The Essentials for Pharmaceutical andMedical Device Companies Desiring to        Enter the U.S. Market     The Structural ...
The Background• A businessperson in the pharmaceutical/medical device industry  wants to enter the U.S. market• Overall co...
Consideration #1: Working withthe FDAThe Food and Drug Administration (FDA) is the U.S. agency responsible forprotecting a...
Consideration #1: FDA and MedicalDevices: the 510(k) Process510(k): An entity that wants to market a device for human use ...
Consideration #1: FDA and MedicalDevices: Premarket Approval PMA)• PMA: An application submitted to the FDA to request app...
Consideration #1: FDA andPharmaceuticalsNew Drug Application (NDA):    ●    Process by which drug companies formally propo...
Consideration #1: Health InsurancePortability and Accountability Act of1996 (“HIPAA”)All “Covered Entities” are subject to...
Consideration #1: CorporateOfficer Liability for FDA Violations● In 2011, the FDA issued prosecution guidelines that state...
Consideration #2: Products Liability●   If a person is injured by a defective product that is unreasonably    dangerous or...
How do most companies enter theUnited States?Entry into the United States—3 typical ways:     – Direct sales into the Unit...
Direct sales into the United StatesMany non-U.S. companies take this approach bylicensing the product to a U.S. company. T...
Consideration #3: Distinguishingbetween distributors and agentsDistributor – think “buy-sell”:     ● Distributor obtains t...
Consideration #4: Protectingintellectual property (IP)● Common law rights to trademarks exist● Additional layer of protect...
From the Oregonian, July 9, 2009:“Chinese startup based in Eugene wants to sellinexpensive solar panels in U.S.A Chinese s...
From the Portland BusinessJournal, October 8, 2009:“Centron Solar changes name to Grape SolarCentron Solar once said it wa...
Consideration #5: Key provisionsin commercial contracts●    Keep it U.S. law governed – EU protections not helpful if ther...
Consideration #6: Having a“representative office” may beproblematic● Beware that an agent or branch in the United States, ...
Establishing a subsidiary in theUnited StatesAfter initiating direct sales into the United States…consider setting-up a fo...
Consideration #7: Do you reallyneed an LLC?● What is an LLC? Google will tell you.● What Google will not tell you: one gen...
Consideration #8: Try acorporation first● Easy to form● Easy to maintain● Capitalization easy to manage:     – Remember to...
Consideration #9: Labor andemployment law● The concept of “at-will” employment● The concept of discrimination● If you have...
Consideration #10: U.S. Stock asincentives?● Usually part of an “equity incentive plan” to encourage employees  to work to...
Consideration #11: Immigration● “Do it yourself” is not usually sufficient● Strongly advise hiring an immigration lawyer● ...
Consideration #12: Acquisitions inthe United States● Managing your external growth in the United States…● Or using acquisi...
Consideration #12: M&A –asset vs. stock acquisitions●    Stock Acquisition (or joint venture) – will you acquire all or a ...
General Trends in thePharmaceutical Industry● Researchers expect to see:     – Significant growth in licensing     – Incre...
About Schiff Hardin LLPSchiff Hardin LLP was founded in 1864. Since then we haveexpanded with offices in Chicago and Lake ...
About Our New York OfficeIn 1991, Schiff Hardin established an office in New York in responseto a clients request and need...
Philippe C.M. Manteau                                                         Partner – Avocat aux Barreaux de New York et...
This publication has been prepared for general information of clientsand friends of the firm. It is not intended to provid...
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doing business in the us (pharma-medical device)

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doing business in the us (pharma-medical device)

  1. 1. The Essentials for Pharmaceutical andMedical 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.
  2. 2. 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 Considerations2 © 2012 Schiff Hardin LLP. All rights reserved.
  3. 3. Consideration #1: Working withthe FDAThe Food and Drug Administration (FDA) is the U.S. agency responsible forprotecting and promoting public health through the regulation and supervisionof, among other things, pharmaceuticals, medical devices, dietarysupplements and cosmeticsFDA 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 devicesFDA Regulation of Pharmaceuticals ● New Drug Application (NDA) ● Abbreviated New Drug Application (ANDA) ● Companies need to adhere to drug labeling and manufacturing standards3 © 2012 Schiff Hardin LLP. All rights reserved.
  4. 4. Consideration #1: FDA and MedicalDevices: the 510(k) Process510(k): An entity that wants to market a device for human use in the United States mustsubmit a 510(k) notification to the FDA at least 90 days before marketing, unless suchentity is exempt or goes through the more onerous PMA process (described on the nextpage). 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 criticshave 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.4 © 2012 Schiff Hardin LLP. All rights reserved.
  5. 5. Consideration #1: FDA and MedicalDevices: 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)5 © 2012 Schiff Hardin LLP. All rights reserved.
  6. 6. Consideration #1: FDA andPharmaceuticalsNew 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 drugs 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 drugs quality are adequate to preserve the drugs identity, strength, quality, and purityAbbreviated New Drug Application (ANDA) - FDA review andultimate approval of a generic drug product6 © 2012 Schiff Hardin LLP. All rights reserved.
  7. 7. Consideration #1: Health InsurancePortability and Accountability Act of1996 (“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 EntityPursuant to HIPAA’s Privacy Rule, a Covered Entity must protect the followinghealth 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.7 © 2012 Schiff Hardin LLP. All rights reserved.
  8. 8. Consideration #1: CorporateOfficer 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 program8 © 2012 Schiff Hardin LLP. All rights reserved.
  9. 9. 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 exposure9 © 2012 Schiff Hardin LLP. All rights reserved.
  10. 10. How do most companies enter theUnited 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 States10 © 2012 Schiff Hardin LLP. All rights reserved.
  11. 11. Direct sales into the United StatesMany non-U.S. companies take this approach bylicensing the product to a U.S. company. Thebenefit of this approach is that the non-U.S.company can take advantage of the U.S. company’sexisting market knowledge. The downside is thatreturns will be limited as revenue will be shared.11 © 2012 Schiff Hardin LLP. All rights reserved.
  12. 12. Consideration #3: Distinguishingbetween distributors and agentsDistributor – 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)12 © 2012 Schiff Hardin LLP. All rights reserved.
  13. 13. Consideration #4: Protectingintellectual 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 States13 © 2012 Schiff Hardin LLP. All rights reserved.
  14. 14. From the Oregonian, July 9, 2009:“Chinese startup based in Eugene wants to sellinexpensive solar panels in U.S.A Chinese startup vying for a piece of the U.S. solarmarket has landed in Eugene, hoping to become anational player in the state’s growing photovoltaicindustry. . . Centron Solar, whose Web site wentlive Thursday morning, is moving fast to sell anddistribute bargain-priced solar panels made inChina to the U.S. market, expected to be theworld’s next big solar player. . .”14 © 2012 Schiff Hardin LLP. All rights reserved.
  15. 15. From the Portland BusinessJournal, October 8, 2009:“Centron Solar changes name to Grape SolarCentron Solar once said it wants to be the Wal-Mart of solarenergy. That may still be true. But now the company istrying to sound a little more like Apple Computers. . . Despitethe fruit-themed logic, combined with the notion that grapesgrow with the help of solar energy, the real cause of the namechange is rooted in a lawsuit filed Sept. 28 in the U.S. DistrictCourt in Arizona. CentroSolar Group AG, a $440 millionGerman solar products manufacturer, filed the trademarkinfringement lawsuit claiming Centron Solar was intentionallytrying to confuse customers.”15 © 2012 Schiff Hardin LLP. All rights reserved.
  16. 16. Consideration #5: Key provisionsin 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 retained16 © 2012 Schiff Hardin LLP. All rights reserved.
  17. 17. Consideration #6: Having a“representative office” may beproblematic● 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 subsidiary17 © 2012 Schiff Hardin LLP. All rights reserved.
  18. 18. Establishing a subsidiary in theUnited StatesAfter initiating direct sales into the United States…consider setting-up a foothold there.18 © 2012 Schiff Hardin LLP. All rights reserved.
  19. 19. Consideration #7: Do you reallyneed 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. partners19 © 2012 Schiff Hardin LLP. All rights reserved.
  20. 20. Consideration #8: Try acorporation 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” rights20 © 2012 Schiff Hardin LLP. All rights reserved.
  21. 21. Consideration #9: Labor andemployment 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 States21 © 2012 Schiff Hardin LLP. All rights reserved.
  22. 22. Consideration #10: U.S. Stock asincentives?● 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 agreements22 © 2012 Schiff Hardin LLP. All rights reserved.
  23. 23. 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)23 © 2012 Schiff Hardin LLP. All rights reserved.
  24. 24. Consideration #12: Acquisitions inthe 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.”24 © 2012 Schiff Hardin LLP. All rights reserved.
  25. 25. 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 years25 © 2012 Schiff Hardin LLP. All rights reserved.
  26. 26. General Trends in thePharmaceutical 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 201426 © 2012 Schiff Hardin LLP. All rights reserved.
  27. 27. About Schiff Hardin LLPSchiff Hardin LLP was founded in 1864. Since then we haveexpanded 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; andCharlotte, North Carolina. As a general practice firm with local,regional, national, and international clients, Schiff Hardin hassignificant experience in most areas of the law.27 © 2012 Schiff Hardin LLP. All rights reserved.
  28. 28. About Our New York OfficeIn 1991, Schiff Hardin established an office in New York in responseto a clients request and needs. Since that time, we have developedsignificant capabilities in complex general litigation, reinsurance,intellectual property, corporate and securities, real estatetransactions and finance, estate planning and administration, laborand employment, international transactions, restructuring andbankruptcy, and an increasing array of other key legal services. OurNew York office also serves as a focal point for our representation ofoverseas clients.28 © 2012 Schiff Hardin LLP. All rights reserved.
  29. 29. 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 andpmanteau@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-borderU.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 SecuritiesInternational ● Fordham University School of Law (LL.M., CorporateIntellectual 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, GermanNew York and European Business Law, 1995)Paris, France ● Institut dÉtudes Politiques de Paris (M.B.A., Economics and Finance Section, 1993)29 © 2012 Schiff Hardin LLP. All rights reserved.
  30. 30. This publication has been prepared for general information of clientsand friends of the firm. It is not intended to provide legal advice withrespect to any specific matter. Under rules applicable to theprofessional conduct of attorneys in various jurisdictions, it may beconsidered advertising material.Tax Matters: The advice contained in this memorandum is notintended or written to be used, and cannot be used by a taxpayer, forthe purpose of avoiding penalties that may be imposed on thetaxpayer under law. © 2012 Schiff Hardin LLP. All rights reserved.

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