doing business in the us (pharma-medical device)

The Essentials for Pharmaceutical and
Medical Device Companies Desiring to
Enter the U.S. Market
The Structural and Legal ‘Need-to-Knows’ for
French and European Pharmaceutical and
Medical Device Companies
Philippe C.M. Manteau
© 2012 Schiff Hardin LLP. All rights reserved.

The Background

• A businessperson in the pharmaceutical/medical device industry
wants to enter the U.S. market

• Overall concern: ensure that activities are appropriately
structured in a manner most beneficial for his or her company and
shareholders

• Specific concerns:

– FDA – LLC Structure
– Products Liability – Corporate Structure
– Distributor vs. Agent – Employment Issues
– Intellectual Property – U.S. Equity Incentives
– Key Provisions in the Contract – Immigration
– A Representative U.S. Office – M&A Considerations

2 © 2012 Schiff Hardin LLP. All rights reserved.

Consideration #1: Working with
the FDA
The Food and Drug Administration (FDA) is the U.S. agency responsible for
protecting and promoting public health through the regulation and supervision
of, among other things, pharmaceuticals, medical devices, dietary
supplements and cosmetics

FDA Regulation of Medical Devices
● “Medical devices” is defined broadly and includes such things as hospital and
laboratory equipment, cosmetic devices and surgical devices
● Approval Process - The FDA classifies medical devices into three categories –
Class I, II and III (III being the riskiest). The class determines which approval
process a marketer must undergo.
– 510(k) Pre-market Notification – 99% of medical devices enter the U.S. market
through this process (e.g., Class I and Class II)
– Premarket Approval Application (PMA) – approval process for Class III devices

FDA Regulation of Pharmaceuticals
● New Drug Application (NDA)
● Abbreviated New Drug Application (ANDA)
● Companies need to adhere to drug labeling and manufacturing standards


Consideration #1: FDA and Medical
Devices: the 510(k) Process
510(k): An entity that wants to market a device for human use in the United States must
submit a 510(k) notification to the FDA at least 90 days before marketing, unless such
entity is exempt or goes through the more onerous PMA process (described on the next
page). The notification must demonstrate that the proposed device is safe and effective,
by showing that the device is “substantially equivalent” to a “legally marketed device”
(the “SE test”).
● A “legally marketed device” includes a device that was legally marketed before
May 28, 1976 (hence, grandfathered into the current regulations), a device for
which a more onerous PMA is not required, as well as devices that were
previously classified as Class III, but have been reclassified to a less risky class
(i.e., Class I or II).
● Once submitted, the marketer must wait for an order from the FDA declaring
that the device has met the SE test. Once received, marketing may begin.
● Note that, although the 510(k) process is a notification, the marketer must still
wait for a communication from the FDA before marketing can begin.

Recently, the 510(k) process has been criticized for being too relaxed and many critics
have pushed for stronger oversight. As such, it would not be surprising for the FDA to re-
evaluate the 510(k) procedure in the near future.


Consideration #1: FDA and Medical
Devices: Premarket Approval PMA)
• PMA: An application submitted to the FDA to request approval to
market Class III devices. Class III devices include those that
sustain human life or pose the greatest risk. As such, they face
this most stringent type of device marketing application required
by the FDA
• Unlike a 510(k), PMA is based on a determination by the FDA that
the PMA contains sufficient valid scientific evidence that provides
reasonable assurance that the device is safe and effective for its
intended use
• Timeline
– Within 45 days of receiving the PMA, the FDA notifies the applicant
that the PMA has been received
– The FDA then has 180 days to review the PMA (but generally, the
review time is longer than this)


Consideration #1: FDA and
Pharmaceuticals
New Drug Application (NDA):
● Process by which drug companies formally propose that the FDA approve a new
pharmaceutical for sale and marketing in the United States
● The purpose of a NDA is to provide enough information to permit the FDA to
determine:
– Whether the drug is safe in its proposed use(s), and whether the
benefits of the drug outweigh the risks
– Whether the drug's proposed labeling (package insert) is
appropriate and what it should contain
– Whether the methods used in manufacturing the drug and the
controls used to maintain the drug's quality are adequate to
preserve the drug's identity, strength, quality, and purity

Abbreviated New Drug Application (ANDA) - FDA review and
ultimate approval of a generic drug product


Consideration #1: Health Insurance
Portability and Accountability Act of
1996 (“HIPAA”)
All “Covered Entities” are subject to HIPAA
● A Covered Entity is a health care provider, a health plan, or a
clearinghouse that submits bills electronically
● Business associates of the Covered Entity (i.e., those that use or
access patient information on the Covered Entity’s behalf) are also
subject to HIPAA
● A reseller to a Covered Entity may be considered a “business
associate”: try to protect such reseller in the contract with such
Covered Entity

Pursuant to HIPAA’s Privacy Rule, a Covered Entity must protect the following
health information about a patient:
● sent or stored in any form (written, verbal, electronic);
● that identifies the patient or can be used to identify the patient; and
● that generally is about a patient’s past, present and/or future
treatment and payment of services.


Consideration #1: Corporate
Officer Liability for FDA Violations
● In 2011, the FDA issued prosecution guidelines that stated that
corporate officers could be criminally liable for violations of the
Food, Drug and Cosmetic Act (the act which gives the FDA its
authority) based solely on their position with the company

● This means a corporate officer could be liable even if he or she
had no knowledge of the illegal conduct

● This is known as the “Park Doctrine”

● Possible penalties – large fines, prohibition from providing any
services to a regulated company, probation and/or jail time

● Minimize risk of possible violations by instituting a comprehensive
compliance program


Consideration #2: Products Liability
● If a person is injured by a defective product that is unreasonably
dangerous or unsafe, the injured person may have a claim or cause of
action against the company that designed, manufactured, sold,
distributed, leased, or furnished the product

● The “product” includes medical devices and pharmaceuticals. The “defect”
can be a design defect, a manufacturing defect or a warning defect
(including a failure to warn)

● Product liability laws are determined at the state level and vary from state
to state

● Parties cannot exclude liability for product defects altogether (i.e., in a
contract) but there are ways to reduce the risk:
– Insurance – one party asks another to list it as an additional insured
– Shift or apportion the risk to another party through an indemnification provision
in the contract - Note, however, this option does not provide protection against
third parties (i.e., end-user customers)

● It is important to consult with your legal counsel so that you can
effectively limit your products liability exposure


How do most companies enter the
United States?

Entry into the United States—3 typical ways:

– Direct sales into the United States

– Establishing a subsidiary in the United
States

– Acquisitions in the United States


Direct sales into the United States

Many non-U.S. companies take this approach by
licensing the product to a U.S. company. The
benefit of this approach is that the non-U.S.
company can take advantage of the U.S. company’s
existing market knowledge. The downside is that
returns will be limited as revenue will be shared.


Consideration #3: Distinguishing
between distributors and agents
Distributor – think “buy-sell”:
● Distributor obtains title to products from principal
● Principal invoices distributor for products
● Distributor sets resale prices for products and is subject to
risks and rewards associated with resale (e.g., loss/gain of
profit, risks of delivery)

Agent:
● Agent never obtains title to products
● Agent invoices principal for services rendered
● No “resale price maintenance” problem

But in both cases – set up objectives (easier to terminate)


Consideration #4: Protecting
intellectual property (IP)
● Common law rights to trademarks exist

● Additional layer of protection by registering IP at
the United States Patent and Trademark Office

● Many companies overlook the concept of
patenting their software

● Check your IP before you expand into the United
States


From the Oregonian, July 9, 2009:

“Chinese startup based in Eugene wants to sell
inexpensive solar panels in U.S.

A Chinese startup vying for a piece of the U.S. solar
market has landed in Eugene, hoping to become a
national player in the state’s growing photovoltaic
industry. . . Centron Solar, whose Web site went
live Thursday morning, is moving fast to sell and
distribute bargain-priced solar panels made in
China to the U.S. market, expected to be the
world’s next big solar player. . .”


From the Portland Business
Journal, October 8, 2009:

“Centron Solar changes name to Grape Solar

Centron Solar once said it wants to be the Wal-Mart of solar
energy. That may still be true. But now the company is
trying to sound a little more like Apple Computers. . . Despite
the fruit-themed logic, combined with the notion that grapes
grow with the help of solar energy, the real cause of the name
change is rooted in a lawsuit filed Sept. 28 in the U.S. District
Court in Arizona. CentroSolar Group AG, a $440 million
German solar products manufacturer, filed the trademark
infringement lawsuit claiming Centron Solar was intentionally
trying to confuse customers.”


Consideration #5: Key provisions
in commercial contracts
● Keep it U.S. law governed – EU protections not helpful if there is a litigation in the
United States

● Think first of an “exit strategy” – one-year contracts automatically renewable unless
terminated by either party, with or without reason, upon 60- or 90-days notice are
common

● Craft IP sections carefully to ensure that IP is not “assigned”; draft know-how sections
tightly to make sure know-how is only licensed in a limited manner, for a limited
purpose, and is kept confidential (remember, only confidential know-how is protected
IP)

● Watch out for warranty, liability and indemnification provisions:
– Warranty: software, products or services should be sold “as is” but for the very limited
warranty set forth in the contract (contracts should carve-out implied warranty of
merchantability or warranty of fitness for a particular purpose)
– Liability: contract should exclude consequential or incidental damages, and limit liability
to only reimbursement of money received under the contract
– Indemnification by product supplier, software publisher or service provider:
contract should restrict indemnification to a limited IP infringement, while control over
litigation should be retained


Consideration #6: Having a
“representative office” may be
problematic
● Beware that an agent or branch in the United States,
of a foreign principal, may subject such principal to
U.S. tax on its revenues generated in the United
States

● In reality, not frequently done but in some cases you
can have a limited agency agreement to perform
ministerial tasks for the parent

● When there is such a need, consider establishing a
subsidiary


Establishing a subsidiary in the
United States

After initiating direct sales into the United States…
consider setting-up a foothold there.


Consideration #7: Do you really
need an LLC?
● What is an LLC? Google will tell you.

● What Google will not tell you: one generally
should not form an LLC when the majority
shareholder (a “member”) is a French corporation
– French parent subject to U.S. income tax
– Branch profit dividend tax: tax on “deemed
distributed” dividends
– Law not as developed - liability issues?

● LLCs are more commonly used “downstream” in
order to bring in U.S. partners


Consideration #8: Try a
corporation first
● Easy to form

● Easy to maintain

● Capitalization easy to manage:
– Remember to keep debt-to-equity ratio at a maximum of 1.5:1
– Augmentation of capital by way of “accrued paid in capital”
– Disconnect between number of shares and amount of capital

● If a shareholder is not a 100% owner, consider the need for a
shareholders agreement

● If a shareholder is a minority shareholder, remember to receive
“tag-along” rights


Consideration #9: Labor and
employment law
● The concept of “at-will” employment

● The concept of discrimination

● If you have an executive, you will want an
employment contract to avoid disputes over:
– compensation issues
– termination issues
– non-competition issues

● Beware of 401(k) and other benefit issues upon any
merger or acquisition in the United States


Consideration #10: U.S. Stock as
incentives?
● Usually part of an “equity incentive plan” to encourage employees
to work to maximize a company’s profits and share in the future
of a company

● Companies with U.S. stock option plans must comply with federal
tax and securities rules

● Establishing a French stock option plan in the United States
renders the incentive package more complicated to manage due
to the requisite French vs. U.S. law analysis, but it avoids the
inclusion of minority shareholders in a company’s subsidiary

● A U.S. stock option plan with a U.S. subsidiary is feasible and
potential workarounds exist such as providing phantom rights (or
profit-only interest in an LLC formed as an indirect subsidiary)

● Beware of valuation issues and consider shareholders agreements


Consideration #11: Immigration

● “Do it yourself” is not usually sufficient

● Strongly advise hiring an immigration lawyer

● Understand the differences among visas: L1
(intracompany transferee), H1B (professional worker)
and E2 (foreign investor)

● Discuss future plans with an attorney to avoid pitfalls
(e.g., E2 is easy to obtain but conversion to a green
card is difficult)


Consideration #12: Acquisitions in
the United States

● Managing your external growth in the United States…

● Or using acquisitions as a first step to penetrate the U.S.
market (if you do so, think of creating a U.S. subsidiary as
an SPV for the U.S. acquisition).

● One example – in 2008, Ipsen, a specialty pharmaceutical
company based out of Paris, acquired three U.S. companies
for $450 million – Vernalis Inc., Tercica, Inc. and Octagen
Corp. in an effort to build what it called a “fully-fledged
North American presence.”


Consideration #12: M&A –
asset vs. stock acquisitions
● Stock Acquisition (or joint venture) – will you acquire all or a control
portion of the equity of target?
– Watch for “change of control” issues
– If buying at premium you do not get to reduce taxes

● Asset Acquisition:
– Select the specific assets and liabilities to purchase or not purchase
– “Cherry-pick” employees (no statutory obligation to transfer employees)

● Asset and Stock Acquisitions:
– “Representations and Warranties” of seller are key
– Escrow accounts are frequently used
– Negotiate any earn-out payments
– Do not forget non-compete/non-solicit provisions

● Tax Trick: The 338(h)(10) election under federal and many state laws to treat
the stock deal as an asset deal
– Step-up your tax basis and amortize your goodwill over 15 years


General Trends in the
Pharmaceutical Industry
● Researchers expect to see:
– Significant growth in licensing
– Increase in the number of mergers and consolidations

● Currently, the global pharmaceutical market is dominated
by the United States
– U.S. accounted for 29% of global pharmaceutical sales in 2009
– U.S. projected to remain the single largest pharmaceutical
market, with sales of $320-330 billion in 2011

● Growth in the generic drug industry as more patents begin
to expire – In the U.S., generic drug sales are projected to
reach $129.3 billion by 2014


About Schiff Hardin LLP

Schiff Hardin LLP was founded in 1864. Since then we have
expanded with offices in Chicago and Lake Forest, Illinois; New York,
New York; Washington, D.C.; Atlanta, Georgia; San Francisco,
California; Boston, Massachusetts; Ann Arbor, Michigan; and
Charlotte, North Carolina. As a general practice firm with local,
regional, national, and international clients, Schiff Hardin has
significant experience in most areas of the law.


About Our New York Office

In 1991, Schiff Hardin established an office in New York in response
to a client's request and needs. Since that time, we have developed
significant capabilities in complex general litigation, reinsurance,
intellectual property, corporate and securities, real estate
transactions and finance, estate planning and administration, labor
and employment, international transactions, restructuring and
bankruptcy, and an increasing array of other key legal services. Our
New York office also serves as a focal point for our representation of
overseas clients.


Philippe C.M. Manteau
Partner – Avocat aux Barreaux de New York et de Paris

Philippe Manteau’s practice focuses on growth and mid-cap
companies, governmental organizations, and individuals in
the United States and abroad in the areas of corporate and
business law, as well as technology transactions. The core of
his practice consists of assisting French and other
international private companies in their U.S. investments and
pmanteau@schiffhardin.com cross-border transactions and litigation.

U.S. Direct: (212) 745-0856 Mr. Manteau’s training and international experience allow him
to identify, analyze, and resolve issues arising in cross-border
U.S. Cell: (646) 251-9204
transactions for European and U.S. clients.

PRACTICE AREAS
Mr. Manteau is fluent in English, French and German.
Corporate and Securities
International
● Fordham University School of Law (LL.M., Corporate
Intellectual Property
Law and Finance, cum laude, 2006)
Litigation
● Université Paris X - Nanterre (D.E.S.S., European
Business Law, with honors, 1996)
BAR ADMISSIONS
● Université Paris X - Nanterre (J.D., French, German
New York
and European Business Law, 1995)
Paris, France
● Institut d'Études Politiques de Paris (M.B.A.,
Economics and Finance Section, 1993)


This publication has been prepared for general information of clients
and friends of the firm. It is not intended to provide legal advice with
respect to any specific matter. Under rules applicable to the
professional conduct of attorneys in various jurisdictions, it may be
considered advertising material.

Tax Matters: The advice contained in this memorandum is not
intended or written to be used, and cannot be used by a taxpayer, for
the purpose of avoiding penalties that may be imposed on the
taxpayer under law.

© 2012 Schiff Hardin LLP. All rights reserved.

doing business in the us (pharma-medical device)

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Destacado

Destacado (6)

Similar a doing business in the us (pharma-medical device)

Similar a doing business in the us (pharma-medical device) (20)

Más de Jean-Xtophe Ordonneau

Más de Jean-Xtophe Ordonneau (20)

Último

Último (20)

doing business in the us (pharma-medical device)