"Pharmaceutical companies using CSOs must renew contracts

with companies that have completed registration"

The KPBMA hosts the 'Ethical Management Workshop for the Second Half of 2024'

Attorney Park Jong-cheol says, "Excessive compensation·guaranteed margins are in violation of the law"

"With the implementation of the CSO reporting system, oversight responsibilities ↑…diversifying transactions may be necessary"

Based on the Contract Sales Organization (CSO) reporting system implemented last month, pharmaceutical companies must be aware of potential legal risks.

 

Pharmaceutical companies using CSOs must sign contracts with companies that have completed registration and renew existing contracts to align with the timeline following reporting.

 

The Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA) hosted the

On November 22, the Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA) hosted the 'Ethical Management Workshop for the Second Half of 2024' at the Mondrian Seoul Itaewon.

 

During the workshop, Attorney Park Jong-cheol from the law firm Hwawoo advised as such.

 

Over 300 compliance officers (CP) from the pharmaceutical industry, in-person and online, have participated.

 

Park presented strategies for minimizing legal risks for pharmaceutical companies using CSOs.

 

According to him, these companies face various legal risks, including violations related to illegal rebates, labor laws, fair trade laws, and pharmaceutical laws.

 

To minimize risks, Park emphasized the necessity of continuous management and oversight of CSOs and maintaining detailed records as evidence.

 

Park also advised that promotional activities conducted by in-house sales teams and those belonging to CSOs should not overlap.

 

To minimize risks, He said, "Companies must select larger, established firms capable of independently fulfilling contractual obligations." Park gave examples of practices that could constitute violations of the Fair Trade Act.

 

He explained that these include cases where a CSO provides excessively high or low compensation to healthcare professionals, guarantees fixed margins, or continues transactions despite repeated unfair practices.

 

Park also emphasized the importance of compliance with the CSO Reporting System, which has been effective since October 19.

 

Under this system, pharmaceutical companies are permitted to contract only with CSO companies that have completed registration with local governments.

 

Any existing contracts must be renewed following the registration date to ensure compliance.

 

Contracts must include the following details: ▲The name of the pharmaceutical promotion agent ▲The name of the representative, the location of the business office, registration number, and business registration number ▲Details of the promotional activities entrusted, including the names of the delegated pharmaceutical products and the commission rates for each item ▲Duration of the contract ▲Obligations and compliance requirements for the entrusted party, including training provisions.

 

The mandatory retention period for these contracts is five years, and they must be submitted to the MOHW upon request.

 

Park advised, "If an existing contracted company fails to register, the termination of the contract should be considered." He added, "During subcontracting, oversight may become less stringent.

 

It is advisable to diversify CSO transactions and standardize transaction terms to better align with industry standards." "Increasingly rigorous tax audits on pharmaceutical companies…must prepare by conducting diagnostics assessment" Suseok Ryu, an accountant at KPMG Samjong Accounting, explained ways to respond to the high-intensity investigation of the pharmaceutical industry by the National Tax Service.

 

Ryu said the pharmaceutical and biotech industries have faced increasingly rigorous tax audits.

 

These audits are characterized by extended or suspended timelines and comprehensive requests for access to companies’ IT systems.

 

Both planned and unplanned investigations have become more frequent, while the intensity of regular audits has also increased.

 

The documents requested during these audits cover a wide range, including internal company policies on sales incentives, discounts, and employee welfare expenses, domestic and international bank account details showing cash and cash-equivalent assets, expenditure reports and corporate card usage records, gift card purchase records, distributor lists and related contracts, employee travel logs, and VAT non-deductible purchase details and data backups.

 

In particular, the National Tax Service primarily focuses on illegal rebates, activities related to the Fair Competition Code, such as product briefings·academic conferences, costs incurred from returns or complaints by healthcare providers, sales discounts, sales incentives, and business travel expenses.

 

"For pharmaceutical companies, tax audits heavily focus on identifying a history of rebates.

 

Therefore, they must identify potential issues and prepare accordingly through tax diagnostics assessments," Ryu emphasized.

 

"As tax investigators are authorized to review financial transactions without the taxpayer's consent, it is crucial to meticulously prepare supporting documentation to account for cash flow and ensure compliance." "For expenses related to academic conference funds, it is essential to secure documentation that can prove the advertising effects, such as booth operation photos and journal advertisement placement records." Ryu added, "Returns of unsellable pharmaceutical inventory should also be justified with detailed evidence, as they could otherwise be misconstrued as entertainment expenses." "Expenditure report will be disclosed at the end of year…must be thoroughly cross-checked for omission·errors" Han-Cheol Kang, an attorney at Kim & Chang's Corporate Compliance, introduced strategies to respond to potential disputes before releasing the first expenditure report at the end of the year.

 

According to the revised Pharmaceutical Affairs Act, the government will disclose expenditure reports submitted by pharmaceutical companies and CSOs for the first time at the end of the year.

 

Kang stressed the importance of accurate data entry.

 

"Even in the U.S., which implemented its disclosure system after years of preparation, 31% of transaction records contained errors," Kang said.

 

"The American Medical Association's findings attributed these issues to a lack of review opportunities and data inaccuracies." "Once expenditure reports are disclosed, they are difficult to amend and may lead to violations of the Pharmaceutical Affairs Act.

 

Therefore, it is crucial to ensure no omissions or errors, such as incorrect attendee records," Kang stated.

 

"It is also essential to cross-check the provided amounts and categories with supporting documentation to ensure accuracy." "Companies must prepare for potential disputes by securing evidence, establishing systems to verify facts, and implementing error-checking procedures," Kang emphasized.

 

"The persistent practices of providing unjust economic benefits, practical challenges due to excessive regulations, and negative public opinion present significant risk factors both within and outside the industry," Jae-Kook Lee, Senior Vice President of KPBMA, said.

 

"The pharmaceutical and biotech industries must not forget their responsibility to meet the era's·public's expectations.

 

In collaboration with its 297 member companies, the KPBMA will continue to make every effort to promote ethical management practices."