By Mario Prohasky, Senior Consultant, Polaris
As life sciences companies continue to expand their footprint in many emerging markets, they will have to grapple with the impact of external economic factors on the Fair Market Value (FMV) of the payments they make to physicians they engage with in those markets. More specifically, payment process controls limiting the impact of high inflation and significant exchange rate fluctuations will need to be integrated into their FMV policies.
Existing FMV rates quickly become outdated whenever there are significant macroeconomic changes, especially if they are based on local currency. Thus, life sciences companies should consider updating their rates once certain macroeconomic conditions are no longer applicable. For example, FMV rates should be updated whenever annual inflation exceeds 10% – 15% on an annual basis. A significant devaluation of a local currency of more than 20% should also trigger an FMV rates update. While the actual percentages can vary, it is important for companies to have the right process in place for initiating an FMV update once specific macroeconomic conditions are met.
In times of economic instability, companies should also be more cautious about relying predominantly on national government statistics for payment benchmarking as these can become more susceptible to political influences. Leveraging more objective international data sources such as those provided by the World Bank, IMF, OECD or other global sources can help to mitigate the reliance on national government data. Independent domestic data sources such as research organizations or non-profits can also provide valuable macroeconomic information. As an additional precautionary step, companies can consider creating a bundle of data sources for each macroeconomic parameter. Outliers can be removed from the bundle, thus further improving the quality of macroeconomic data upon which companies can base their FMV policy in emerging market countries. For example, data from national statistics agencies for annual inflation can be bundled with inflation data from international organizations such as the World Bank or IMF as well as with other global data sources such as Bloomberg.
The case of Argentina can serve as an instructive example of how to address these challenges. As Economist reported recently, real inflation in Argentina currently stands at 28%, almost a three-fold increase from 2009. The value of the Argentine peso has also plummeted with a 15% drop recorded in a single week at the end of January. What has exacerbated the situation even further is the fact that official statistics by the government may underestimate the extent of the problem. The Argentine peso has been trading at a 70% discount against the US dollar on the unofficial black market versus the official government exchange rate, according to The Economist.
A quick checklist for mitigating risk in these types of scenarios should include:
- Updating local FMV rates based on shifts in macroeconomic parameters
- Ensuring that FMV rates quoted and payments made are in a major currency such as USD/EUR
- Diversifying macroeconomic payment benchmark data sources away from official national government statistics to independent local sources or international organizations