The concept paper on the new guidance for importers of medicinal products, or “Annex 21” to the EU Good Manufacturing Practice (GMP), was released in May 2015. Expected to be adopted by the European Commission in Q4 2018, Annex 21 aims to standardize the requirements for the importation of medicinal products across the European Economic Area (EEA). The EU regulatory system already designates importers of medicinal products as manufacturers and requires them to hold a manufacturing and import authorization (MIA). However, regulators and the industry are operating in an environment of uncertainty, with increased complexity of supply chains, the presence of counterfeit drugs in the EU market and a high amount of GMP non-compliance statements by third-party manufacturers.
Under Annex 21, the concept of “importer of medicinal products” is likely to change, as physical and financial flows will have to match. This implies that pharmaceutical companies will need an EEA entity as importer of record. More licenses might be needed if various sites are involved. In anticipation of the release, early adopters have already modelled how to address the impact of Annex 21 on their business models.
As if Annex 21 does not already create enough complexity and uncertainty in itself, the OECD is gradually releasing guiding papers on how to address base erosion and profit shifting (BEPS). Some of the measures proposed – such as the revision of the permanent establishment concept or questions around how taxation should follow value creation – are causing tension with what is targeted by Annex 21. In short, the conditions are in place for a perfect storm.
We’re already in Q4 2018. Has it become business as usual?
One would hope so but the reality is that we’re in the eye of the storm. But probably not for long. A troubled relationship with the authorities, exceptionally high costs of re-implementation due to time constraints and, in some cases, the need to rethink the commercial distribution network has forced some pharmaceutical companies to accept a cut in profitability.
The same pharmaceutical companies affected by Annex 21 will also run into tax audits challenging not only the current set up but also the conversion itself. Those who executed on the design and implementation of a new supporting business model in a structured and aligned manner may look forward to upcoming audits with confidence. However, those who considered emerging changes in the regulatory and in the tax landscape in isolation may want to consider assessing the robustness of their model to avoid long and costly audits and litigation.
So, Annex 21, a paper exercise?
Absolutely not! Some pharmaceutical companies have successfully aligned the supply chain by “merely” changing the financial and legal title flows. Others have had to rethink how to import medicinal products and ship them to patients. Not seldom do we experience cases where regulatory requirements were setting the terms and conditions for commercial models and interactions with third-party logistic providers (including batch release but also packaging and labelling). In cases involving controlled substances, the room for maneuver was even smaller. Nevertheless, many of the leading pharmaceutical companies were able to secure supply to patients and facilitate proper financial reporting. Success depends on the support of “solution-oriented” authorities and careful alignment of work streams such as supply chain, legal, tax, accounting, regulatory but also commercial and IT.
What is next?
Audits are to follow. Proper management of audits entails documentation, communication and coherence. Many of the individual Member States will have their audit specifics. We should also not forget that many of the pharmaceutical companies have their country-specific characteristics, too. Bringing to life what has been put on paper is not a one-time exercise. In this respect, quality inspections are not much different to tax audits.
Doing nothing is not an option. Pharmaceutical companies need to continue to assess the emerging changes to the concept paper Annex 21. Are you already prepared?
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