Rx Marketplace

quarterly
Finance and reporting trends in the pharmaceutical and life sciences industry

December 2018
Issue 20

In this issue of Rx Marketplace Quarterly, we provide an update on initial public

offering and venture capital funding. We discuss key reminders on tax reform with
the SAB 118 measurement period coming to an end. We also provide insight into
recent SEC comment letter trends and examine the impact of new guidance from
the FASB which clarifies the interaction between collaborative arrangements and
In this issue the new revenue standard.

In the market 1 The US healthcare industry, including the PLS sector, continues to be top of mind
for both parties as they pursue their regulatory agendas. Our spotlight section
Regulatory update 2 focuses on how the results of the 2018 midterm elections could impact PLS
companies. I would also like to highlight PwC’s Health Research Institute’s
Accounting and financial 3
recently released annual report: ​Top health industry issues of 2019 - The New
reporting
Health Economy comes of age​, which details the issues we expect to shape the US
Spotlight 4 healthcare industry in 2019.

Contact information 5 I hope you find this publication of interest and welcome your thoughts on how
these issues affect your organization. If you’d like to have a deeper conversation on
Contributors 5 this or any of our other PwC publications, please contact me or your local PwC
partner. You can find this and other publications on our industry website at
www.pwc.com​.

Best regards,

Laura Robinette
US Pharmaceutical & Life Sciences Assurance Leader
In the market
Initial public offerings
The PLS sector continued its run of strong IPO volume and
value during Q3 2018.
PLS IPOs:
Q2 2018 Q3 2018
Volume 24
Value $2.5 billion $3.3 billion
For the sixth consecutive quarter, the PLS sector, led by
biotechnology companies, exceeded all other sectors in
IPO volume with 20 IPOs raising a total $3.3 billion.
Additionally, returns on Q3 2018 PLS IPOs through
9/28/18 lead all sectors at 61% on average based on the
closing price as of that date compared to the IPO price.
Thought leadership:
● PwC's Capital Markets homepage
● PwC's Q3 2018 US Capital Markets Watch
● Roadmap for an IPO: A guide to going public
● Considering an IPO? An insight into the costs
post-JOBS Ac​t
Venture capital funding and mergers
and acquisitions
While the PLS sector continues to be attractive to
investors, both venture funding and M&A dollars
decreased compared to the prior quarter. Even though
M&A volume increased in Q3 2018, a lack of very large
individual megadeals led to the lowest overall deal value
since Q4 2016. Despite the significant interest in getting
deals done, high valuations have led to fewer transactions.
We expect the desire to enter into transactions will help
loosen some of the pent up demand, but it will likely be in
a disciplined manner. We also expect PLS companies will
continue to reassess their portfolios and divest non-core
assets which will be sought after by Private Equity buyers.
PLS Venture Funding and M&A:
Q2 2018 Q3 2018
Venture Funding Volume 153
Venture Funding Value $4.1 billion $3.8 billion
M&A Volume 61
M&A Value $119.1 billion* $22.6 billion
* ​Note Q2 2018 value includes Takeda’s $81.7 billion
announced acquisition of Shire.
PwC​ |​ ​Rx Marketplace quarterly
Thought leadership:
● Healthcare MoneyTree Report - Q3 2018
● Global Pharma & Life Sciences Deals Insights:
Q3 2018
20
Tax reform considerations as the SAB 118
measurement period comes to an end
The measurement period afforded by SAB 118 related to
accounting for the impacts of US tax reform is complete
when a company’s accounting is complete, but in no
circumstances extends beyond one year from the
enactment date of December 22, 2017. This means that all
companies must complete their accounting for the impacts
of tax reform. A review of public company disclosures
reveals that most companies have continued to apply the
guidance in SAB 118 with very few companies disclosing
that they have finalized provisional amounts.
Additionally, the issuance of Treasury and IRS guidance
intended to clarify certain provisions or the application of
the new tax law is expected to continue. Generally, as
future developments further refine the application of law
affecting a tax position, the effects are recorded in the
financial statements in the period the law is enacted or
such guidance is issued. This means that until future
clarification or corrections are issued, a company’s
financial statements would reflect the tax law as it exists
today. Transparent disclosures can be a useful tool to help
users understand the impact of tax reform on a company’s
financial statements.
Another area of focus as year-end approaches should be
valuation allowance assessments. Areas of significant
change as a result of US tax reform that may impact a
company’s valuation allowance assessment include NOL
deduction, limitations on the deductibility of interest, and
the foreign tax credit regime.
135
As 2018 comes to a close, companies will need to finalize
provisional estimates, make certain policy elections related
74 to accounting for GILTI, and consider the impact of
legislative and regulatory updates. Moreover, expectations
for future global legislative developments will require
companies to remain focused on the changing landscape.
1
Regulatory update
the digital platform at​ SEC comment letter trends for
SEC comment letter trends Health
Health Industries​. For comment letter observations
Industries specific to ASC 606 refer to​ Stay informed: SEC comment
The SEC Division of Corporation Finance’s filing review letter observations on the new revenue standard​.
process is a key function utilized by the SEC staff to SAB 74 considerations
monitor the critical accounting and disclosure decisions
applied by registrants. Our analysis of SEC comment As the implementation dates of new accounting standards
letters identifies the frequency of topical areas addressed approach, in particular the new leasing standard, the SEC
staff has used public forums to remind issuers of their
by the SEC staff for Health Industries clients and how their
responsibility to disclose the impact of the final FASB
focus changed over time. The table below depicts the top standard not yet adopted. The SEC staff expect a registrant
ten areas of SEC staff comments. to consider additional qualitative financial statement
disclosures when the quantitative effect of adopting a new
standard is not known or reasonably estimable. The staff
Trend expects disclosures to include a description of:
compared to
● the effect of the accounting policies that the
Rank* Topic prior period
registrant expects to apply, if determined, and a
1 Form compliance and comparison with the current accounting policies;
exhibits and
● its progress in implementing the new standards
2 Revenue recognition and the significant implementation matters it still
needs to address.
3 MD&A Through September 2018 filings, we have seen an increase
in companies indicating that the adoption of the new
leasing standard will have a material impact, though most
4 Fair value measurement
registrants isolate their disclosure to the balance sheet.
There has also been an increase in companies
5 Research and development communicating use of the new transition method.
Companies should continue to consider the adequacy of
their SAB 74 disclosures in year-end filings in light of the
6 Non-GAAP measures
SEC staff’s expectations.
Reminder on change to SEC definition of
7 Liabilities and accrual a smaller reporting company
estimates
As a reminder, on June 28, 2018, the SEC adopted
8 Segment reporting amendments to expand the definition of a “smaller
reporting company” (SRC). Registrants that meet one of
the following two criteria qualify as an SRC:
9 Goodwill and other
intangibles ● Public float test: less than $250 million of public
float as of the last business day of their most
10 Disclosure controls & recently completed second fiscal quarter, or
ICFR ● Revenue test: no public float or public float less
than $700 million, and annual revenues of less
*For period October 1, 2017 to September 30, 2018 than $100 million in the most recently completed
fiscal year.
Within Health Industries there continues to be a focus by
SRCs qualify for certain reduced disclosure requirements
the SEC staff on compliance considerations, such as including, among others, only presenting two years of
submission of material agreements, specifically when financial statements and corresponding MD&A
compared to other industries. As expected, disclosures disclosures. To read more about the impact of this change,
related to the adoption of ASC 606 have been a recent area refer to PwC’s ​In brief: SEC changes smaller reporting
of focus. For discussion of comment letter trends refer to company definition and some XBRL requirements​.

PwC​ |​ ​Rx Marketplace quarterly 2

Accounting and
financial reporting
FASB clarifies guidance on collaborative Annual reporting considerations
arrangements While not intended to be an exhaustive list, the table below
provides a listing of topics relevant to 2018 year-end
The FASB issued Accounting Standard Update 2018-18 financial reporting for public companies. The table
(“ASU 2018-18”) that clarifies the interaction between the includes those topics that continue to present challenges
guidance for collaborative arrangements and the new for preparers and provides links to helpful resources.
revenue standard. ASU 2018-18 discusses how elements of
a collaborative arrangement could qualify as a transaction Topic Resources
with a customer and be included within the scope of ASC
606 ​Revenue from contracts with customers (​ “ASC 606”). Accounting for the ● PwC accounting guide: ​Income
ASU 2018-18 requires the application of existing guidance impacts of tax taxes
to determine the units of account in a collaborative reform (​ASU ● CFO Direct: ​Income tax
arrangement for purposes of identifying transactions with 2018-02, 2018-05, accounting and tax reform
customers. For units of account in a collaboration and the 2017
arrangement that represent transactions with a customer, US Tax Cuts and
companies will need to apply the guidance in ASC 606. For Jobs Act)​
units of account in a collaboration arrangement that do
not represent transactions with a customer, and are New revenue ● PwC accounting guide:
outside the scope of ASC 606, companies can apply standard (​ASC Revenue from contracts with
elements of ASC 606, other relevant guidance by analogy, 606​) customers
or apply a reasonable accounting policy if there is no ● In depth: ​New revenue
appropriate analogy. guidance - Implementation in
the pharmaceutical and life
While the amendments may improve consistency in sciences sector
identifying parts of a collaborative arrangement subject to ● CFO Direct: ​Revenue
the revenue standard, we generally expect diversity in recognition issues
practice will continue for these arrangements.
Statement of cash ● Chapter 6 of the PwC
The amendments are effective for public business entities flows - accounting guide, ​Financial
for fiscal years beginning after December 15, 2019 (one presentation of statement presentation
year later for other entities). Companies can early adopt certain ● In depth: ​Sales of trade
the new guidance, but no earlier than their adoption of transactions (​ASU receivables get new statement
ASC 606. 2016-15​) of cash flow treatment

For more details on key considerations, including unit of New definition of ● PwC accounting guide,
account assessment, presentation, transition guidance and a business (​ASU Business combinations and
disclosures, refer to ​PwC’s In Depth: FASB Clarifies 2017-01) noncontrolling interests
Guidance on Collaborative Arrangements. ● PLS Alert: ​The new definition
of a business promises to
impact PLS companies

Financial ● PwC accounting guide, ​Loans

instruments: and investments
Recognition and
measurement
(​ASU 2016-01​)

PwC​ |​ ​Rx Marketplace quarterly 3

Spotlight
Election 2018: What the election means for the
pharmaceutical and life sciences industry
The Democrats’ midterm wins likely will slow, but not
stop, the Republicans’ pursuit of their healthcare agenda,
which has focused on recasting the role of the federal
government in the US health industry. Pharmaceutical and
life sciences companies can expect the FDA’s review
process to become more efficient and that the agency will
likely continue to seek ways to work more closely with
industry.
The current landscape
● The White House is supporting disclosure of drug
prices in direct-to consumer advertising.
● While CMS is still not directly negotiating drug
prices in the Medicare program, they are
introducing tools that provide more negotiating
leverage for private plans.
● In the days before the election, the administration
proposed a pilot program that would tie provider
reimbursements for administering some Medicare
Part B drugs to prices paid for those products
overseas.
● Under President Trump, the FDA has released
fewer significant regulations than under President
Obama during the same time period, yet the
agency has been prolific in issuing guidance
documents and plans.
● During the first two years of the Trump
administration, congressional Republicans and
members of the administration have supported
FDA Commissioner Dr. Scott Gottlieb’s leadership
of the FDA.
● The administration also has introduced new policy
initiatives. The FDA is streamlining reviews of
medical products and involving industry in the
approvals and clearance process earlier and more
often.
● FDA approvals of new and generic drugs are at, or
near, record levels, reflecting the agency’s efforts
to address drug prices by improving competition,
according to an analysis by PwC’s Health Research
Institute (HRI).
PwC​ |​ ​Rx Marketplace quarterly
The changes
● Pharmaceutical manufacturers could find
themselves more at risk for scrutiny as attempts to
control rising healthcare costs focus increasingly
on drug prices.
● Democratic control of Congress likely will have a
modest impact on the FDA, as it enjoys broad
bipartisan support on many issues. The most
recent two legislative vehicles for passage of FDA
reform, the FDA Reauthorization Act of 2017 and
the 21st Century Cures Act of 2016, received votes
from lawmakers of both parties.
● Over the next two years, healthcare companies will
see a higher premium placed on transparency,
which will extend beyond prices for goods and
services to corralling new coverage practices.
Impact analysis
● Legislation will continue to address limiting
pharmacy benefit manager rebates and increasing
consumer awareness of alternatives.
● Interest in biosimilars could grow as regulations
that promote interchangeability and faster
approvals are enacted, bringing more products to
market.
● Increased attention will be paid to regulations of
opioid prescribing and delivery.
● Delay or repeal of the medical device tax has
bipartisan support, but remains unassured.
● New user fee agreements aim to increase
transparency and reduce complexity.
Where to read more
For more information on how the midterm election will
impact the healthcare industry, please read PwC Health
Research Institute's report, ​Healthcare after the 2018
midterm election: As control shifts, certainty settles in.
4
Contact information Contributors
For a deeper discussion on items included in Benjamin Comer
this edition of ​Rx Marketplace Quarterly​, Scott Doelger
please contact: Alexander Gaffney
Laura Robinette Phillip Galbreath
US Pharmaceutical and Life Sciences Chris Hudson
Assurance Leader Kathy Michael
1-919-791-4100 Benjamin Proce
laura.robinette@pwc.com Holly Reeves
Brett Cohen
National Professional Services Group Partner
1-973-236-7201
brett.cohen@pwc.com
Mark Barsanti
US Pharmaceutical and Life Sciences
Technical Liaison Partner
1-617-530-6374
mark.s.barsanti@pwc.com
Jeroen van Paassen
National Professional Services Group Partner
1-973-236-5746
jeroen.van.paassen@pwc.com

PwC​ |​ ​Rx Marketplace quarterly 5