What happens to marketing authorisations (MAs) or sanitary registrations for pharmaceutical and medical devices may be one of the biggest questions to consider before, during and after a merger or acquisition of a legal entity active in the pharmaceutical or medical device industry (for further details please see "M&A, asset sales and spin-offs in pharmaceutical and medical device industries: what you need to know" and "M&A, asset sales and spin-offs in pharmaceutical and medical device industries – part two: marketing authorisations").
The Federal Commission for the Protection against Sanitary Risk (COFEPRIS) grants MAs to individuals or legal entities to permit them to carry out controlled activities or processes regarding a specific product, including its manufacturing, import, warehousing, distribution and sale.
Arguably, an MA should not be considered an asset or product subject to the general rules of ownership under Mexican law. Rather, it is an authorisation granted after COFEPRIS has:
- analysed the relevant product's characteristics; and
- determined that the product does not pose a health risk to the general public and may thus undergo any of the abovementioned processes.
To obtain an MA for a pharmaceutical or medical device, a considerable amount of information and documents specifically issued to or prepared by the requesting party must be submitted to COFEPRIS, including:
- the product dossier;
- the titleholder's authorisation to, among other things, import, manufacture and distribute the product;
- certificates evidencing the manufacturer's good manufacturing practices;
- certificates evidencing due compliance with the technical requirements of the manufacturing, warehousing and distribution premises; and
- patent licences, where applicable.
Once the requesting party has filed these documents and evidenced due compliance with all of the applicable requirements, COFEPRIS will issue the corresponding MA that will permit the party to carry out the abovementioned processes.
The application process is fairly standard; for administrative law purposes, it is no different to when an individual requests a driving licence and must file the necessary documents, evidence and information required by the transport authorities. Just as a licence cannot be freely transferred between individuals as it refers to a specific person, an MA cannot be transferred between individuals or legal entities, as it is closely linked to a product, regardless of ownership.
One of the first matters to arise during due diligence for an M&A transaction is the transfer of existing MAs. Transferring an MA arguably results in the need for a new approval for the product which is now in the hands of a different party. This party will have the burden of evidencing continuous compliance with the MA's formal requirements in order for it to remain valid.
Due to practical reasons and a number of unclear General Health Law provisions, the health authorities have used 'assignment', 'transfer', 'MA administrative amendments request' and similar terms that provide a specific procedure for the implementation of an MA linked to a product that was initially approved or granted on the request of a different party.
Likewise, an MA should not be considered an intangible asset on transfer between individuals or legal entities, since – as mentioned above – it is an authorisation permitting specific individuals or legal entities which have duly complied with certain requirements to carry out specific activities. This position is supported by the differences between MAs and authentic intangible assets, such as rights over software, copyrights, patents, trademarks and know-how, which are all developed and held by individuals or legal entities and are not subject to a government authorisation or compliance with specific requirements. The nature and characteristics of intangible assets for Mexican legal purposes are detailed in the Federal Copyright Law, the North American Free Trade Agreement and the Customs Law, among other statutes.
Further, the health authorities can suspend or cancel MAs at any time (including on a request for transfer) due to non-compliance with the corresponding requirements or perceived health risks, which further supports the argument that they are not intangible assets.
From a strict regulatory perspective, transferring an MA is clear-cut: regulations establish the requirements for such a transfer and, if they are complied with, the MA will pass to a second party. However, some tax issues can arise from the transfer or sale of an MA because this will trigger a taxable event if the MA is deemed to be an asset.
Thus, financial advisers typically:
- assign a value to an MA in light of its transfer to the acquiring party when constructing the purchase price allocation for the business or asset purchase agreement;
- consider the MA to be subject to the general rules applicable to assets;
- include the MA in the transfer pricing analysis as if it qualifies as a good;
- include the MA on the list of assets being transferred; and
- recategorise the MA as a product or asset when its real nature is that of a licence or authorisation, as described above.
This asset qualification could trigger numerous tax-related issues where the transfer arises from a merger or a stock, business or asset purchase, as assets are subject to tax rules for both the transferor and the transferee. For example:
- Value added tax will generally be triggered at a 16% rate upon the transfer, with the value assigned to the MA being the taxable basis.
- Where the transferor is the first holder of the MA, the MA will generally have no cost basis; therefore, the taxable income for the transferor will be the gross value assigned to the MA with no deduction.
- The transferor will generally have to issue a tax-compliant invoice to document the MA's transfer.
- A proper valuation study will need to be kept by both the transferor and the transferee to support a proper assessment of the income tax and value added tax effects; however, in practice, the valuation of these assets can be subjective, so there is a latent risk that the tax authority will take a different approach in the event of a tax audit.
- The transferee could consider the acquisition cost of the MA as the cost basis for subsequent transfers through the tax compliant invoice issued by the transferor and the valuation study with the complexities described in the above bullet.
- The appropriate depreciation rate in the hands of the transferee depends on the nature of the MA. If the MA qualifies as a tangible asset for tax purposes, it seems that no specific depreciation rate will apply.
If an MA qualifies as an intangible asset for tax purposes, it is questionable whether it would constitute a 'deferred expense', which is defined as "intangible assets represented by goods or rights that allow to reduce operation costs, improve quality or acceptance of a given product, use, enjoy or exploit a good, for a limited period of time".
This is because, as mentioned above, an MA is an authorisation granted by COFEPRIS to permit an individual or legal entity to carry out controlled activities or processes regarding specific pharmaceutical and medical devices.
Transferring an MA as an asset may be feasible and even practical from a regulatory perspective. However, the possible consequences of the tax treatment of such a transfer should be carefully analysed and evaluated.
Similarly, it is important to determine the manner in which such MAs will be registered for both accounting and tax purposes, as well as the documents and information upon which their existence, cost basis and nature will be supported in the event of a tax audit by the authorities.
Parties undertaking a merger or acquisition which involves the transfer of an MA are advised to undertake a comprehensive analysis beforehand, as bundling the MA with other actual assets (eg, stocks or trademarks) could trigger tax issues or exposure.
For further information on this topic please contact José Alberto Campos Vargas or Mariana Eguiarte at Sanchez-DeVanny Eseverri SC by telephone (+52 55 5029 8500) or email ([email protected] or [email protected]). The Sanchez-DeVanny Eseverri SC website can be accessed at www.sanchezdevanny.com.
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