Driving the life sciences sector to achieve the ‘Fair’ in Fair Market Value

PharmaOver the last few years, the Indian life sciences industry has been growing rapidly, with new products, low costs and aggressive research & development. Touted among the ‘top five emerging markets’, it has already carved a niche worldwide with most companies possessing strong capabilities in the drug innovation space. But the industry still faces challenges which can expose companies’ to the hazards of bribery and corruption risks. Consider these questions, should the senior management be apprehensive about payments made by its company to its third parties for providing services? These third parties include healthcare professionals (HCPs), key opinion leaders (KOLs), regulatory consultants, overriding commission/sales/institutional agents, clinical trial experts, event organizers, travel events etc. And is it possible that some of the payments being made are excess or unwarranted and this excess money could be misused by third parties?

To give an example, it appears to be a common business practice for many pharmaceutical companies to compensate HCPs for rendering professional services. These include participation in advisory board meetings, support in research studies, speaker opportunities at medical conferences, training employees and entering consulting agreements. However, these “benefits” have the potential to be misused – organizations can use these as tactics to coerce HCPs into promoting the company by handing out increased prescriptions of the company’s products. If they come under the scanner, healthcare regulators could end up viewing these payments or “benefits” as thinly veiled bribes. So it is important to prevent such “grey” practices and manage risks arising out of related dubious transactions. There should be a clear and objective basis for establishing the compensation to be provided to these third parties.

To safeguard their business’, companies in the life sciences sector should therefore adopt leading practices and establish a methodology for calculating the appropriate compensation for services provided by third parties. They must compensate third parties at “fair market value” (FMV) in order to avoid the appearance of offering inducements and discourage “quid pro quo” relationships in general.

An ideal FMV process should address:

  1. Business Justification – Does the service provided by third parties’ meet a legitimate business need?
  2. Build or Buy – Justification to outsource – Is the service provided essential and cannot be taken up by an internal resource?
  3. Third parties selection and FMV determination – What are the estimated considerations when appointing and determining the appropriate compensation for third parties?
  4. Proof of Service – What are the specific activities to be performed by the third parties and how are the efforts documented?

Some of the key parameters life sciences companies’ should consider when selecting and determining appropriate compensation for third parties would be the nature of work to be performed, scientific benefits expected from the service(s) obtained, unique capabilities, level of experience or expertise. They should also focus on the previous history with the company, market reputation, competition mapping and relevant regulatory requirements or limitations.

Once the FMV has been determined, it is equally imperative to document commercial reasonableness that can form the basis for the contract with third party. Companies must ensure that FMV documentation should be developed and documented before the offer is made to a third party.

The rationale behind selecting and determining the compensation of third parties should also be thoroughly and accurately documented. This could be achieved by framing a healthcare compliance review committee which has representation across various business functions. Implementing these steps will push companies’ in the right direction and ascend many steps in the compliance ladder!

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