Fair Market Value Considerations in Industry Relationships

1. Fair Market Value Considerations in Industry Relationships Wendy C. Goldstein, J.D., M.P.H. Partner Epstein Becker & Green, P.C. • Tom Gregory, CPA, CFA • Partner • Ernst & Young LLP

2. Industry Relationships Relevant Legal Principles Recent Enforcement Activity Defining Fair Market Value (FMV) Incorporating FMV Approaches into Pharma Compliance Programs Presentation Overview

3. This presentation is intended to highlight key regulatory and financial considerations in structuring certain industry relationships. It is not intended to convey legal or accounting advice, nor is it intended to advocate any particular position. Each situation is unique and subject to individual facts and circumstances. The content is the responsibility of the individual speakers and does not represent any position of by their respective firms. Disclaimer

4. Direct Payments to Healthcare Professionals (fee for service relationships): Consulting arrangements Speaker training Speaker programs Advisory board participation Market research Medical education or CME events Researchers Industry Relationships

5. Payments to Customers (Direct and Indirect) Data purchase agreements Service agreements Indirect Payments to Healthcare Professionals or Customers (fee for service relationships): Affiliations Industry Relationships

6. Relevant Legal Principles • Legal principles govern the evaluation of the appropriateness of each payment to a health care professional or customer by a pharmaceutical manufacturer or biotechnology company • Appropriateness assessment begins with an evaluation of the intent of the arrangement • What is the payment intended for?

7. Relevant Legal Principles • OIG Compliance Program Guidance for Pharma (5/03) identifies certain relationships that “present a significant potential for abuse” • Key Considerations: • Is there a potential to interfere with clinical decision making? • Is there potential to interfere with the integrity of the formulary? • Is there potential to increase costs to the federal health care program (FHCP) beneficiaries or enrollees? • Is the arrangement a disguised discount that amounts to a circumvention scheme for government price reporting obligations? • Is there a potential for overutilization or inappropriate utilization? • Are there patient safety issues or quality issues?

8. Relevant Legal Principles • It is a felony under the Federal Anti-Kickback Statute to knowingly and willfully: • Solicit, receive, offer, pay • Any remuneration (kickbacks, bribes or rebates) • Directly or indirectly • Overtly or covertly • In cash or in kind • In return for: • Referring an individual to a person for the furnishing or arranging for the furnishing of an item/service; or • Purchasing, leasing, ordering or arranging for or recommending purchasing, leasing or ordering any good, facility, service or item • For which a FHCP may pay

9. Relevant Legal Principles • Violators may be subject to the following penalties: • $25,000 for each offense • Prison for up to 5 years • Exclusion from the Medicare, Medicaid and/or other Federal or State health care programs • Civil monetary penalties calculated as $50,000 per act in addition to damages of up to three times the amount offered, paid, solicited or received • Violations also may create liability under the False Claims Act (government price reporting)

10. Relevant Legal Principles • Exceptions to the Federal Anti-Kickback Statute adopted by Congress • Congress also gave DHHS authority to issue “Safe Harbor” regulations to describe financial arrangements that fall outside of the Anti-Kickback Statute • Compliance with a Safe Harbor should offer protection against protection under the Anti-Kickback Statute • Conduct outside the Safe Harbors must be analyzed based on the “facts and circumstances” to determine whether a violation exists

11. Relevant Legal Principles • Personal Services and Management Contracts Safe Harbor • Written and signed agreement for not less than one year that states the services and if the services are not intended to be full-time services, the agreement must specify the intervals precisely (including the charge for the intervals). The services must not involve the counseling or promotion of a business arrangement or other activity violative of any law.

12. Relevant Legal Principles • Personal Services and Management Contracts Safe Harbor (continued) • The Services contracted for do not exceed those that are “reasonably necessary” to accomplish the “commercially reasonable business purpose” of the service.

13. Relevant Legal Principles • Personal Services and Management Contracts Safe Harbor (continued) • Aggregate payment amount must set in advance, consistent with “fair market value in arms length transactions” and isn’t determined in a manner that takes into account the volume or value of any referrals or business paid for by FHCPs.

14. Relevant Legal Principles • What is a “commercially reasonable business purpose?” • Originally the safe harbor required “legitimate business purpose” • Replaced in November 1999 Safe Harbors • Preamble to the November 1999 Safe Harbors explains the change as follows: “the test is not whether a business arrangement is lawful, but whether it serves a commercially reasonable business purpose, that is, whether the space and equipment leased or purchased have intrinsic commercial value to the lessee or purchaser.” (emphasis added)

15. Relevant Legal Principles • What is a “commercially reasonable business purpose?” (continued) • The OIG further states in the November 1999 Safe Harbors : “By ‘commercially reasonable business purpose,’ we mean that the purpose must be reasonably calculated to further the business of the lessee or purchaser. In other words, the rental or the purchase must be of space, equipment, or services that the lessee or purchaser needs, intends to utilize, and does utilize in furtherance of its commercially reasonable business objectives.” (emphasis added)

16. Relevant Legal Principles • What is Fair Market Value? • The Personal Services Safe Harbor does not include a definition of FMV. • In July 1991, OIG addressed FMV in connection with comments regarding the restrictive definition of FMV in the space rental Safe Harbor: “The safe harbor provision for space rental does not contemplate a single figure for fair market value. Rather, it contemplates a rental fee falling within a reasonable commercial range, but not taking into account any value attached by either party based upon the property's proximity or convenience to referral sources.”

17. Relevant Legal Principles • What is Fair Market Value?(continued) • Pursuant to SSA, the OIG is not authorized to opine on FMV for the purposes of Advisory Opinion requests.

18. Regulatory agencies and Congressional scrutiny of payments to health care professionals: Department of Justice Centers for Medicare & Medicaid Services DHHS Office of the Inspector General MEDICs State Attorneys General Congressional Subcommittees Enforcement Activities

19. Significance of FMV in connection with state law reporting requirements relating to sales and marketing of pharma products Vermont, Maine, Minnesota … State laws require the reporting of payments to health care professionals with certain exceptions including, in some instances, “bona fide payments” that do not exceed “fair market value” Certifications Relevant Legal Principles

20. AdvancePCS Civil Settlement (9/8/05: $137 million, 5 year CIA) APCS allegedly, among other things, solicited and received kickbacks from pharmaceutical manufacturers in the form of Excessive administrative fees Over-priced services agreements as a reward for favorable formulary treatment Enforcement Activities

21. AdvancePCS Civil Settlement (continued) U.S. alleges that during 1/1/96 – 1/27/04, APCS allegedly solicited and/or received payments of (a) administrative fees from pharmaceutical manufacturers for services related to the negotiation and administration of rebate contracts with those manufacturers, and (b) fees for products and services agreements from pharmaceutical manufacturers for the provision by APCS to those manufacturers of pharmacy medical data, outcomes research studies, RXReview and Clinical Consulting services, and ReSolve 500 programming and data. Enforcement Activities

22. AdvancePCS Civil Settlement (continued) U.S. alleges that to the extent that the payments exceeded the FMV of the above-referenced services and products provided, APCS knowingly solicited and/or received the payments as an improper reward or favorable treatment in connection with FHCPs and FEHBP contracts…. …to the extent the payments exceeded FMV false claims were made and were caused to be made to OPM and HHS. Enforcement Activities

23. Schering-Plough Settlement (E.D. Pa. Investigation) Criminal & Civil Settlement (~$350 million) Guilty Plea to federal Anti-Kickback Statute Criminal plea by Schering Sales Corporation (a subsidiary of Schering-Plough corp.) Schering Sales excluded from federal health care programs for at least 5 years Company products continue to be available for federal healthcare program reimbursement through Schering-Plough Corp. 5 year CIA Schering II (D. MA) – 8/06 (permanent exclusion) and an addendum to the CIA Enforcement Activities

24. U.S. Attorney charges included generally: Kickbacks to managed care customers in exchange for preferred formulary treatment for Claritin False claims in connection with failure to accurately report Medicaid Best Price Enforcement Activities - Schering

25. Among other things, Schering Sales Corp.: “25. Schering Sales disguised the true nature of the 2% fee by calling it a data fee,” to give the appearance that the payment was fair-market-value transaction rather than a hidden inducement to the HMO to keep Claritin on its formulary. As part of its concealment of the true nature of the 2% fee, Schering Sales agreed to pay the HMO a data fee to purchase an annual cumulative report from the HMO. In fact, the annual report was to contain the identical information that the HMO was already providing to Schering Sales in its quarterly reports, as required under its pre-existing reimbursement contracts. The annual report provided no additional value.” The report that contained the “exact same information the HMO already provided” in previous quarters was received and never used. Schering Sales had difficulty accessing the report Enforcement Activities - Schering

26. Statutory Authority (e.g., IRS 2002 Business Valuation Guidelines) Case Law / Legal Precedent (e.g., IRS Revenue Ruling 59-60) Accepted Industry Practice (e.g., USPAP) Relevant Professional Guidance (e.g., AICPA, ASA, NACVA, IBA) Defining Fair Market Value

27. A widely accepted definition: “The price at which a good or service would trade hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of all relevant facts as of the date of valuation.” Defining Fair Market Value

28. Cost Sum of Individual Asset Values (“Asset Approach”) Cost Build-Up Market Comparable Transactions Public Company Valuation Multiples Income Discounted Cash Flow Capitalization of Earnings Defining Fair Market Value - Approaches

29. Measures FMV by estimating the current cost of replacing the utility of an asset or service. Cost Build-Up Approach: Actual or expected costs incurred are analyzed and an assumed profit level is added to derive an indication of FMV. Defining Fair Market Value – Cost Approach

30. Measures FMV by examining transactions in the marketplace involving the sale of assets or services similar to those of the subject. Requires the existence of reasonably similar transactions with active trading markets and publicly available data. Defining Fair Market Value – Market Approach

31. Measures FMV based on the present value of future economic benefits associated with the asset or service. Cash flows are adjusted to a present value based on the market’s required rate of return and the risk associated with the cash flows. Defining Fair Market Value – Income Approach

32. Approaches observed in the industry Cost build-up approach Market Approach Custom industry surveys Proprietary survey data Additional analyses? Other approaches for corroboration Sensitivity analysis Professional judgment Incorporating FMV Approaches into Pharma Compliance Programs

33. Articulate policy regarding the triggers for appropriate payment of services in all relevant compliance program documents Code of Conduct Relevant SOPs Identify relevant relationships (sales, marketing, contracting, clinical research, supply chain …) Definitions are key Example – “Customer” (direct, indirect, past, current, future, nexus to FHCPs, prescribers, recommenders …) Establish and adopt a process required for assessing the appropriateness of payments in advance of the approval of such payments Different payments may have different additional requirements Incorporating FMV Approaches into Pharma Compliance Programs

34. At a minimum, a formal review process should be required for each potential relationship prior to the approval and funding: Bona fide, reasonably necessary and commercially reasonable business practice Arms-length FMV Satisfaction of personal services safe harbor requirements Written rationales should be submitted by funding requestor “No one size fits all” regarding a review process structure Consider carefully the committee composition Cross-functional teams? Incorporating FMV Approaches into Pharma Compliance Programs

35. Criteria for assessing “bona fide” services What is the business purpose? What is the supporting documentation? Are the services required by the company? What are the qualifications of the service provider? Are the services duplicative with other purchase agreements or functionalities within the organization? What is the output of the services provided (e.g., how will the organization use the services to create a work product?) Incorporating FMV Approaches into Pharma Compliance Programs

36. Criteria for assessing payment is FMV in advance Detailed budget broken down by components Independent third party? Industry surveys? No guarantee fee arrangements Review of payment schedules Criteria for assessing arms-length Independence of the relationship – no quid pro quo May require “firewalls” Incorporating FMV Approaches into Pharma Compliance Programs

37. Satisfy Safe Harbor Requirements in Written Agreements Address payments terms – detailed invoices, deliverables prior to payment Cancellation policy Return of funds Term of the relationship Specific services and intervals Incorporating FMV Approaches into Pharma Compliance Programs

38. Maintain thorough, transparent business records in accordance with relevant company/department document retention schedule Establish and/or ensure that a process exists for collecting and archiving Documentation submitted for approval by requestor Review committee documents, including FMV documentation Detailed, verifiable record of all services performed including any/all deliverables Address document retention and/or return of data provisions in all service provider contracts Incorporating FMV Approaches into Pharma Compliance Programs

39. Monitor the process Audit the process, including documentation Incorporating FMV Approaches into Pharma Compliance Programs

40. QUESTIONS ? Wendy C. Goldstein Epstein Becker & Green, P.C. 250 Park Avenue New York, New York 10177 (212) 351-3737 wgoldstein@ebglaw.com Tom Gregory Ernst & Young LLP 600 Peachtree Street Atlanta, Georgia 30308 (404) 817-5205 Tom.gregory@ey.com