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Capitol Checkup: US FDA in 'unfamiliar territory;' Azar, PhRMA court Congress


IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

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Capitol Checkup: US FDA in 'unfamiliar territory;' Azar, PhRMA court Congress

The U.S. Food and Drug Administration, which is now in its fifth week of a partial government shutdown, has entered "unfamiliar territory," Commissioner Scott Gottlieb said.

Gottlieb said the shutdown — triggered by the dispute over whether American taxpayers should fund President Donald Trump's border wall — was a "watershed moment in the life" of the FDA, which already has struggled to fill open positions and could be losing nearly half of its senior leadership to retirement over the next two years.

Nearly 300 nonprofit groups told the White House last week the shutdown was putting the nation's health and safety at risk.

The FDA is continuing to provide only scant details on the types of employees affected by the government shutdown after Gottlieb acknowledged last week he would need to send more workers home.

The agency initially said 7,053 employees were being furloughed on Dec. 22, 2018, at the start of the partial shutdown, which has lasted 32 days and is the longest shuttering of federal agencies in U.S. history.

On Jan. 18, the FDA said about 31% of its 17,400 employees had been furloughed, meaning they were placed in a temporary non-duty, unpaid status.

About 9% of FDA employees fell into the "excepted" category — staffers who are funded through annual appropriations and excluded from being furloughed. Another 37% of the agency's workers were considered "exempt" and were on the job with pay — funds that were carried over and user fees the FDA collects from the industries it regulates, including drugmakers, food producers and tobacco manufacturers.

The other 23% of the FDA's employees were placed on "partially exempt-excepted-furloughed" status, meaning they were only paid for the exempt hours they had worked.

Earlier last week, Gottlieb said he was bringing back about 400 food and drug inspectors, though in an unpaid capacity.

On Jan. 20, the commissioner wrote on Twitter that 450 of the 750 employees in the FDA's Office of Import and Enforcement Operations were working, while 200 food investigators out of 550 from the Office of Human and Animal Food Operations were on the job.

"We've had to make hard decisions in the last month to preserve key functions to maintain our critical consumer protection role," Gottlieb said at a Jan. 18 public hearing focused on eliminating youth use of electronic cigarettes and other tobacco products.

The commissioner said he expected to make more such decisions as user fees run out.

Last week, Gottlieb said the FDA had four to five weeks' worth of user fees left from brand-name drugmakers to help with the agency's review work on new medicine applications.

The FDA is not allowed to collect user fees during the shutdown.

HHS chief meets with lawmakers on drug prices

Meanwhile, Health and Human Services Secretary Alex Azar met last week on Capitol Hill with a number of Republican and Democratic lawmakers about ways to lower Americans' prescription drug costs.

Among the members of Congress Azar chatted with was Rep. Elijah Cummings, D-Md., chairman of the House Oversight and Reform Committee, who opened an investigation into a dozen biopharmaceutical makers last week on their pricing practices and plans to hold a hearing on the matter on Jan. 29.

Cummings is also among a group of Democrats who teamed up with Sen. Bernie Sanders, I-Vt., earlier this month to introduce legislation aimed at cutting Americans' drug costs.

On Jan. 16, Azar also sat down with the Republican members of the Senate Finance Committee, which is now led by Sen. Chuck Grassley, R-Iowa, who said last week that reducing healthcare costs was a top priority for the panel.

Grassley has partnered with Democrats on a number of bills, including one that would allow Americans to import medicines from Canada — a measure he is promoting with Sen. Amy Klobuchar, D-Minn.

In a Jan. 21 research note, Cowen & Co. analyst Rick Weissenstein said public remarks by Azar on Jan. 15 about "safe importation of drugs from abroad" was more about setting the stage for an expected report from an FDA-convened task force on limited use of the practice than backing any legislation from Grassley or other lawmakers.

Azar had met separately on Jan. 15 with Senate Majority Whip John Cornyn, R-Texas, a member of the Finance Committee, who wrote on Twitter a few days later that the panel would lead an investigation into high prescription drug prices and "questionable" rebates to pharmacy benefit managers "that don't directly benefit consumers."

Cornyn noted that drugmakers have increased prices by threefold or more for some older medicines that are in short supply.

The HHS chief also hooked up last week with Sen. Lamar Alexander, R-Tenn., chairman of the Senate Health, Education, Labor and Pensions Committee.

Azar and Alexander have frequently been in touch on healthcare-related matters, including costs and drug pricing, the Tennessee lawmaker's spokeswoman told S&P Global Market Intelligence.

The secretary also has a meeting set for Jan. 29 with House Ways and Means Committee Chair Richard Neal, D-Mass.

Azar is expected to soon also meet with Democratic members of the Senate Finance Committee, though no date has been confirmed.

PhRMA building allies against international pricing

The HHS chief has been trying to muster support on Capitol Hill on several proposals in the administration's blueprint to lower drug prices, unveiled in May 2018.

One idea Azar has been hoping to get lawmakers' buy-in on is a plan to test an international price indexing model for expensive injectable drugs covered by the government's Medicare Part B program for seniors and disabled Americans.

The Pharmaceutical Research and Manufacturers of America, or PhRMA, the lobbying group representing brand-name drugmakers, however, is fiercely opposed to the idea, saying it would be importing foreign price controls.

Lori Reilly, executive vice president for policy, research and membership at PhRMA, told reporters at a Jan. 16 briefing the international pricing model would impose "a lot of changes, upending our current system" and could drive investment away from biopharmaceutical research and development if investors think the future reimbursement environment will be unstable.

Reilly also argued the HHS pricing model conflicts with U.S. laws, particularly those that govern America's patent system.

PhRMA President and CEO Stephen Ubl said it was premature to consider litigation to stop HHS from testing its model, noting right now it was only put forward in an advance notice of proposed rulemaking — a bureaucratic mechanism used to gauge public opinion ahead of making a formal proposal — and has a "very long deliberative process ahead."

Right now, the drug trade group is concentrating on building a coalition of lawmakers to oppose the idea, Ubl said, though he would not identify any Democrats or Republicans that were willing to act as PhRMA's champion in the fight.

If the five-year test on the model goes forward, it would be carried out by the Center for Medicare and Medicaid Innovation, or CMMI.

On Jan. 18, the Centers for Medicare and Medicaid Services said it also wanted to use CMMI to test a program aimed at incentivizing prescription drug plans offered under Medicare Part D to carry more of the financial risk in the so-called catastrophic phase of the program. When beneficiaries hit that threshold, they are only responsible to pay 5% of their costs, while insurers pay 15% and the government picks up the remaining 80%.

Under CMS' proposed model, the participating Part D plans would take on greater risk for spending in the catastrophic phase of Part D in exchange for sharing in the savings if they stay below the target, though they will be accountable for losses if they exceed it.

Dem panel leaders target drug prices

In the meantime, some of the new Democratic committee leaders in the House have vowed to take on the drug industry, including Ways and Means Health Subcommittee Chairman Lloyd Doggett of Texas.

"We can finally break new ground on healthcare solutions for American families — not just those tailor-made for big pharma or corporate interests," Doggett said in a Jan. 17 statement.

Rep. Anna Eshoo, head of the House Energy and Commerce Health Subcommittee, whose California district is home to a number of biotechnology companies, also said reducing the prices of prescription drugs was on her agenda. The Democrat, however, has long been known to side with drugmakers, particularly when it came to ensuring biologic therapies had 12 years of exclusivity protection against lower-cost competitors, known as biosimilars.

Last week, Eshoo walked back some earlier comments she made about holding a number of hearings on various proposals to make U.S. healthcare a single-payer system — Medicare for All — saying that perhaps her panel would hold joint hearings on the matter with other committees.

As the new chair of the Energy and Commerce Oversight Subcommittee, Rep. Diana DeGette, D-Colo., said she also planned to make healthcare costs a key focus, particularly taking aim at insulin prices.

Committee chairs seek CDC Ebola briefing

DeGette and Eshoo also joined Energy and Commerce Chairman Frank Pallone, D-N.J., last week in calling on the Centers for Disease Control and Prevention to brief the lawmakers on the U.S. response to the Ebola outbreak in the Democratic Republic of Congo, which has now infected nearly 700 people, killing 422.

The outbreak is now the second deadliest in the virus' known history.

There are currently a number of drugs being tested to treat Ebola in the DRC. An experimental vaccine from Merck & Co. Inc. is also being used in the region.

An American health worker who was under observation since Dec. 29, 2018, at Nebraska Medical Center in Omaha for potential exposure to Ebola in the DRC was released on Jan. 12 after never developing the disease.

Unlike the 2013-2016 Ebola epidemic that spread through West Africa when the U.S. took a visible and significant role in the global response, the Trump administration has been mostly mum on the DRC outbreak.

Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

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