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Pharmaceutical Industry Overview - Accounting Principles, Industry Operating Procedures, and Government Regulatory Requirements


"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

4. Accounting Principles

The industry uses standard U.S. accounting GAAP. Foreign Controlled Companies may use Organization of Economic Community Development guidelines for their transfer pricing policies. They may also follow International Accounting Standards (IAS) which is becoming more popular.

5.  Industry Operating Procedures

Drug companies rely on the strength of their patents whether on the chemical or process involved in bringing the product to the market.  Clinical trial information that is generated on the safety and effectiveness of a product is also submitted to approving authorities in foreign countries to insure statistically valid results are observed.

Marketing is another area of strength for many companies.  Detail men, as they are called in the business, visit doctors to detail the benefits of the company’s products and encourage the medical staff to prescribe them to their patients.  Companies tend to specialize in specific therapeutic areas such as central nervous system (cns), gastrointestinal, etc. making it easier to level their sales force often striking deals to co-market products for other companies. 

6.  Government Regulatory Requirements

A.     Federal Requirements

The Food and Drug Administration makes or breaks this industry’s potential for sales.  The FDA must give approval to market the product in the U.S.

The U.S.’ rigorous approval process is respected around the world and in many countries approval by the FDA is enough to approve a product in a foreign country.

A drug company, in order to get marketing approval for a drug, must show it is safe for human consumption through animal and human testing.  A drug company must also prove it is effective for the illness it intends to alleviate.  The FDA does not mandate a particular methodology.  The scientific community has established a four Phase method for establishing the effectiveness.

Phase I – Animal and toxicity studies.

Phase II – Investigational New Drug Application is filed to test in small numbers of humans and allow the transportation of unapproved drugs.  These trails usually involve a few hundred patients.  These trials will also involve determining the most effective dosage for the Phase III trial.

Phase III – Large scale trials are conducted involving thousands of patients to prove the product is effective against a specific disease.  Human trial subjects must provide consent to be part of the experimental group.  The results must be statistically valid and include the determination of side effects that may exist in the general population.  During this phase pharmacoeconomic data is generated.  Pharmacoeconomic data involves the costs involved in using the product versus standard current treatment, competitor products or non-treatment options.  The information is used for insurance and government reimbursement purposes.  If insurance plans or government reimbursement is available, the drug will suffer in the market place.

Phase IV – Post approval marketing testing.  These types of trials are conducted to generate marketing data that will be used in the competitive market.  The trials usually involve one or more  competitor products.

The Environmental Protection Agency (EPA) is involved in insuring the disposal of unused products and waste material as biological hazardous waste.

B.    State Requirements - None

C.    Local Requirements - None

Chapter 3 | Table of Contents, | Chapter 7

Page Last Reviewed or Updated: 15-Apr-2015