Published November 21, 2012

What Role Does Fair Market Value Play Within the Life Sciences Industry?

As the government continues to increase scrutiny of physician compensation in the life sciences, many life sciences companies are seeking independent, third-party fair market valuations of their physician compensation arrangements, clinical trial arrangements, and intellectual property licensing agreements.  Like hospitals and health systems, the life sciences industry, which includes pharmaceutical, medical device, medical supplies/equipment, and biotechnology industries, is subject to ensuring transactions with physicians are consistent with fair market value.

Valuing Physician Consultant Arrangements, Clinical Trial Arrangements, and Intellectual Property

Physicians are often asked to participate as consultants in the development of life sciences products, such as drugs and medical devices, serve on advisory boards, and  speak on behalf of life sciences companies.  Since physicians are ultimately responsible for selecting these products, their compensation must be clearly defined and at fair market value in order to not influence the physician’s prescribing practice or choice of medical device. To appraise such transactions, third-party valuation experts may consider similar positions within the healthcare industry, including medical director arrangements, or contemplate comparisons to a non-healthcare setting, if appropriate, in order to ensure that the level of physician compensation is comparable to similar settings and is consistent with fair market value.

A second application for valuations in the life sciences industry surrounds research opportunities for physicians.  As researchers, physicians may receive funds from life sciences companies to conduct clinical trials as independent investigators.    Valuation of clinical trial arrangements between the life sciences company or sponsor and the physician or principal investigator (“PI”) must consider the PI’s responsibilities, including overall resources and accountability, time commitment, and study complexity for the conduct of the trial.

While not specific to arrangements with physicians, another area within the life sciences industry where appraisal services are warranted includes valuing intellectual property such as licensing agreements for patents, trademarks, and copyrights.  The process associated with the discovery and development of pharmaceuticals and medical devices is lengthy, costly, and fraught with risks that include the uncertainty of clinical testing and market acceptance.  Therefore, several factors should be considered in determining the fair market value associated with intellectual property, including royalty rates for similar products, scope of the license, and profitability of the product.  Appraisers often utilize the income approach for valuing intellectual property in which expected future royalties are discounted using a risk-adjusted rate of return.

If you would like more information regarding fair market value within the life sciences industry, please contact the experts listed below at PYA, (800) 270-9629.

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Learn more about Healthcare Consulting and Fair Market Value

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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