disclosures
B roadly, U S lers and foreign U S lers disclose m ore risks than non-U S lers,
w hether assessed on risks disclosed by m ore than 15 percent of all com panies
or on total num ber of risks disclosed. Foreign U S lersdisclosures seem to be
m ore com prehensive than U S lers but the approach to disclosure in Form 20-F
seem s m ore free-form than traditional risk factor disclosure as Item 1A in a
10-K ling. U S lers disclosed on average 28 risks, foreign U S lers on average
31 risks and non-US flers on average 15 risks.
Average total number of disclosures*
18%
U S Filers
*Including all disclosures
0
5
10
15
20
25
30
35
N on-U S Filers Foreign U S Filers
28
31
15
Source: KPM G analysis of 2011 com pany lings, A pril 2012.
Foreign US lers
disclosures seem to be
more comprehensive
than US lers 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 ling.
Risk frequency
2011 m arked the beginning of a four-year period during w hich patent protection
for products w ith U S$120bn in sales is being lost.
3
R isks related to intellectual
property protection and generic com petition appear m ost frequently. Patent life
also drives the need for R&D organizations to deliver suffcient products with
potential to replace the revenue being lost to generic com petition in the face of
increasingly stringent regulatory requirem ents, w hich m ay result in failure. The
w orldw ide pressure on pharm aceutical pricing in the face of tough econom ic
conditions features frequently.
3
IM S Institute for H ealthcare Inform atics: The G lobal U se of M edicines: O utlook Through 2015 M ay 2011
Risks related to
intellectual property
protection and
generic competition
appear most
frequently.
U S healthcare reform legislation
0% 20% 40% 60% 80% 100%
C om petition from biosim ilars
C ounterfeit products
A nti-bribery and corruption legislation
International business risks
Liquidity risks/insuf cient cash
B usiness restrictions due to high debt ratios
Em erging m arket risk
N ew or revised accounting standards
Failure or adverse im pact of productivity initiatives/failure
to im plem ent business strategy
C oncentration of sales to key custom ers, e.g. w holesalers
Product safety issues
Im pairm ents/credit risk and bad debts
Reliance on key products
European econom ic exposure
H um an resources/key personnel
Political instability
D elay in product launches
D isruption from natural disasters
Reliance on third party m anufacturing/providers or
m arketing suppliers
Reliance on IT
Taxation
Environm ental/health and safety liabilities
Product liability
U nsuccessful strategic alliances/business com binations
G lobal, political and econom ic conditions
M anufacturing processes/product supply/raw m aterials
Patent litigation
Legal proceedings including adverse outcom e of litigation and
governm ent investigations
Interest rates/currency exposure/in ation
R & D efforts m ay not be successful
Regulatory requirem ents
Pharm aceutical pricing: C om petition, price controls and
reim bursem ent reductions
Protection and expiration of intellectual property rights
Industry/generic com petition 100%
94%
91%
91%
91%
88%
88%
82%
79%
79%
74%
71%
68%
68%
65%
62%
62%
53%
53%
50%
44%
44%
38%
35%
29%
26%
24%
24%
24%
21%
21%
18%
15%
15%
15%
N ew risks reported by m ore than15 percent of com panies
Frequency of risk disclosure
Changes in risk frequency
Overall there was a 13 percent increase in the aggregate total number of risks
disclosed by the com panies w e review ed in the 2011 lings vs. the 2010 lings
(573 vs. 506).
Against a background of political unrest in N orth A frica and the M iddle East
over the past year, it is perhaps not surprising that the largest increase in risk
frequency w as for political instability. Sim ilarly, the East Japan earthquake w as
no doubt a factor in a m ore than 100 percent increase in disclosure of risk from
exposure to natural disaster.
The rapid grow th in the use of and reliance on inform ation technology raises
a num ber of new risks. O ne com pany disclosed that social m edia/m obile
technologies could result in liabilities or security breaches. O verall there w as a
m ore than 50 percent increase in disclosure of IT-related risk.
While social media adoption provides the pharmaceutical and life sciences
industry great opportunities, there are also clear risks for com panies that
usethese channels, including threats to the control of con dential inform ation
or intellectual property, increased levels of reputational risk (that develop
at viral speed), and the potential for regulatory infractions. If a social m edia
solution provider updates or changes its functionality policies, for instance,
com panies can be left w ith less control over com m unity com m entary,
resulting in a reduced ability to m aintain com pliance in this rapidly expanding
m arketing area.
In m any cases, the success or failure of a social m edia program lies in its
ability to create a dialogue w ith the audience being addressed through
any selected channel, w hether it be a product inform ational page on
Facebook, a Tw itter stream dedicated to product launch, or instructional
training m aterials released through YouTube. In all of these exam ples, the
sponsoring organization m ust rem ain vigilant about the content and tone
of the m essaging being generated by the audience in response to the
organizations intended m essage. C onsum ers are m ore frequently turning
to these channels to com m ent on the effectiveness of a product, and this
could very likely develop into a m echanism for reporting adverse events.
Therefore, the sponsoring organization m ust rem ain involved in the ongoing
dialogue through carefully developed m onitoring program s and m oderation of
com m ents being publicly captured in these social m edia applications.
Source: D avid B lum berg and John H air, KPM G LLP-U S. Reproduced w ith perm ission 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
The rapid growth in
the use and reliance
on information
technology raises
a number of new
risks.
Social media risk
There was a 30 percent increase in the disclosure of legal proceedings including
adverse outcom e of litigation and governm ent investigations.
The greatest reduction in risk frequency w as 27 percent reduction in the failure of
productivity initiatives. M ost com panies have been restructuring for several years
and m ay w ell have a better perspective on delivery than in the past.
Change in risk frequency
Political instability
D isruption from natural disasters
Reliance on IT
H um an resources/key personnel
Taxation
Legal proceedings including adverse outcom e of
litigation and governm ent investigations
Patent litigation
Reliance on third party m anufacturing/providers or
m arketing suppliers
N ew or revised accounting standards
Industry/generic com petition

Environm ental/health and safety liabilities
U nsuccessful strategic alliances/business
com binations
Reliance on key products
M anufacturing processes/product supply/raw
m aterials
Protection and expiration of
intellectual property rights
Regulatory requirem ents
R & D efforts m ay not be successful
Pharm aceutical pricing:
com petition, price controls and reim bursem ent
C oncentration of sales to key custom ers,
e.g. w holesalers
Liquidity risks insuf cient cash
Interest rates/currency exposure/in ation
Product liability
G lobal, political and econom ic conditions
Im pairm ents/credit risk and bad debts
B usiness restrictions due to high debt ratios
Failure or adverse im pact of productivity
initiatives/failure to im plem ent business strategy
-50% 0% 50% 100% 150% 200% 250%
240%
133%
57%
50%
35%
30%
27%
24%
14%
13%
10%
9%
8%
8%
7%
6%
3%
3%
0%
0%
0%
-3%
-4%
-10%
-13%
-27%
Analysis of newly disclosed risks
We identifed eight risks reported by more than 15 percent of companies for
the rsttim e:
US healthcare reform legislation, i.e. the Patient Protection and Affordable
C are Act of 2010
European economic risk
Emerging market risk
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 flers and 83 percent of Foreign US Filers specifcally
identi ed the im pact of the U S Patient Protection and A ffordable C are Act of 2010
as a risk to their businesses, although the language varied from the exact w ording
of the Act to U S healthcare reform in 2010, increased rebates,m andated
contribution taxes,and other contributions to close the M edicare Part D coverage
gapw ere all cited.
European economic risk
The Eurozone crisis and severe econom ic dif culties experienced in som e Southern
European countries such as Spain, Portugal, Italy and G reece in the past year, have
raised the pro le of potential nancial im pact on m any com panies. This includes
the extended tim e taken to collect trade receivables, sovereign debt issues that
could increase collection risk given the high proportion of sales in these countries
to publicly-ow ned custom ers, and the im pact of austerity m easures introduced to
reduce governm ent spending on pharm aceutical reim bursem ent prices.
The Eurozone crisis m ay also in uence exchange rates and the translation
of overseas sales into the reporting currency. Wholesalers and third-party
m anufacturers based in the EU m ay also be affected by the econom ic dow nturn
w ith particular im pact on the larger pharm aceutical and life sciences com panies. The
effects of the EU econom ic crisis extend to its in uence on consum er spending.
While self-evident for those life science companies with diversifed business
m odels including over-the-counter (O TC ) m edicines or other consum er products,
the increasing use of patient co-pays by governm ents m eans a cut in consum er
spending has an im pact on pharm aceutical sales and is a grow ing risk. Three
com panies speci cally identi ed consum er spending as a risk to their business.
The Eurozone crisis
may also inuence
exchange rates
and the translation
of overseas sales
into the reporting
currency.
G iven that few er than 50 percent of lers disclosed European econom ic risk,
w e investigated the relationship betw een percentage of sales from the EU and
disclosure. We were surprised that six companies with more than 30 percent of
revenue from the EU chose not to highlight this risk in an explicit m anner.
4
Passing
reference to tough econom ic conditions in a business description section w as
deem ed a retrospective com m ent and not a risk factor disclosure for shareholders
or potential shareholders. Som e com panies w ith approxim ately 20 percent of
revenue from the EU chose to disclose the risk: this seem s prudent to us give the
continuing uncertainty in these m arkets.
We were surprised
that six companies
with more than
30 percent of
revenues from the
EU chose not to
highlight this risk in
an explicit manner.
Compani es t hat di scl ose EU ri sk
P
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Compani es t hat do not di scl ose EU ri sk
40%
Disclosure of European economic risk vs. percentage of sales in the EU
37% 37%
32% 32%
31%
30%
29% 29%
27%
25%
29%
22% 22%
49%
40%
34%
33%
32%
31%
26%
25%
20% 20%
17%
12%
9%
6%
2%
0%
10%
20%
30%
40%
50%
4
W e have had to m ake judgm ents about w here non-U S filers disclose risks; w e concluded that if these w ere not included w ith other risks to the business or
under risk factors in m anagem ents review of the year, then this w as not an explicit disclosure.
Emerging market risk
Slightly less than a quarter of ling com panies disclosed risks associated w ith
strong grow th from em erging m arkets. These risks included:
The strong, often double-digit growth rates experienced in recent years may not
continue.
Some developing countries have reduced (or threatened to reduce) the duration
of patent protection to facilitate early generic com petition.
Companies may not be able to realize the expected benefts of signifcant
investm ents in em erging grow th m arkets.
There may be a relatively limited number of people with the skills and training
suitable for em ploym ent 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 fuctuate substantially and should
these currencies devalue w ithout it being possible to offset the devaluations w ith
price increases, products m ay becom e less pro table.
M any com panies do not explicitly disclose em erging m arket sales and, w hen
they do, the de nition of em erging m arkets can vary from com pany to com pany.
We compared the number of companies that disclose emerging market risk with
the percentage of sales from non-U S and non-European sources. This includes
Japan, but again, not all com panies disclose Japanese sales (w here it is disclosed,
the range of sales from Japan is 6 to 19 percent). As illustrated below, there is a
substantial proportion of com panies w ith signi cant sales outside the traditional
Western markets and Japan that do not disclose emerging market risk. We see this
as a potentially im portant area for review .
Companies that disclose Emerging Market risk Compani es t hat do not di scl ose Emergi ng Market ri sk
43%
33%
30%
26%
24%
22%
18%
4%
42%
36%
31%
27%
26%
25%
23%
21% 21%
26%
12%
11% 11% 11%
10% 10%
9% 9%
8% 8%
6% 6%
5%
3% 3%
0%
0%
10%
20%
30%
40%
50%
Many companies do
not explicitly disclose
emerging market
sales and, when they
do, the denition of
emerging markets
can vary from
company to company.
Disclosure of emerging market risk vs. percentage of ex-US, ex-EU sales
Financial
statement disclosures
T
he top ve critical accounting policies are the sam e as w e reported in 2010,
w hen w e review ed 12 m ajor U S and European pharm aceutical com panies.
This year the order has changed, re ecting a broader population of com panies
review ed. C ritical accounting policies and frequency of disclosure are show n
below . O nly six policies w ere disclosed as critical by m ore than 50 percent of the
com panies.
91%
76%
76%
61%
61%
61%
47%
44%
44%
38%
35%
35%
35%
32%
29%
29%
18%
15%
15%
12%
0% 20% 40% 60% 80% 100%
A llow ance for doubtful accounts
Earnings per share
U se of estim ates
N ew accounting standards
Leases
Share-based com pensation
C ash, cash equivalents and investm ents
Foreign currency translation
Financial instrum ents
Acquisitions/business com binations
C onsolidation
R & D costs
G oodw ill
Inventory valuation
Property, plant and equipm ent/im pairm ents
C ontingent liabilities and litigation
Pension/retirem ent bene ts
Intangible assets/im pairm ent
Revenue recognition
Incom e/deferred/contingent taxes
R isks reported by m ore than 15 percent of com panies for the rst tim e
Critical accounting policies percentage reported
Taxes were the most-disclosed critical accounting policy, disclosed by 90 percent of
these com panies. This is consistent w ith their global supply chains and m ovem ents
of intellectual property across borders. Additionally, m any of the com panies have
effective tax rates below or w ell below expected statutory rates. Recently, tax
authorities have been very focused on the am ount of pro t recorded in and outside
of their country. These factors clearly highlight the critical nature of the judgm ents
utilized to record the appropriate tax provision and reserves.
The next m ost-disclosed critical policies w ere revenue recognition and intangible
asset im pairm ents. G ross revenue for m ost pharm aceutical com panies is not
very subjective. The critical nature of revenue recognition is judgm ent regarding
gross to net adjustm ents for rebates, governm ental fees and returns (particularly
as patent expiration nears). We believe gross revenue recognition will become
m ore challenging in the future as pricing m oves aw ay from a xed price to m ore
outcom es-based pricing that w e are starting to see in Europe and in a m ore lim ited
w ay w ith U S m anaged care organizations.
Intangible asset im pairm ent is critical particularly w ith respect to in-process
research and developm ent (IPR D ) w hich results from acquisitions and is recorded
on the balance sheet and not subject to am ortization until approved, m eaning it
is subject to annual im pairm ent testing. A ssessing im pairm ent in developm ental
technology can be extrem ely subjective especially for early technology that m ay be
several years aw ay from an approval date.
Assessing
impairment in
developmental
technology can be
extremely subjective
especially for early
technology that may
be several years away
from an approval
date.
G iven the highly regulated nature of the industry, contingent liabilities and litigation
have a high degree of uncertainty and are highly judgm ental w ith respect to
outcom es. A high degree of judgm ent is necessary in assessing w hen to accrue,
how m uch to accrue, and w hen and w hat should be disclosed.
We noted that less than 15 percent of the companies disclosed allowance for
doubtful receivables as critical. We found this surprising given the various European
governm ent debt issues for a num ber of European countries.
Topics discussed separately in Managements Discussion and
Analysis (MD&A), Operating and Financial Review (OFR) or
Equivalent
There is a w ide variation in how com panies choose to disclose certain topics
pertaining to their business. This is partly because non-U S lers have a m ore free-
form approach to business description w ithin their annual reports. For exam ple,
strategy was only a specifc MD&A/OFR topic in slightly more than half of the
cases; this is perhaps surprisingly low given the seism ic shift in the business
environm ent com bined w ith econom ic uncertainties.
0%
20%
40%
60%
80%
100%
100%
82%
79%
71% 71%
65%
56%
53%
50%
47%
41%
29%
15%
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Topics discussed separately in Managements Discussion andAnalysis
(MD&A), Operating and Financial Review (OFR) or equivalent

A high degree of
judgment is necessary
in assessing when
to accrue, how much
to accrue, and when
and what should be
disclosed.
Surprisingly, given the challenging business clim ate only 70 percent of the
companies discussed the business environment and just 65 percent discussed
product pipeline/R&D. With the complex business environment and patent cliff
pressures, greater disclosure here m ay aid an investor in understanding how a
company is responding to these challenges. We note even fewer companies (45
percent) discussed their future prospects and outlook.
R&D pipeline disclosures
The approach to disclosure on R&D pipelines varied widely. Some companies
have m oved aw ay from any discussion of early stage com pounds, w hich m akes
sense given that early stage R&D has always had more failure than success, and
that in the wake of a relatively disappointing decade for pharmaceutical R&D,
the external w orld has becom e skeptical of early prom ise turning into actual
revenue dollars. It seem s that som e of the industry is dealing w ith the rising risk
in R&D by choosing to disclose less detail about their pipelines. For instance the
m echanism of action of pipeline com pounds is not readily revealed by a num ber
of m ajor com panies, including som e U S com panies. M any investors w ould nd
this inform ation useful in assessing the relative attractiveness and com petitive
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 m uch as a quarter of
annual costs.
5
M ore than 80 percent of com panies disclose the m ost recent pipeline inform ation
in a form al link on their w ebsite. Those that do not disclose pipeline inform ation are
som e generic com panies and foreign U S lers.
Some companies 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.
5
Based on estim ated 16 percent R & D /sales and 32 percent operating m argins: See Future Pharm a, KPM G 2011, p8.
R&D
review
Tabular disclosures
Pipeline on
website
Stage of development
Name/
Code
Therapy
area
Indication Mechanism
Expected
ling date
Discontinued
projects
Formulation Partner
P1 P2 P3 Filed
Abbott
Allergan
Amgen
Baxter
Biogen Idec
BMS
1
N/A N/A N/A N/A

Celgene
Eli Lilly
Forest Lab
Gilead
J&J
2

Merck & Co
Mylan
Pzer
3

Watson
AstraZeneca
GSK
Novartis
Novo Nordisk
Sano
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%
An Overview of Risk and Disclosure | 17
2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms of the KPMG network of independent rms are afliated with KPMG International. KPMG International provides no client services. All rights reserved.
1
BMS disclosed the number of compounds in the respective development stages as dened 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 led compounds/devices were sourced from the pharmaceutical/medical devices and
diagnostics pipeline link on the companys website.
3
Pzer includes no specic compound discussion in its 10-K ling, giving only headline numbers of compounds.
The pipeline on the companys website does not include a discussion of the pipeline.
Source: KPMG analysis of 2011 company lings, April 2012.
D isclosure of discontinued projects rem ains rare, w ith less than a quarter of
com panies m aking this explicit. In a very highly scrutinized industry, success and
failure w ill be readily apparent to interested investors or shareholders; it should
enhance the reputation of com panies to disclose failures.
D isclosure of the estim ated return on R & D spending rem ains unique to
G laxoSm ithKline. There is an opportunity for other com panies to be m ore
transparent w ith their R & D spend and help shareholders and potential investors
understand w hy the strategies being pursued w ill im prove returns. W e have
illustrated previously that returns on R & D have been falling steadily for the past
tw odecades.
6
A s evident below , average industry returns on R & D have been falling
since 1999 w hileR & D spend continues to grow .
0
10,000
20,000
30,000
40,000
50,000
1999 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
A
n
n
u
a
l

U
S

i
n
d
u
s
t
r
y

R
&
D

s
p
e
n
d
I
l
l
u
s
t
r
a
t
i
v
e

p
o
s
t
-
t
a
x

r
e
t
u
r
n

o
n

R
&
D

e
x
p
e
n
d
i
t
u
r
e
0 6%
9%
12%
15%
Returns on R&D compared to R&D spending
Source: Future Pharm a, KPM G 2011.
6
Future Pharm a KPM G 2011, p13 and 14
Legal proceedings
analysis
P
harm aceutical com panies are frequently involved in a num ber of legal
proceedings and the disclosures regarding the resulting contingent liabilities
vary from com pany to com pany. The m ajority of legal proceedings involve
actions by U S state or federal governm ent, or U S patent disputes. D isclosure by
U S lers and foreign lers is, therefore, typically substantially m ore lengthy than
that of foreign flers. We include seven Japanese companies, which have much
low er levels of exposure to the U S m arket, in the foreign lers group.
18%
26%
42%
Product liability
Sales and m arketing
O ther
Patents
14%
Categories of contingent legal liabilities
There w ere tw o notew orthy agreem ents reached w ith the U S governm ent over
sales and m arketing practices in late 2011. In N ovem ber 2011 G laxoSm ithKline
agreed in principle to a US$3 billion settlement with the US government to conclude
its m ost signi cant ongoing Federal investigations, tw o of w hich w ere related to
sales and m arketing practices: the investigation begun by the U S A ttorneys of ce of
C olorado in 2004 and the D epartm ent of Justices investigation of the developm ent
and marketing of Avandia. In December 2011 Merck agreed to pay US$950 million
to settle crim inal and civil charges w ith the U S D epartm ent of Justice related to
research, m arketing and selling activities w ith respect to Vioxx.
Rising legal risk
In spite of extensive risk m anagem ent input to board audit com m ittees, there
has been a rise in the num ber of settlem ents for violations of a variety of law s
as exem pli ed by data from the U S over the past 20 years w ith a very rapid
rise since 2003. Since 2005, the annual value of the settlements has exceeded
US$1billion reaching US$4.4 billion in 2009.
40
35
30
25
20
15
10
5
0
1
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
1 1
0
2
3
1 1
3
2 2 2
9
8 8
10
14
27
38
32
Number of Pharmaceutical industry settlements with US state and federal
governments 19912010
The industry needs to
reverse these trends
to begin to win back
condence and trust
from consumers and
governments alike. This
is no small task.
Source: Future Pharma,
KPMG 2011
Summary of signicant contingent legal liabilities from 2011 disclosures
(or 2010 where 2011 was unavailable as of 31 March 2012)
Company USD $m Status Brief description
A bbott 1,845 Pending HUMIRA patent infringement with Centocor (part of Johnson & Johnson)
A bbott 1,630 Pending D epakote m arketing D epartm ent of Justice (D O J) investigation
A m gen 780 Pending Federal investigation of sales and m arketing practices for erythropoietin
stim ulating agents (ESA s)
A straZeneca 135 Pending Seroquel product liability litigation and state attorney general investigation of
sales and m arketing practices
Baxter 300 Pending C ontam inated heparin
Bayer 125 In A ppeal G M contam inated rice
Bayer 750 Pending G M contam inated rice
Bayer 133 Pending G M contam inated rice
Eli Lilly 245 Settled Zyprexa product liability ($230m 2009 $15m 2008)
Forest 313 Settled C elexa
, Lexapro and Levothroid

G SK 4,435 Pending M anufacturing, Paxil and Avandia product liability claim s
Johnson & Johnson 593 In A ppeal C YPH ER stent patent infringem ent
Johnson & Johnson 330 In A ppeal R ISPER D A L prom otion
Johnson & Johnson N /A R ISPER D A L prom otion - crim inal settlem ent - m edia suggest m ore than $1bn
M erck 950 Pending D O J investigation of Vioxx m arketing
N ovartis 1,059 Pending Environment landfll
N ovartis 66 Settled Average w holesaling pricing settlem ent
N ovartis 150 Settled Average w holesaling pricing settlem ent
N ovartis 53 Pending Average w holesaling pricing settlem ent
N ovartis 99 Pending Wage and hour law violation for failure to pay overtime
N ovartis 422 Settled Trileptal m arketing
O tsuka 311 Pending Paym ent to B ristol-M yers Squibb if A bilify generics launched 2012-2015
P zer 790 Pending H orm one Replacem ent Therapy litigation
Sano 985 Pending Product liability risks
Sano 2,267 In A ppeal Environm ental liabilities
Teva 270 Pending D esign, m anufacture and sales of large vials of propofol
Risk factor raw data
Ri sk Fact or
US Fi l ers Forei gn US Fi l ers Non-US Fi l ers
Count
Abbot t Al l ergan
Amgen
Inc.
Baxt er
Bi ogen
Idec
Bri st ol
M yers
Squi bb
Cel gene
El i
Li l l y
Forest
Lab
Gi l ead
Johnson
&
Johnson
M erck
& Co.
M yl an Pzer
Wat son
Pharma
Ast ra
Zeneca
Gl axo
Smi t hKl i ne
pl c.
Novart i s
AG
Novo
Nordi sk
Sano
Teva
Pharma-
ceut i cal s
Bayer
AG
Boehri nger
Ingel hei m
CSL
M erck
KGaA
Roche
UCB
SA
Ast el l as
Pharma
Chugai
Pharma-
ceut i cal s
Dai i chi
Sankyo
Ei sal
M i t subi shi
Tanabe
Ot suka
Hol di ng
Co.
Takeda
Pharma-
ceut i cal s
Indust ry/ Generi c compet i t i on 34
Prot ect i on and expi rat i on of
i nt el l ect ual propert y ri ght s
32
Pharmaceut i cal pri ci ng:
Compet i t i on, pri ce cont rol s and
rei mbursement reduct i ons
31
Regul at ory requi rement s 31
R&D ef f ort s may not be
successf ul
31
Int erest rat es/ Currency
exposure/ Inat i on
30
Legal proceedi ngs i ncl udi ng
adverse out come of l i t i gat i on
and government i nvest i gat i ons
30
Pat ent l i t i gat i on 28
M anuf act uri ng processes/ Prod-
uct suppl y/ Raw mat eri al s
27
Gl obal , pol i t i cal and economi c
condi t i ons
27
Unsuccessf ul st rat egi c
al l i ances/ Busi ness
combi nat i ons
25
Product l i abi l i t y 24
Envi ronment al / Heal t h and
saf et y l i abi l i t i es
23
Taxat i on 23
Rel i ance on IT 22
Rel i ance on t hi rd part y
manuf act uri ng/ Provi ders or
market i ng suppl i ers
21
Di srupt i on f rom nat ural
di sast ers
21
Del ay i n product l aunches 18
Pol i t i cal i nst abi l i t y 17
Human resources/ Key personnel 15
European economi c exposure* 15
Rel i ance on key product s 13
US heal t hcare ref orm
l egi sl at i ons*
13
Impai rement s/ Credi t ri sk and
bad debt s
12
Product saf et y i ssues* 10
Concent rat i on of sal es t o key
cust omers, e.g. whol esal ers
9
Ini t i at i ves/ Fai l ure t o i mpl ement
busi ness st rat egy
8
New or revi sed account i ng
st andards
8
Emergi ng market ri sk* 8
Busi ness rest ri ct i ons due t o
hi gh debt rat i os
7
Li qui d ri sks/ i nsuf ci ent cash 7
Int ernat i onal busi ness ri sks* 6
Ant i -bri bery and corrupt i on
l egi sl at i ons*
5
Count erf ei t product s* 5
Compet i t i on f rom bi osi mi l ars* 5
Tot al number of ri sks 25 21 21 24 27 23 25 15 13 25 18 28 32 28 26 26 29 27 24 28 27 16 7 13 16 18 14 10 11 15 19 15 17 10 34
Risk factor raw data
Ri sk Fact or
US Fi l ers Forei gn US Fi l ers
Gl axo
Novart i s
Smi t hKl i ne
AG
pl c.
Novo
Nordi sk
Sano
Teva
Pharma-
ceut i cal s
Bayer
AG
Boehri nger
Ingel hei m
CSL
M erck
KGaA
Roche
UCB
SA
Non-US Fi l ers
Chugai
Ast el l as
Pharma-
Pharma
ceut i cal s
Dai i chi
Sankyo
Ei sal
M i t subi shi
Tanabe
Ot suka
Hol di ng
Co.
Takeda
Pharma-
ceut i cal s
Count
34
32
31
31
31
30
30
28
27
27
25
24
23
23
22
21
21
18
17
15
15
13
13
12
10
9
8
8
8
7
7
6
5
5
5
29 27 24 28 27 16 7 13 16 18 14 10 11 15 19 15 17 10 34
Abbot t Al l ergan
Amgen
Inc.
Baxt er
Bi ogen
Idec
Bri st ol
M yers
Squi bb
Cel gene
El i
Li l l y
Forest
Lab
Gi l ead
Johnson
&
Johnson
M erck
& Co.
M yl an Pzer
Wat son
Pharma
Ast ra
Zeneca
Indust ry/ Generi c compet i t i on
Prot ect i on and expi rat i on of
i nt el l ect ual propert y ri ght s

Pharmaceut i cal pri ci ng:
Compet i t i on, pri ce cont rol s and
rei mbursement reduct i ons

Regul at ory requi rement s
R&D ef f ort s may not be
successf ul

Int erest rat es/ Currency
exposure/ Inat i on

Legal proceedi ngs i ncl udi ng
adverse out come of l i t i gat i on
and government i nvest i gat i ons

Pat ent l i t i gat i on
M anuf act uri ng processes/ Prod-
uct suppl y/ Raw mat eri al s

Gl obal , pol i t i cal and economi c
condi t i ons

Unsuccessf ul st rat egi c
al l i ances/ Busi ness
combi nat i ons

Product l i abi l i t y
Envi ronment al / Heal t h and
saf et y l i abi l i t i es

Taxat i on
Rel i ance on IT
Rel i ance on t hi rd part y
manuf act uri ng/ Provi ders or
market i ng suppl i ers

Di srupt i on f rom nat ural
di sast ers

Del ay i n product l aunches
Pol i t i cal i nst abi l i t y
Human resources/ Key personnel
European economi c exposure*
Rel i ance on key product s
US heal t hcare ref orm
l egi sl at i ons*

Impai rement s/ Credi t ri sk and
bad debt s

Product saf et y i ssues*
Concent rat i on of sal es t o key
cust omers, e.g. whol esal ers

Ini t i at i ves/ Fai l ure t o i mpl ement
busi ness st rat egy

New or revi sed account i ng
st andards

Emergi ng market ri sk*
Busi ness rest ri ct i ons due t o
hi gh debt rat i os

Li qui d ri sks/ i nsuf ci ent cash
Int ernat i onal busi ness ri sks*
Ant i -bri bery and corrupt i on
l egi sl at i ons*

Count erf ei t product s*
Compet i t i on f rom bi osi mi l ars*
Tot al number of ri sks 25 21 21 24 27 23 25 15 13 25 18 28 32 28 26 26
We would like to thank Kevin Wilson, Managing Director
of J ovin Healthcare, for his invaluable contribution to this
project, and we look forward to your feedback on this report.
Ed Giniat
Global Leader
Pharm aceuticals
US Leader Healthcare
& Pharmaceuticals
Chris Stirling
European Leader
Chemicals &
Pharm aceuticals
Norbert Meyring
Asia Pacifc Leader
Chemicals &
Pharm aceuticals
About KPMGs Pharmaceuticals
& Life Sciences Practice
KPM G offers a broad range of audit, tax and advisory services to pharm aceuticals
and other life sciences clients, ranging in size from biotechnology start-ups to
m ultinational pharm aceutical com panies. A s a global leader in serving this evolving
industry, KPM G is com m itted to helping our m em ber rm clients stay abreast of
em erging m arket trends, regulatory and legislative changes, leading practices and
effective approaches to m anaging their business.
KPM G is a global netw ork of professional rm s providing audit, tax and advisory
services. We have 145,000 outstanding professionals working together to deliver
value in 153 countries worldwide. Through its member frms, KPMG has invested
extensively in developing a highly experienced pharm aceuticals and other life
sciences team . KPM G s understanding of the industry is both current and forw ard
looking, thanks to m em ber rm sglobal experience, know ledge sharing, industry
training, and the involvem ent of professionals w ith direct experience in the
pharm aceutical industry.
Through its
member rms,
KPMG has invested
extensively in
developing a
highly experienced
pharmaceuticals
and other life
sciences team.
For more information, contact
Ed Giniat
Global Leader Pharmaceuticals
US Leader Healthcare &
Pharmaceuticals
T: +1 312 665 2073
E: eginiat@ kpm g.com
Chris Stirling
European Leader Chemicals &
Pharmaceuticals
T: +44 20 731 81512
E: christopher.stirling@ kpm g.co.uk
Norbert Meyring
Asia Pacic Leader Chemicals &
Pharmaceuticals
T: +8 621 221 22707
E: norbert.m eyring@ kpm g.com .cn
David Blumberg
Global and US Advisory Sector
Leader Pharmaceuticals
T: +1 267 256 3270
E: dblum berg@ kpm g.com
Mark Drozdowski
US Audit Sector Leader
Pharmaceuticals
T: +1 973 912 6640
E: m drozdow ski@ kpm g.com
Frank Mattei
Global and US Tax Leader
Chemicals & Pharmaceuticals
T: +1 267 256 1910
E: fm attei@ kpm g.com
Melissa Stahl
Global Executive & Knowledge
Manager Pharmaceuticals
T: +1 609 524 5608
E: m stahl@ kpm g.com
Adrienne Rivlin
European Executive Chemicals &
Pharmaceuticals
T: + 44 20 769 41992
E: adrienne.rivlin@ kpm g.co.uk
Candice Zhang
Asia Pacic Executive Chemicals &
Pharmaceuticals
T: + 8 621 221 24085
E: candice.zhang@ kpm g.com
kpmg.com
The inform ation contained herein is of a general nature and is not intended to address the circum stances of any particular individual
or entity. A lthough w e endeavor to provide accurate and tim ely inform ation, there can be no guarantee that such inform ation is
accurate as of the date it is received or that it w ill continue to be accurate in the future. N o one should act on such inform ation
w ithout appropriate professional advice after a thorough exam ination of the particular situation.
2012 KPM G International C ooperative (KPM G International), a Sw iss entity. M em ber rm s of the KPM G netw ork of independent
rm s are af liated w ith KPM G International. KPM G International provides no client services. N o m em ber rm has any authority to
obligate or bind KPM G International or any other m em ber rm vis--vis third parties, nor does KPM G International have any such
authority to obligate or bind any m em ber rm . A ll rights reserved.
The KPM G nam e, logo and cutting through com plexityare registered tradem arks or tradem arks of KPM G International.
D esigned by Evalueserve.
Publication nam e: A n O verview of R isk and D isclosure in the G lobal Pharm aceutical and Life Science Industry
Publication number: 120437
Publication date: A pril 2012

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