Fair Market Value vs. Current Market Leverage

Full Article published here.

Fair Market Value (FMV) is a legal concept in the pharmaceutical industry that defines the appropriate amount to pay for services. It’s a critical component of compensation arrangements and a regulatory compliance issue. FMV reports help determine the value of bona fide service fees rendered during government price reporting and provide financial guardrails during wholesaler distribution service agreement negotiations. They are often referenced to justify certain fees the manufacturer cannot exceed. While no single formula is defined by law to guide the development of FMV calculations, should an entity be investigated for violating the False Claims Act or Anti-Kickback Statute, its FMV calculations will be highly scrutinized. Therefore, FMV calculations are typically created using analyses and feedback from internal compliance, outside legal counsel, and consultant firms and must be carefully documented with regular internal and external reviews.

Given the rigor and expense of developing FMV calculations and the sensitivity of pricing negotiations, they are treated as highly confidential information. Their existence is often shared with wholesalers in service fee negotiations to justify arguments for lower price points. Wholesalers frequently push back against FMV arguments during negotiations, insisting that these fees do not account for the full range of services they provide. They are keenly aware of their own costs and thus are motivated to maximize fees during manufacturer negotiations to achieve margins consistent with “like” brands.

Before these negotiations commence, each party must assess its Current Market Leverage (CML), which we are redefining from a financial debt risk metric to the degree of leverage each party believes it can exert. Pharma can use this as a valuable strategic effort to help align financial and operational expectations within the organization.