A sustainable operating model for Life Science companies, the buy-sell model could replace commissionaire structures which not only no longer offer strong operational benefits but also create potential compliance risk. Converting to a new structure isn’t easy, but best practices pave the way.
As international regulations continue to evolve and tighten, companies respond to the pressure by adjusting their operating models. Commissionaire structures are a concern for Life Science companies and must be changed to adjust to regulatory demands. In this context, conversions to buy-sell structures could become an industry trend
The need to adapt
The highly restrictive environment and continuously evolving rules that are common to the Life Science industry create a need to adapt and reconsider the way business is done. A recent example are the changes to the EU Falsified Medicines Directives requiring an alignment of invoicing and legal flows and possibly disrupting how medicine is commercialized through commissionaire models.
Fueled by the OECD BEPS Project, commissionaire distribution models, whereby a distributor acts in its own name but for the economic benefit of the product owner (i.e. the principal) – have been subject to criticism and are no longer considered to be a sustainable option.
The simultaneous pressure from both the regulatory and the tax sides leads companies to review their operating model and take anticipatory measures. There are multiple ways to address the regulatory pressure and each option must be viewed from a different angle. These considerations go beyond tax and legal concerns as operational continuity remains the highest priority. Ease of implementation, financial impact, disruptions on customer interactions become the decisive criteria.
Industry experience shows that conversion of the commissionaires into a buy-sell structure with limited risk distributors (LRDs) is a viable solution for the operating model redesign. Such a transition, however, requires careful consideration and planning.
Considerations beyond tax
Although initiated through tax and regulatory concerns, the conversion as such impacts many aspects of the business on a global scale. It requires early onboarding of multiple stakeholders to jointly address a multitude of questions that come up in relation to the future-state design and the transition itself:
- managing (new) working capital needs of the buy-sell distributors;
- deciding on conditions for intercompany financing given regional and even country-specific limitations;
- establishing inventory treatment going forward;
- changing processes behind free goods, returns and scrap materials; and
- reconsidering the intercompany remuneration strategy and its cornerstones.
In addition to solid technical analysis, a conversion requires a strong coordinating role to solicit a common understanding and cooperation between the finance, tax, IT, legal and supply chain teams. The best practice is to have a separate project management role to facilitate and manage the conversion processes. Capturing the decisions in a practical playbook – a manual for the business that details each aspect of the new operations and transition to the future-state – allows the business to ensure a consistent implementation.
The elements of conversion
Experience shows that a clear definition of the future path and operational design is only the first step on the winding road to the transition. Running a global business involves many moving pieces and a smooth and simultaneous change is often not feasible.
It is possible that the initial layout gets complicated, when the need for new processes or additional country-specific considerations reveal themselves. On the other hand, a conversion may become a good opportunity to reconsider the existing processes and enhance the current strategy as all relevant processes and business activities are being reassessed.
The complexity of the implementation of the new model will also depend on the approach to the transition itself. A “clean cut” might require more preparatory efforts, but decreases the level of complexity that would be expected in the “tie back” approach when two models are maintained.
A sustainable model for the future
A change is never easy, but can act as an accelerator for future growth and optimization. Commissionaire structures no longer provide for strong operational benefits and may create compliance challenges from a regulatory perspective. Conversion to a buy-sell structure may therefore be a potential solution to a sustainable setup for the future.