on the gc grapevine - hungary - edition 3

In this issue:

“There is less pressure to impress and sell myself so I see it as a more down-to-earth profession.”

“Commonplace but more and more true to our days: only change is constant..”

“..where lawyers add value is not in giving the answers that everybody already knows, but giving the answer that nobody has thought about.”

“Due to the effect of the changes on their profitability [..] pharmaceutical companies may be forced to reconsider their investments in Hunga-ry.”

“It is not clear from the word-ing of the Medicinal Thrift Act whether any changes that occur after the notification would need to be reported to the Authority.”

“..it is clear that Hungary has probably the greatest variety of such measures, including the highest level of extra taxes imposed on pharmaceutical companies.”

Issue 3: Pharma

ISSUE 3 VOLUME 1

This Issue’s Grapevine Pick:

dr. Gergő Budai - Legal Director - Pf izer

OCT, 2011

In this issue:

DR. JUDIT MISKOLCI - LEGAL DIRECTOR - SANOFI-AVENTIS….5

DR. GERGŐ BUDAI - LEGAL DIRECTOR - PFIZER...…………8

Issue 3: Pharma

Letter s from the editor s

Volume 1

When we first launched the

GCG in May we could not

have imagined what lay

ahead. 3 editions, 3 sec-

tors, 9 General Counsels,

10 senior private practice,

countless reader submissions for the

“Private Practice Strip” and “(My) Word

On The Grapevine” sections, all brought

together by a simple idea - building a

strong GC community to share challeng-

es, solutions and best practices.

In retrospect, what makes us most proud

about this publication, is the fact that, in

reality, it is not our publication. Almost

all of the content, ideas, suggestions or

simple funny stories, belong to our read-

ers that were not shy in reaching out to

us and expressing their opinions and

comments .

With that in mind, we thank you all and

we cannot express enough what an honor

it has been to work with you. Your input

is what drives this publication forward at

the momentum it is going so keep those

emails coming.

We are working diligently on the skele-

ton of the next issue and next volume,

but we need your nominations to pick

the first Grapevine Pick for 2012. Write

to us by December 1st and let us know

who should be given this honor.

We are always happy to hear from our

readers so, please, feel free to write to us

at [email protected] or join the

dedicated group here for more details.

Radu Cotarcea Marketing Manager - Emerging Europe and Latin America Legalis

What’s the prognosis,

Dr.?

The pharmaceutical mar-

ket in Emerging Europe is

clearly facing a need for

realignment with pressing

issues of reduced health

care expenditure, govern-

mental cost reductions, product pricing,

generics and the list goes on and on.

How is Hungary’s Pharma industry

planning to endure the next 5, 10 years

and beyond? What are the major

influencing factors in Hungary at present

and what is everyone debating? Will

innovation suffer? But in such a competi-

tive industry with patents expiring on big

ticket drugs, the industry is in dire need

of the subsequent “smash hit(s)”. We are

hearing so much talk about the Széll

Kálmán plan but how is it actually affect-

ing the industry and ultimately the end

consumer? Everyone’s asking the same

question “what’s in store for Hungary’s

Pharma future?”. The GCG has invited

General Counsels of some of the most

prominent players of the pharmaceutical

industry to share their experiences,

adversities and feats in this challenging

environment. We’ve asked the tough

questions about generics, price competi-

tion, governmental policies and many

more pressing issues. The controversy

and zeal associated with many of the

topics we thrash out in this edition has

undoubtedly resulted in, we hope, a very

exciting and informative product not

only for us to work on, but foremost to

share with you. We hope you enjoy the

read!

Orsolya Endrefi Associate Director - Emerging Europe and Latin America Legalis

PAGE 2

ISSUE 3 VOLUME 1 OCT, 2011

DR. ESZTER TÖRÖK - GENERAL COUNSEL FOR HUNGARY AND CENTRAL-EASTERN EUROPE - TEVA GROUP…………………..3

THE SZÉLL KÁLMÁN PLAN PUTS INCREASING PRESSURE ON PHARMACEUTICAL COMPANIES - BY DR. ILDIKÓ CSÁK..………..12

EXTRA PHARMA SECTOR TAX-ES IN HUNGARY: AN EUROPEAN OVERVIEW AND INTERPRETATION ISSUES - BY DR. HELGA BÍRÓ & DR. GERGELY RISZTER……….14

PHARMACEUTICAL COMPANIES FACING NEW CHALLENGES DUE TO THE AMENDED REGULATION OF PROMOTIONAL ACTIVITIES - BY DR. DÓRA PETRÁNYI..……….13

http://www.linkedin.com/groups?about=&gid=3930144&trk=anet_ug_grppro

dr. Eszter Tőrők - Genera l Counsel for Hungar y and Central -Easter n Europe - Teva Group

PAGE 3


HL: I am sure our readers

would enjoy to learn a bit

about your background..

ET: I have been with Teva for

nearly 8 years. Before that, I

worked with CMS Cameron

McKenna in Budapest. Prior to

that, I worked with the same

firm in London as a trainee

solicitor. I am Hungarian by birth

but I lived in the UK for 11 years

and studied Law in Oxford. In

truth, I was not really planning

on coming back but I did in 1993

for the first time and then again

in 1997 when I quite simply got

stuck. I just loved Budapest and

while London is beautiful, it is

not a great city to live and work

in.

HL: What was it that made

you stay?

ET: As a very junior lawyer, the

work was much more interesting

and challenging here. It was

simple math since, at that stage in

London, I was one of the hun-

dreds of trainees and here I was

one of three. I also had a lot of

friends here who I had not seen

for years and part of my family

was living here as well. I think,

overall the quality of life was

better and I found living here a

lot more pleasurable.

HL: One of the myths relat-

ed to in-house lawyers is

that their workday ends at 5

pm. How accurate do you

find it?

ET: It is indeed much more

balanced. You have less push

from clients, although you have

your own internal ones. I think it

is a lot more flexible as people

care a bit less of how and where

you do your work. They do not

mind if you send them an e-mail

from home or on a Saturday

evening. They simply want

solutions. There is less pressure

to impress and sell myself so I see

it as a more down-to-earth pro-

fession. I simply work with my

colleagues towards a common

goal rather always need to

impress the client and to

convince them they are the best

there is and ever will be.

With that in mind, my advice to

lawyers would be, especially

when you work with a large law

firm, do not be afraid to look

around. There is another life. It

is pretty rare and pretty lucky to

find a company that has a good

reputation and great work expe-

rience but they are out there.

HL: What makes a good GC

in your view?

ET: First of all, I think it the case

with most lawyers that they start

as external counsels, most often

with an international firm, and

later in their career they move

in-house. When working in

private practice, especially with

large international firms, lawyers

need to specialize in one particu-

lar practice and, as a result, one

of the main challenges is to wid-

en your scope when you move in

-house.

I had the same challenge since, as

a GC, I had to have at least a

basic idea of most areas of the

law so I had to become more of a

generalist. Before joining Teva, I

was doing M&A, corporate and

commercial work so my experi-

ence with other areas was lim-

ited. On the other hand, that is

why I find my current role so

much more interesting, because

it is much more varied.

At the same time, you need skills

that go beyond the legal skills:.

You need good networking skills;

strong communication with all

levels of the company is also key;

you need to have basic feel of the

company and what it is doing;

and probably one of the most

important aspects, especially in a

large organization, you need to

be patient. For example, a lot of

my work today is internal

politics, liaising with different

people and reaching compromis-

es, which most of the time I do

not mind, actually quite enjoy,

but sometimes it can become a

bit frustrating.

HL: You mentioned commu-

nication. What would you

say are the differences

between how an external

counsel interacts with a

client and how you interact

with your colleagues?

ET: It really is a very different

type of a relationship than when

you are an external lawyer. In

that situation you have a

question, you write an answer

along the lines of ‘you can do

this, you cannot do this’ and at

the end you write a very large

disclaimer. As an in-house

lawyer, if you say ‘this cannot be

done’ your colleague will come

back the next day and ask ‘ok,

still, how can I do this?’. It is

much more of a practical

exercise, and you learn to avoid

the very first step and not go out

and say ‘this cannot be done’ but

try to come up with a compro-

mise of sorts.

HL: Having worked mainly

in M&A prior to Teva, how

did you manage the move

to the pharmaceutical in-

dustry?

ET: The way I became involved

with Teva was by sheer coinci-

“There is less pressure

to impress and sell

myself so I see it as a

more down-to-earth

profession.”

Th

e P

rivate

Prac

tice

Strip

Andrékó Kinstellar

Euromedic refinancing

Kinstellar advised Euromedic Group (a pan-European medical services provider) on the EUR 250 million refinancing of the group including related regulatory and employment law advice.

J o h n s o n & J o h n s o n competition law advice

Kinstellar advised and represented Johnson & Johnson (a global healthcare products manufacturer) in cartel proceedings at the Hungarian Competition Office regarding Vision Care products including related regulatory advice.

Gide Loyrette Nouel - D’Ornano Iroda

Balkan operations sale advice

Gide Loyrette Nouel, with the active participation of its Budapest office, is currently advising an important European distribution group on the potential sale of its operations in the Balkans, including Romania, Serbia, Bosnia and Kosovo.

Advising on the creation of regional joint venture

Gide Loyrette Nouel Budapest is currently advising a Swiss investment group on the creation of a regional joint venture structure operating the wholesale and the distribution of a clothing brand in Hungary, the Czech Republic and Slovakia.

PAGE 4


dence. When I applied for the

role, I was replying to a job ad-

vert that only said ‘multinational

pharmaceutical company’. I had

no idea it was Teva. Moreover,

after I learned it was Teva, I did

not even know much about the

company. At the time, 2004, the

Teva brand was not so widely

known. On the other hand, what

did help was the fact that at times

I can be a bit of a hypochondriac

so, even then, I already knew

quite a bit about various medical

conditions and pharmaceutical

products.

Even so, when you come into

this industry for the first time,

you need to interact with

doctors, researchers and business

people who have a very strong

knowledge of the industry, so it

is quite a challenge. I guess, in

the early stages, I learned how to

ask questions without revealing

that I was asking them because I

was not really familiar with the

topic. Of course, reading and

researching a lot was key in

bringing myself up to speed. At

the same time, I was blessed with

great colleagues who never made

me feel uncomfortable for asking

what they might have perceived

as silly questions.

HL: You have been in the

industry, and the company,

for quite a few years now.

What made you stay?

ET: I tend to stay unless I have a

very strong incentive to leave. I

like being familiar with what I

am doing and I like the environ-

ment, I like the people. You will

probably laugh but I like Monday

mornings... I like coming to

work. Most of the time I just

enjoy what I do.

HL: Your role as GC must be

even more challenging since

your responsibility is at a

regional level. Which of the

markets do you need to

spend most time on and,

from a regulatory point of

view, which one is the most

problematic?

ET: These days, it would be

Hungary. We have a lot of very

good lawyers and a large team

for example in the Czech Repub-

lic. If something really big comes

up then I would get involved but

generally I know I have a strong

team and I let them get on with

it.

From a regulatory point of view,

currently Hungary is the most

problematic and it is all the most

worrying to see that other Gov-

ernments such as those of the

Czech Republic and Poland have

taken a liking into what the Hun-

garian one has done and are

thinking of following their exam-

ple.

HL: In Hungary we have

seen a lot of changes with

the introduction of the Széll

Kálmán plan, which most

GCs are not happy about.

What part of the plan gives

you the most headaches?

ET: How long do you have? I

believe it to be extremely painful

and extremely damaging, espe-

cially in the long run. To offer

some background information,

Teva has 3 divisions in Hungary,

manufacturing, marketing and

wholesale. The plan introduced

very hefty taxes making it

basically impossible for pharma-

ceutical companies to promote

their products. This is based on

the notion that pharmaceutical

companies are greedy and ‘evil’.

The idea is that the new Govern-

ment measures should stop us

promoting our products so that

people buy less and, as a result,

cut some of the Government’s

spending. This rather simplistic

approach is based on the notion

that the reason people buy so

many pharmaceutical products is

not the health state of the popu-

lation but that we promote our

products too much. Unfortu-

nately whoever was responsible

for writing the changes in the

law was probably under quite

some pressure and did not have a

lot of time to draft the law

properly. The way the law is

phrased is very far from ideal.

When we got it for the first time

we spent hours reading it simply

because there were many sec-

tions that could be read in many

different ways. It is a very uncer-

tain piece of legislation. At the

same time, the fines and other

sanctions that can be imposed for

breaching the law have been

considerably increased. It is real-

ly a very tough balancing exer-

cise at the moment.

HL: Will this plan impact

your clients?

ET: Yes. There have also been

radical changes made to the

reimbursement system. Obvi-

ously, the aim was to reduce the

“I was blessed with

great colleagues who

never made me feel

uncomfortable for

asking what they might

have perceived as silly

questions.”


burden on the State health fund

as far as possible. To achieve

this, for certain products they

introduced a so-called blind

bidding system. Now, every 6

months each pharmaceutical

manufacturer puts in a bid for

the next few months based on

the price of their products.

This system has recently resulted

in extremely low prices being

offered in some cases, especially

by smaller companies. They won

the bid because of the low prices

and the problem I see in this is

that in a few months we might

see that these companies will not

have the capabilities to supply

the market while the largest

manufacturers have lost their

reimbursements on their prod-

ucts.

HL Usually, companies in

regulated industries compa-

nies are invited to provide

input for such changes. Was

this the case?

ET: There was some consulta-

tion but it was carried out under

the form of receiving a 300 page

draft on a Friday evening and

with a request to provide

comments by Monday morning.

This obviously impacted the

quality considerably. Of course,

the Government is under a lot of

pressure to cut costs but it is

very frustrating to be singled out

(along banks or other "bad peo-

ple").

HL: I noticed your patent

department is separate from

your legal department. Why

is that?

ET: Patents are actually very

important to us. Not necessarily

because of R&D - though the

patent group does support the

R&D department as well. It is

very important for our business

development side since every

time we want to launch a new

product, the first test that it has

to pass is whether the original

patent period of the originator

has expired.

This is a fairly complex exercise.

There are patents in many

countries and there is no unified

patent system between all of

them so the time when you can

launch a patent differs from

market to market and when you

look at your pipeline you need

their know-how.

It is a very different team in a lot

of respects. They are patent

attorneys who, opposed to law-

yers who are either pharmacists

or chemists by education and

then take a separate course to

become a patent attorney. There

are not that many cross-overs

either. Rarely, corporate lawyers

will work together with them

when [knock on wood] we

would have a litigation but other

than that we operate separately.

HL: When were you most

proud to have been work-

ing with Teva?

ET: Whenever I have been to

Israel, Teva’s home country. It is

a great feeling because there it is

seen as a national treasure. It is

THE flagship company. I am not

really sure what to compare it

with because if I compare it to

MAV it does not really cut it.

Whenever I enter Israel and I am

asked for the purpose of my visit

I tell them I am working for Teva

and the way they look at me is

indescribably uplifting.

HL: What would you rec-

ommend to any lawyer con-

sidering going in the phar-

maceutical industry?

ET: It helps if you have an inter-

est in the industry itself. You will

need an ability to adapt and to

research a lot but, passed that, it

will really be worth it.

dr. Judit Miskolci - Legal Director - Sanof i -Aventis

HL: In your view, what are

the top characteristics

needed to be a good GC?

JM: I consider the role of a GC

totally different than the role of

a free-lance lawyer or a lawyer

working at an independent law

firm, since being an in-house

lawyer means that you live

together with the company. A

GC has to be able to understand

the diverse needs of the busi-

ness, including logistics, R&D,

manufacturing, regulatory af-

fairs, HR, finance etc. One is

also expected to meet you inter-

nal requirements and give clear,

company-focused, relatively

short answers instead of citing

the complicated rules in a

“strange” legal language. The GC

frequently has to give answers

immediately in the meetings

when questions are raised and

immediately evaluate the possi-

ble risk.

Communication skills are very

important as well, because the in

-house counsel is part of an

organism and a GC not only

provides effective legal support,

but makes decisions day by day.

Therefore he/she needs to be

able to justify the solution

chosen.

HL: Why did you choose to

practice law in-house?

JM: Joining the Sanofi Group as

an in-house lawyer four years

ago was a once-in-a-lifetime

opportunity for me in my career

path and it was a radical change

as I had worked before as a

member of a law firm which

worked for TEVA industrial site.

I was also seeking new challeng-

es at that time. As the Legal

“Of course, the

Government is under a

lot of pressure to cut

costs but it is very

frustrating to be singled

out (along banks or

other "bad people").”

Th

e P

rivate

Prac

tice

Strip

Horváth & Partners DLA Piper

DLA Piper advises Albany M o l e c u l a r R e s e a r c h Institute

DLA Piper in Hungary is advising Albany Molecular Research Institute, Inc., a major US biotechnological company, on establishing its Hungarian presence by acquiring the sole ownership of a Hungarian biotechnological company including the assistance in its restructuring of the subsidiaries (spin off, merger, transformation) and daily operational issues. We also drafted internal patent regulation for the Hungarian subsidy of Albany Molecular Research, Inc. Continuous legal advice concerning filing and protecting of patents of the client.

Financing subsidiary of Hankook

DLA Piper in Hungary is advising a club of banks, led by Raiffeisen Bank Zrt., in relation to the English and Hungarian law aspects of the financing of the local subsidiary of Hankook Hungary, the Korean tire manufacturing giant.

Kajtár Takács Hegymegi-Barakonyi Baker & Mckenzie

Successful representation in competition proceedings

We successfully represented a major Italian-based pharmaceutical company in a proceeding before the Hungarian Competition Office initiated due to alleged unfair c om m er c i a l p r a c t i ce s v i a pharmaceutical advertisements to patients. We also regularly advise the same client on wide range of pharmaceutical regulatory matters (product promotion, wholesale and retail sale of medicines etc.).

PAGE 6


Director of the company I am

not an outsider but I have real

relationship with my colleagues

that I really enjoy.

HL: What aspect of the GC

role do you find most

challenging? Why? How do

you cope with it?

JM: Sanofi has four affiliates in

Hungary, pursuing very complex

activities, including R&D, manu-

facturing, wholesaling, distribu-

tion, promotion and clinical

trials, employing more than

2000 people altogether. The

legal department is responsible

for the legal support of all kinds

of activities. Taking everything

into account, the most significant

challenge for me is to provide

appropriate legal background for

each unit while harmonizing with

the corporate guidelines and

Hungarian regulation in every

field of the company.

Moreover, reacting quickly to

the fast and sometimes unex-

pected changes in the regulation

is essential in order to be able to

meet all the requirements of the

law. I have to be proactive with

regards to implementation of the

pharmaceutical and other rele-

vant regulation

It is also well-known that this

industry is heavily regulated in

every manner, and ethical

behaviour, compliance, and

transparency are of the utmost

importance to the Group. I’m

not saying that it is easy to cope

with, but with continuous

“follow-up” and “readiness” it can

be manageable.

HL: Why did you choose the

Pharma sector? What gets

your blood flowing when

talking about this industry?

After graduation I started to

work for an agricultural co-

operative. However, I felt that it

was not really my “dream” so I

took the first opportunity to

change and joined Biogal

Pharmaceutical Works (known

today as TEVA Pharmaceutical

Works). From that point on, my

life was connected with the

Pharma sector: I’m continuously

keeping my eyes on the relevant

news. Since we try to be proac-

tive and always be sure that we

follow what is happening in the

course of preparation of regula-

tions, we had to learn how to

“read between the lines” of the

statements of the regulating

bodies’ representatives.

HL: As a General Counsel

for a major pharmaceutical

company, you must receive

countless proposals from

law firms.

JM: Yes, I receive proposals

regularly from different law

firms. However, my options are

limited by the Group’s guide-

lines. We only work with some

of the preferred firms and our

first step is always to see that

there really is a need. We turn to

an external law firm only in case

of workforce shortage or when

the risk is high and the particular

project requires special experi-

ence and knowledge.

HL: What do you look for

when you choose what law

firm to outsource work to?

JM: The chosen law firm must

possess the following features:

appropriate experience, in-depth

knowledge of the pharmaceutical

industry, reliability, deadline

keeping and co-operative atti-

tude.

HL: What do you definitely

not like to see in a proposal?

As I have mentioned above, we

need clear, comprehensible,

“easy-to-digest” analysis for the

colleagues involved in the

decision-making process. As a

result, I am really unsatisfied

when I have to “translate” it for

them to make it clear, because it

is rather time-consuming.

HL: What do you find to be

the biggest regulatory

challenge in the Pharma

industry in Hungary?

JM: One important aspect is

predictability. Every company

finds it very important to plan

ahead. When regulations and tax

burdens change even within one

business year planning becomes

very difficult. Moreover the

introduction and increase of

surtaxes creates a competition

handicap for us not only interna-

tionally but also within the

group, as group projects may be

implemented in other countries

where the conditions are more

favourable.

A good example is the R&D

incentive: a 20% abatement was

introduced in 2007 which was

then increased to 100%; but

before the 100% could become

effective an amendment negated

the use of the abatement, the

(My) Word On The Grapevine

“..we had to learn how

to “read between the

lines” of the statements

of the regulating

bodies’ representatives.”


legal regulation being incon-

sistent with the implementing

rules.

Of course, we are given the op-

portunity to comment on new

bills and new laws and submit

our proposals, in most of the

cases in cooperation with other

pharmaceutical industry stake-

holders and, when that is done

properly, transparency and pre-

dictability is achieved. Unfo-

tunately the system is far from

ideal and does not always work

out that way.

HL: Without a doubt, the

industry took a considera-

ble hit as a result of the

measures put in place by the

Széll Kálmán plan. How did

this affect your work and

how do you expect it will in

the long-term?

JM: The Széll Kálmán plan and

the rest of the measures affecting

the health sector cause legal

statutes to change all the time

and impose more and more

restrictions on the budget. I

think we have to coexist with this

in the coming years. The greatest

challenge in the continuously-

changing legislative environment

is the sustenance of operations.

Commonplace but more and

more true to our days: Only

change is constant.

HL: There are many aspects

to the Széll Kálmán plan.

Which one in particular are

you most passionately op-

posed to and/or keen on

and why?

JM: I hail the recognition that the

present healthcare system is not

sustainable on the long run but I

cannot agree with those that

largely blame pharmaceutical

industry for the problems. I disa-

gree with a non-transparent drug

financing system causes part of

the money to go to the drug

companies. These are exaggera-

tions.

I agree with the importance of

prevention and believe in solidar-

ity where pharmaceutical stake-

holders take part together in the

struggle to educate people on

healthy living. On the longer

term this may be an important

contr ibution to reducing

healthcare costs. Not incidentally

Sanofi slogan is „from drug com-

pany to health provider”

HL: Which aspect of the

Széll Kálmán legislation do

you think should be revisit-

ed due to its impact on the

end consumer, the patient?

JM: Governments, and not only

in Hungary, are making attempts

to reduce drug budget expendi-

ture and patient burdens. But the

cost cutting measures should not

be allowed to reach the point

where merely fiscal considera-

tions prevail in healing.

Patients must get the most effec-

tive therapy. Laying stress on

fiscal aspects has dangers for

patients: for example if a medi-

cine that a patient has been taking

for a long time is lost by price

competition and delisted, the

patient has to be switched to

another drug that may be less

effective or even harm his organ-

ism.

HL: Both in Europe and in

the US, politicians have

been pushing aggressively

for Sanofi to lower drug

costs or expand generic

licensing. What are the fore-

front issues when we speak

about pricing of pharma-

ceutical products in Hunga-

ry?

JM: As I mentioned, the focus is

on medicine price cuts and there

is strong support to cheaper

generic products. Hungary has a

rather complicated reimburse-

ment system - in effect compel-

ling manufacturers to go in for

tough price competition. The

OEP keeps reviewing the prices

ex officio to ensure cost efficacy

and adherence to budget, and the

companies make their price bids

through an electronic system. In

this system there is no

negotiation.

The challenge for us is obvious

when a product with a new

active ingredient is being

reimbursed in a new indication,

because in this case a so-called

subsidy-volume contract has to

be concluded. Contract conclu-

sion is preceded by thorough

negotiations, but the legal frames

are given. The essence of the

contact is that the manufacturer

has a payment obligation towards

OEP according to reimburse-

ment outflow generated with the

included medicine, by this manu-

facturers contribute to reducing

public burdens upon the inclu-

sion of a new medicine making it

possible for the patients to buy

modern therapies on affordable

price.

Kajtár Takács Hegymegi-Barakonyi Baker & Mckenzie

Advising biotech company

We advised a major US-based biotech company in connection with regulatory questions (e.g. wholesale licensing questions, medicine donation, clinical trial template agreements, etc.), including the revision of the standard operating procedures (e.g. Sponsorship Policy, Policy on the Interactions with healthcare professionals, Donation Policy) to ensure compliance with applicable Hungarian laws and ethics rules.

(My) Word On The Grapevine

Th

e P

rivate

Prac

tice

Strip

“Commonplace but more and

more true to our days: Only

change is constant.”

RE: On The GC Grapevine - Energy

Edition

Simandi Bird & Bird is experiencing activity

in the area of traditional energy sources with

increased interest in gas & oil exploration and

exploitation in the region. This fall's hot

topic will be the new support scheme for

renewable energy sources, the so-called

"METÁR", which will replace the "old"

mandatory takeover and subsidising system

("KÁT"). "METÁR" is expected to play a

major role in meeting the mandatory targets

for renewable energy by 2020 in Hungary.

Zsófia Szerda Head of Energy and Real Estate in Hungary Bird & Bird

If you would like to comment, reply or

add your viewpoint on any of the

articles or the publication overall,

write to us at [email protected]

to share your views with the GC com-

munity.


HL: I’m sure our readers are interested in learning a bit about your background at first...

GB: I had a very international upbringing. My father is in the diplomatic service and my moth-er is a chemical engineer, so I got to live in a few places around the world at a relatively young age. Like many Hungarian boys, I played our national sport, water-polo, throughout my school years, which I still enjoy as a pastime. When I started law school I worked at a popular radio station writing commercial jingles and subsequently a sight-seeing boat company in Buda-pest. I really enjoyed these jobs,

but when it was time, I did turn to the legal side of the profes-sional arena.

During my university years, I spent my professional practice periods at the Hungarian Consti-tutional Court as a clerk to Jus-tice István Bagi, and afterwards at a midsized local law firm. My first real legal job was at White & Case, where I started as a 4 hour-a-day intern. I ended up spending 7 years with the firm, during which time I had very interesting international assignments and cases. Amongst others, I got to work in Washington D.C. and spent 6 months in White & Case’s Brussels office on a se-condment. That was particularly interesting as it was the time of Hungary’s accession to the Euro-pean Union making it a great experience. While I did study quite a bit of European law at university, having the chance to actually work with EU law in practice and work with clients in the European Court of Justice or before the European Commission or Parliament was absolutely phenomenal. I’m really thankful to White & Case and especially István Réczicza as well as other colleagues, as without them, I

wouldn’t be who I am today. It was really an excellent learning and working experience.

Transitioning to a pharmaceutical company was not necessarily the obvious choice, although, while in private practice, I did repre-sent pharmaceutical companies and the Association for Innova-tive Pharmaceutical Producers. In fact we won a major case for the Innovative Association. The Government at the time intro-duced a price decrease and price freeze which we were able to argue against in front of the Constitutional Court and have it annulled within a record 3 month period, one achievement that I am very proud of to this day. The pharmaceutical industry was, however, only one of the areas I worked on while at White & Case. For example, I was in-volved in several privatisation transactions, and various energy and infrastructure deals, as well as considerable local and interna-tional litigation and arbitration.

HL: Why did you decide to move in-house?

GB: During my time as an exter-nal counsel I had the opportunity not only to work with the best

attorneys, but also to work with a number of in-house counsels and legal advisors. I always perceived them as having a much closer relationship with the business due to their daily work and interactions with the compa-ny’s board. Having a better understanding of the specific company’s needs meant that they provided more business friendly advice. On the other hand, as an outside consultant, you are brought in for a very specific project and, as a result, have a more limited perspective on the issues at hand. Ultimately, I wanted to get to the point where I could truly understand an industry and, without the insight you gain as an in-house counsel, it would have been much harder.

HL: Looking back at your in-house experience, was it the right call?

GB: After almost 6 years at Pfizer, my answer is a definite “yes”. For me, working as a Legal Director is pretty much like running your own law firm because you have so many different aspects, or practice areas. The difference is that you have one client, who you have to

dr. Gergő Budai - Legal Director - Pf izer

1983 1985 1988 1990

Bocksai Istvan

Elementary School

Paul Revere

Elementary School

Budapest New York

Robert F. Wagner

Junior High

Budapest

Kerek Utca

Elementary School

1991

Szilagyi Erzsebet

High School

1995

Peter Pazmany Catholic University, Doctor of Law and Political Sciences

1998

University of Pretoria International

Law and Human Rights Course

Pretoria

PAGE 8


know inside and out. You need to deal with regulatory issues, mergers and acquisitions. compe-tition, labor law, civil law, litigation, etc.. In fact, I used to love working in litigation and, even today, I like to stay close to this classic attorney function.

I know every day I will be faced with at least one question or issue that will be truly challeng-ing. This comes as a result of the variety of work, the innovative nature of the company, as well as, unfortunately, a result of the legal environment of the industry in Hungary at the moment. And when I say at the moment, I mean the last 3 years.

HL: “Classic attorney” func-tion?

GB: Well, when I was growing up, and this might sound a bit like a cliché, a lawyer was some-one in a courtroom, arguing in front of judge and jury. Litigation is the classical place where a lawyer can truly present. Sure, you also have that to a certain

extent in a negotiation process, but for me, it is not nearly as engaging or stimulating. As for reviewing documents, sure that can be interesting but it is not really the exciting part. That is why even today, time permit-ting, I take almost every oppor-tunity to represent Pfizer in front of a court or authority.

HL: Well, I guess it is a good (or bad) thing you have the opportunity to do this often then. Talking about your function at Pfizer, what makes for a good LD in your mind?

GB: I think the best way to describe it is by using the mission statement of Pfizer’s legal division: Deliver competitive advantage by understanding our businesses, managing risks, and inspiring our colleagues to drive creative and useful legal solu-tions.

I think that has everything neces-sary to describe a good LD. You need a very strong level of legal knowledge combined with a very good understanding of the busi-ness. On one hand, the role of a General Counsel - or Legal Director as we say it - is to safe-guard the company from issues arising from non-compliance or outside challenges. On the other

hand, enabling business is the most important aspect of the role since, in my view, a good Legal Director is one that tells you how you can do or achieve something or reach a business goal as opposed to just someone saying “no” or “you can’t do that”. Of course sometimes you do have to say no, but finding solutions - creative and legally compliant solutions - is extremely im-portant, and you always need to be able to stay ahead of the game and try to shape the upcoming regulatory changes and the envi-ronment.

HL: The idea of creative thinking is interesting as most people imagine law-yers thinking along the lines of ‘this is the law in black on white and you cannot med-dle with it’.

GB: Don’t get me wrong. There are a lot of things which are very clear cut with regards to what you can and cannot do, and of course I would never give advice that is not compliant with existing regulation. What I mean by being creative is that, when someone puts a business need forward, the need has to be met. The real challenge is being able to blend that need with the regulatory requirements into one

consistent solution. We have to be committed to raising the bar by challenging traditional think-ing and ways of operating. We recognize that our ability to provide the best legal service depends on how well we listen to colleagues and engage with them to solve problems and seize opportunities together. As Amy Schulman says, where lawyers add value is not in giving the answers that everybody already knows, but giving the answer that nobody has thought about.

HL: Before we move into the industry specific issues, we are always curious what a Legal Director looks for when evaluating different proposals from law firms.

GB: Pfizer has an innovative out-side counsel program called the Pfizer Legal Alliance (or PLA in short, started by Amy Schulman, Pfizer’s global General Counsel). The Pfizer Legal Alliance is a collaborative partnership be-tween Pfizer and 17 law firms that aims to transform the way legal services are delivered and valued. These firms have agreed to work on a flat-fee basis, which is established at the beginning of each calendar year, and to provide counsel to the company on a wide range of matters.

1995

1998

University of Pretoria International

Law and Human Rights Course

Pretoria Budapest

2001

2000

Clerk at Hungarian Constitutional

Court

Associate to Senior Associate at White & Case

2004

Secondment with White & Case

Brussels

Brussels Budapest

2007

Legal Director - Hungary at Pfizer

PAGE 9

“In fact, I used to love

working in litigation and,

even today, I like to stay close

to this classic attorney

function.”


This is something unique, and it has proven quite effective in securing quality external counsel - who if need-be work with each other. Of course this program stems from the U.S., and these firms are not present everywhere in the world, so occasionally, we do need to look at other firms and we make those decisions locally.

When we need to secure exter-nal counsel outside the scope of the PLA, we look for law firms that are practical, with good knowledge in the relevant prac-tice area. When I say practical, I mean to say that it is annoying when you receive 20 pages of admittedly beautiful legal analysis when you simply needed a straight-forward short answer. While I would be delighted to read interesting legal analysis (which has a beauty of its own) and emerge into questions of academic importance (and we must find the time for that some-time!), unfortunately, in today’s world, you have to deal with so much information on a daily basis, that you simply don’t have the time to indulge.

On the other hand, there are a few things that many firms present in proposals that don’t have such a significance. For example, firms like to put forward a large number of lawyers. That I feel is almost never relevant when compared to their expertise level. Another thing I tend not to follow is all the different awards or rankings that they showcase when doing a pitch. Don’t get me wrong, I don’t mean to devalue these at

all, but what really matters for me is the day to day interaction that I have with these firms. I simply think it is hard to truly asses a firms value without first-hand experience.

HL: Looking at the pharma-ceutical industry specifical-ly, the first natural question is why did you choose it when you moved in-house?

GB: We need to go back in time for a bit to answer that. As I mentioned, I loved working in litigation and, while I was working at White & Case, one of the most interesting litigation cases that I worked on was focused on this industry (it revolved around reimbursements and claw backs from the National Health Insurance Fund).

Throughout the case, I practically had to learn the industry inside out. I found it challenging and interesting and I was kind of drawn into this world.

HL: In general, what do you find to be the most chal-lenging aspect of working in this industry?

GB: As strange as it may seem, the unpredictability. Regulations change virtually every month and change dramatically at least every year, if not more. To illustrate this, take one of the most important pieces of legislation governing our industry, the Pharma Economic Act. Since its enactment by Parliament in 2006, it has been amended substantially at least 25 times. These amendments have oc-curred at all levels, from promo-tional rules to applicable taxes or fines, and even to regulatory structures. An ever-changing regulatory environment is chal-lenging but after a certain point it simply goes against the basic principle of the rule of law, and while we have a dedicated legal

team, how small pharmacies, physicians, or even consumers and patients keep track of it all, I do not know.

Even on our end, it is not enough to just keep track of all the new regulations. If we did that, all our work would be purely reac-tive. We need to closely monitor every proposal and, within the applicable legal framework, we try to influence the process and provide our input to shape the environment. The bottom line is that we need to be on top of every piece of draft legislation from the moment it comes into the pipeline.

HL: There is a lot of buzz at the moment about the recent Széll Kálmán Plan.

GB: It is one of many changes in the past 5 years. Like many things in life, it is not black or white. Every few months we have to adjust to changes that never really lived out their life before they were changed again. I agree that Healthcare needs reform, and there are certain elements pointing to true correc-tion and reform. However, there are also many elements that are of purely financial, cost-saving, and cost reduction nature, and for true reform you would need investment in public healthcare, investment that is not financed solely by the Pharma companies.

HL: Let us dissect it a bit as it is a very comprehensive legislative package. Which aspect of this plan do you believe will damage compa-nies the most?

GB: Unfortunately I cannot pick only one, but I will limit it to

two. The damage, however, is not only to the companies, but ultimately to society. One is that two years ago, Hungary intro-duced a very good R&D incen-tive plan for the Pharma industry (which allegedly is identified as one priority in terms of boosting the Hungarian economy), according to which, out of only the industry-specific extra taxes, companies would receive a tax deduction if they invested in certain types of research and development, like basic research or phase I, II and III clinical trials. Knowing the experience and the level of research at the Hungarian academic institutions, Pfizer invested in this opportunity and invested significant funds in R&D in Hungary. Unfortunately, this tax incentive was cancelled as of July 1, 2011 and, on top of it, it was cancelled with a retrospec-tive effect going back to 2010. Again, if you look at it from a legal perspective, a new piece of legislation coming into effect with a one year retrospective effect is unheard of and against the very idea of the rule of law. This I find detrimental to society as well as to the rule of law itself, not to mention the companies and all the scientists and universi-ties that would have potentially benefited from this tax incentive, or members of society that would have benefited from the research results. At the same time, the move will also impact the country’s credibility and will cast a shadow over investor trust.

The other measure is the sales representative tax changes. Originally this tax was intro-duced in 2007 and, back then, all the pharmaceutical companies reduced the number of their sales representatives considerably.

Now this tax has doubled from 5 million HUF to 10 million HUF per year per sales representative.

PAGE 10

“..where lawyers add value is not

in giving the answers that

everybody already knows, but

giving the answer that nobody has

thought about.”

“..the Pharma Economic Act. Ever

since its enactment by Parliament

in 2006, it was amended

substantially at least 25 times. “


Initial numbers indicate that at least 1000 people industry-wide will be made redundant as a re-sult and we are talking about highly qualified people who were paying a considerable amount in personal income and social secu-rity taxes, ultimately making the Government lose out much more on the long run than they expect to earn via these taxes. Quite literally it will turn out to be a case of putting some additional money in one pocket while loos-ing much more from another

HL: In light of the R&D tax incentive cancellation you mentioned, is it realistic to expect more and more part-nerships between pharma-ceutical companies aligning their efforts in R&D?

GB: I believe this is a natural process that is going to gain momentum globally, not just in Hungary. It is extremely expen-sive to develop a new product with numbers reaching 3 to 4 billion dollars before a product is launched so I do expect a grow-ing trend towards such partner-ships. Further, the research scene is changing, and nowadays its not about one big blockbuster prod-uct, but advancing research step by step to find cures.

HL: What are the positive elements of the plan launched on July 1?

GB: I believe the single most important benefit is the fact that Gyemszi’s, the new regulatory body for the industry and the NAV’s (National Tax and Cus-toms Authority) scope and authority were strengthened in

combating wonder pills and counterfeit medication. The results are already significant and can be seen weekly in the news media.

HL: I know you have quite a few interesting stories in-volving counterfeits.

GB: Indeed. The one product that is most threatened by coun-terfeits is one of our erectile dysfunction products. As strange as it is, due to the applicable legislation, I cannot say the name in this interview. A good exam-ple of “sensible” legislation. We fight counterfeits on a daily basis as they hurt our bottom line of course, but that is nothing compared to the health risk to patients. We need to make the general population aware of the huge dangers that come with using such products. We found fake pills that contained brick powder and food paint, and those were the happy scenarios. In certain cases we even came across illegal narcotics and wall paint on the pills (discovered when the patient’s hands and tongue turned blue), and we even received calls reporting hallucinations. We naturally want to investigate these cases with our global security group, but usually when we ask “where did you buy the pills” the imme-diate reaction is ‘well..I would rather not tell you’. When we ask for the batch number, from the very first couple of digits we know instantly we are dealing with a counterfeit product. Counterfeiting pharmaceuticals is big. The return is bigger than on illegal narcotics and the prison sentences are significantly shorter for the time being.

Also, every now and then we receive phone calls from border police and customs that they discovered counterfeits coming in from Australia, China, and

India, sometimes transiting through Western Europe to make the packages less suspi-cious. One time a huge shipment of pillows came in from a coun-try in Asia. Some were full of pills, others had blisters, and others had the information leaf-lets and the hologram stickers. All separately, as they say, “to be assembled” .

Unfortunately the Hungarian regulatory system is not about treating patients as “adults”. It aims at limiting information to patients so they have to go on the internet and look for it from other jurisdictions and sources in foreign languages. How that is beneficial, I really don’t know. The regulators often use the reasoning that pharmaceuticals are dangerous and can be abused and one can kill oneself with them. Under this logic, we should not sell knives and buses and trains should not run either. I’m really hoping that this men-tality will change and patients will be treated as adults who can receive valuable information and make judgments based on that.

HL: Patents play a major role and many see it as one of the biggest headache in the industry. What could be improved in Hungary to mitigate this?

GB: I think that, in Hungary, over the past few years a lot has been done. Prior to EU acces-sion, only process patents were in place. This simply meant that if you would simply stir a mix from right to left as opposed to the other way around you could copy the exact mix needed to produce the patented drug. Since 2004, product patents have been

introduced, which offer much better protection. The only existing problem that I would identify is that the Patent Protec-tion Office’s processes are still quite slow. For example, we had a patent claim that lasted from 1994 until 2010.

HL: Since Pfizer has such a wide global footprint, what role do you, as a GC for Hungary, play in the patent-ing processes?

GB: Most of our patents are created globally. There are a lot of them through the discovery process. Our primary role in the legal team here, when it comes to this issue, is patent enforce-ment.

HL: When were you most proud to be working for Pfizer?

GB: Luckily, it happens often. One proud moment was when we concluded a number of research agreements and partner-ships with Hungarian universities and academic institutions. An-other was the launch of the Dis-tribution and Logistics Centre for CEE here in Hungary which involved a massive amount of work and coordination. Last but not least, and this occurs regular-ly every time we launch a new product that will touch millions and save or considerably improve their lives, one cannot help but feel proud to be a part of a com-pany that is truly making a differ-ence. If I would want to be a bit sarcastic, I’d say I could tell you that I’m very proud of a new product developed recently for lung cancer, but I can’t, due to the applicable promotional rules, as if I named the product, and you published it, we would both be in for a huge fine.

Since the interview, in addition to

Hungary, Gergő became Legal Director for the Czech Republic and Romania.

PAGE 11

“..a new piece of legislation coming into effect with a one year

retrospective effect is unheard of and against the very idea of the rule of

law. “

“..due to the applicable legislation, I cannot say the name in this

interview. A good example of “sensible” legislation. “

The Szél l Kálmán Plan puts increas ing pressure on phar maceutical companies dr. I ld ikó Csák, Récz icza White & Case LLP

“..several companies have

calculated their 2010

R&D expenditure

assuming a reclamation of

100%, however, due to

the retroactive legislative

changes, many companies

will only be able to

reclaim 20-50% or

nothing at all, causing

significant losses to the

affected companies.

“Due to the effect of the

changes on their

profitability and together

with the increase of the

sales representatives

registration fees,

pharmaceutical companies

may be forced to

reconsider their

investments in Hungary.”


PAGE 12

While pharmaceutical companies have been quite adaptable to the continuous changes in the regulatory environment, the measures that have been put in place as part of the Széll Kálmán Plan caused a major stir among pharmaceutical companies, as well as their employees.

1. Main measures

As of July 1, 2011, the Hungarian government implemented the following measures affecting pharmaceutical companies:

i.increase of the tax payable by pharmaceutical companies on the sale of subsidized products from 12% to 20%;

ii.increase in the fee paid for the registration of pharmaceutical sales representatives;

iii.introduction of more stringent regulations relating to promo-tional activities (notification obli-gations, increased fines, etc.), and

iv.retroactive legislative changes regarding the deduction of R&D spending.

While all these measures have had a significant impact on pharma-ceutical companies, the legislative changes regarding the deduction of R&D spending may be the most onerous and controversial.

2. R&D tax incentive prior to July 1, 2011

Since January 1, 2010, marketing authorization holders have received a reduction of up to 100% of (i) monthly payments they have made with respect to their subsidized turnovers and (ii) monthly payments they have

made with respect to the sales representatives they have employed; in the amount of their total adjusted R&D expenditure (“R&D Costs”) as shown in their year-end accounts.

In order to qualify for the allowance, the taxpayer should have incurred R&D costs in the amounts exceeding 20% of the proportion of the amount of state subsidy received under the social security reimbursement scheme based on the sale of pharmaceuti-cal products sold in pharmacies, and the manufacturer price or import price of the same products (the “Comparative Data”).

The allowance could be claimed monthly in the form of a reduction of the payment obligations in subsections (i) and (ii) above, starting from the fourth calendar month of the year following any given year when the qualifying R&D Costs were incurred up until the full amount of the R&D Costs have been credited. This means that the allowance with respect to the qualifying R&D spending of 2010 was to be claimed in 2011 in the form of a deduction from the monthly payments, up to the amount of payments made on the same grounds in 2010.

3. R&D tax incentive as of July 1, 2011

The new measures reduce and eventually eliminate the R&D tax allowance.

As of July 1, 2011, market authorization holders may only receive the same allowance if the amount of R&D Costs incurred in 2010 exceeds 70% of the

Comparative Data, as opposed to the 20% threshold applicable as per the old rules. If the R&D expenditure is less than 70%, but more than 30% of the Compara-tive Data, the allowance is restricted to 50% and 20% if the R&D expenditure is below 30%, but over 20% of the Comparative Data.

The amendments have also caused the R&D allowance to lose effect as of January 1, 2012, closing the above R&D Costs related tax incentives from the end of the year.

4. Implications

The amendment reduced the extent to which the allowance may be claimed in comparison to the allowance which was available under the legislation in force in the tax year when the qualifying R&D spending was affected.

In view of the laws in effect prior to July 1, 2011, several compa-nies have calculated their 2010 R&D expenditure assuming a reclamation of 100%, however, due to the retroactive legislative changes, many companies will only be able to reclaim 20-50% or nothing at all, causing signifi-cant losses to the affected compa-nies.

By way of an example, a pharma-ceutical company deducted 100% of R&D expenditures from its tax payment obligations starting Jan-uary 1, 2010 in its accounts. Accordingly, the company calcu-lated it would be refunded HUF 2.8 billion of the payments made in year 2010 and another HUF 0.4 billion for January-March of


PAGE 13

this year. Based on the retroac-tive legislative changes, however, such company will be able to reclaim only 50% instead of 100% of the R&D expenditure or HUF 1.4 billion for the 2010 calendar year, and will not be able to reclaim any payments made after January 1, 2011.

The rules setting out the qualifi-cation criteria for the allowance

changed as of July 1, 2011, in a way which implies that the new rules also apply to allowances taxpayers have qualified for based on their closed tax years.

The legislative changes, while they aim to fulfil the Hungarian government’s drug cost contain-ment plans, have an adverse effect on the pharmaceutical industry. Due to the effect of the

changes on their profitability and together with the increase of the sales representatives registration fees, pharmaceutical companies may be forced to reconsider their investments in Hungary, reorganize their operations and lay off a large number of their employees, which will most likely have an impact on Hunga-ry’s unemployment rate as well as its economy.

As the Hungarian government is determined to reduce its annual drug-reimbursement bill by more than HUF 100 billion by 2013, additional stringent measures are expected to be taken in the future.

Phar maceutical companies f acing new chal lenges due to the amended regulat ion of promotional act ivit ies . dr. Dóra Petrányi, CMS Cameron McKenna

“It is not clear from the

wording of the Medicinal

Thrift Act whether any

changes that occur after

the notification would

need to be reported to the

Authority.”

Pharmaceutical companies’

promotional activities must be

reviewed in order to comply with

the new regulations of the Medic-

inal Thrift Act (Act No. XCVIII of

2006) which came into force as of

July 1, 2011. Since entering into

force, the relevant authority

issued public guidelines on the

interpretation of the regulations

in order to assist companies in its

implementation.

The bomb on the need to modify

Hungarian legislation regarding

pharmaceutical companies’ pro-

motional activities exploded early

this year when a Hungarian health

care professional (“HCP”) attend-

ing a “professional event” in Thai-

land died in the swimming pool of

a luxurious hotel – the HCP’s

attendance was sponsored by a

generics company also present

in Hungary.

This accident caught not only big

media attention but also put sub-

stantial pressure on the legislators

to modify the laws on Pharma

companies’ promotions. We

below summarise the major

changes of the new legal regula-

tions.

1. What is an “event”?

The definition now includes not

only third party organized events

but also events organized by the

pharmaceutical companies.

2. Restriction on the location of

the event

The Medicinal Thrift Act clearly

prohibits pharmaceutical compa-

nies from sponsoring or organis-

ing professional or scientific

events at locations where the

relevant resources and/or exper-

tise connected to the object or

subject matter of the event are

not available.

3. Obligation to notify the au-

thority on sponsoring an event

The most significant administra-

tive impact that pharmaceutical

market players face in the pro-

motional field is the obligation to

notify the competent Hungarian

authority (that is the National

Institute for Quality and

Organizational Development in

Healthcare and Medicines, in

Hungarian: Gyógyszerészeti és

E g é s z s é g ü g y i M i nős é g - é s

Szervezetfejlesztési Intézet,

Országos Gyógyszerészeti Intézet,

“Authority”) about sponsoring an

educational and/or professional

event at least 30 days prior to the

event.

It is not clear from the wording of

the Medicinal Thrift Act whether

any changes that occur after the

notification would need to be

reported to the Authority;

however, this question was

answered by the Authority’s

statement published on Septem-

ber 9, 2011 (“Statement”) accord-

ing to which any change in the

data already submitted to the

Authority needs to be reported as

soon as possible regardless of the

fact that the second report will

take place within 30 days of the

event. Further, the Statement also

addresses the absence of regulato-

ry clarity in the Medicinal Thrift

Act, namely the question of

whether the pharmaceutical

market players may support an

event when the need to sponsor

the event arose within less than

30 days. The Statement stipulates

that in such cases, a pharmaceuti-

cal company may sponsor the

event but must report its inten-

tion immediately to the Authori-

“..fines up to HUF

500,000,000 (approx.

EUR 1,800,000) can be

imposed on the marketing

authorization holder or

the manufacturer in case it

does not comply with the

regulations”


ty also verifying the reason for

the delayed notification.

4. Promoting or not promoting

that is the question

The same regulations also

increased the sales reps taxes to

double the original amount. Due

to the doubling of the already

high sales reps taxes, Pharma

players are considering cuts to

the number of their sales repre-

sentatives or modifying their

roles, by limiting the activities to

those of non-promotional type

interactions.

According to the Statement, such

employees may carry out logisti-

cal tasks including the recording

of orders, delivering brochures

etc. as those are not considered

promotional activities according

to the Statement.

At the same time, the Authority

emphasizes that it is highly

unlikely for a non-registered

colleague of a pharmaceutical

company to provide only infor-

mation on OTC products to the

HCPs which information are

already available for the consum-

ers and the reveal of which is not

considered a promotional activity

in line with Section 5 of the

Promotional Decree (Decree

No. 3 of 2009 (II. 25.) of the

Minister of Health).

With respect to such information

flow, the Authority assumes the

promotion of a medicinal prod-

uct as – according to the State-

ment – the interest of the moti-

vation to order and use the given

medicinal product can be estab-

lished behind such activity. This

assumption will have to be

demonstrated against by the

companies that decide to main-

tain the logistics in-house.

5. Higher fines for violating the

regulations on promotions

Pharmaceutical companies shall

face higher fines for violations of

regulations on promotional

activities. According to Section

19 (2) d) of the Medicinal Thrift

Act, f ines up to HUF

500,000,000 (approx. EUR

1,800,000) can be imposed on

marketing authorisation holders

or manufacturers not complying

with the regulations on promo-

tional activities. Lower value

fines can be imposed on others,

including distributors, who will

face a fine of up to HUF

25,000,000 (EUR 90,000) and

sales representatives up to HUF

5,000,000 (EUR 18,000) for

violating the regulations on

promotional activities.

PAGE 14

Extra Phar ma Sector Taxes in Hungar y: An Europea n Over view and Inter pretat ion Issues dr. Helga Bíró & dr. Gergely Riszter, Kajtár Takács Hegymeg i -Barakonyi Baker & McKenzie

1 July 2011 brought about the increase of taxes imposed in Hungary on pharmaceutical companies as part of the Government's reform package. What are those taxes? And how do they compare to the taxes imposed on pharmaceutical com-panies operating in some other

EU member states? What are some of the key issues raised by this new legislation?

1 The Extra Taxes

Hungary now imposes three types of extra taxes on the pharma sector. First, there is the so-called "sales rep tax" - payable in respect of each medi-cal sales representative engaged by a pharmaceutical company to perform medicine promotional activities ("MSR"). The amount of that tax has doubled, from HUF 416,000 to HUF 832,000 per month (the "Rep Tax").

The amended Medicines Act also increased the payment obliga-tions of pharmaceutical compa-nies relative to the total amount of reimbursement in respect of each of their products which is reimbursed by the national health insurance system, from 12% to

20 % (the "20% Tax").

Further, in case of a deficit of the pharmaceutical budget, pharma-ceutical companies marketing reimbursed products in Hungary must pay a contribution, depend-ing on the amount of the budget-ary overspend.

2 An EU Overview

The amount of the extra taxes imposed on pharmaceutical com-panies in Hungary seems to be unprecedented in Europe.

A brief survey of Baker & McKenzie Pharma industry(1) and tax lawyers practicing in several European Union coun-tries revealed that no tax is paid for MSR in any of the surveyed countries. In most of the EU countries surveyed, no extra taxes are imposed on Pharma companies at all. With the

exceptions of Belgium, Spain and Poland. Belgium taxes the turno-ver of pharmaceutical compa-nies; the amount of the tax varies each year, but tends to be about 1% to 1.3% of the Pharma com-pany's turnover. Spain imposes an extra tax on pharmaceutical companies, for annual sales volume derived through Spanish pharmacies; the amount of the tax varies between 1.5% and 2%.

Pharmaceutical companies may be entitled to reduction of the above taxes in case of R&D activ-ities both in Belgium and in Spain. Similarly to Hungary, in Poland the government has recently introduced a new tax for pharmaceutical companies which must be paid for increased spending of the pharmaceutical budget (which is determined by the Polish government annually).


Although there are plenty of other instruments that govern-ments may use to control public expenditure on pharmaceutical products - from reference pricing through co-payment to various risk-sharing instruments (and most countries apply those measure) - it is clear that Hunga-ry has probably the greatest vari-ety of such measures, including the highest level of extra taxes imposed on pharmaceutical com-panies.

Although the Medicines Act also provides for certain limited ex-emptions from or reductions of the special pharma taxes, due to

constant changes of the law, the tax benefits are inconsistently applied and their applicability is highly uncertain.

3 Certain Interpretation Issues Regarding the Rep Tax

Given the high tax burden to which they are exposed, pharma-ceutical companies often crea-tively interpret the provisions of the Medicines Act on the Rep Tax, particularly because the language of the Medicines Act on the Rep Tax gives rise to ques-tions of interpretation regarding its applicability.

For example, one such question is the circumstances under which the Rep Tax must be paid. Arti-cle 36 (4) of the Medicines Act says the Rep Tax must be paid (i) in respect of each person engaged (either through an employment contract or a contract for ser-vices) by a pharmaceutical com-pany; (ii) who is registered as a MSR by the competent authority (GYEMSZI-OGYI); (iii) in re-spect of his/her promotional activities. This wording gives rise to the question of whether the Rep Tax must be paid for periods

during which a person is em-ployed by a company but he/she does not carry out promotional activities; e.g. during a longer vacation period or during an induction training program.

A recent opinion from the tax authority (the "NAV") sheds some light on the possible inter-pretations of Article 36 (4) of the Medicines Act. The NAV point-ed out that the tax payment obli-gation primarily depends on the actual tasks of the employee; i.e. whether the employee is engaged in the promotion of medicinal products. If the employee's em-ployment duties change (e.g. the employee is no longer engaged in pharmaceutical promotion but deals with administrative tasks within the company), the compa-ny must notify the change to the GYEMSZI-OGYI and request the deletion of the employee from the register of MSRs. However, if the employee's employment duties do not change, the compa-ny will be exempt from the pay-ment of the Rep Tax only during those periods expressly listed in Article 38/A of the Medicines Act (e.g. the duration of sick

leave, maternity leave or the period of unpaid vacation, etc.) but will be required to pay the Rep Tax in all other circumstanc-es during which the employee may be absent from work for a certain period of time (e.g. dur-ing a longer vacation period).

In case of induction training pro-grams organized for new em-ployees, it is advisable that com-pany's employment documenta-tion, such as labour contracts and job descriptions, make it clear that the employees will start actual promotional activities only following completion of a training program. As well, employees should also be regis-tered as MSRs at the GYEMSZI-OGYI only following completion of the training.

The Medicines Act will likely give rise to other practical inter-pretation issues in the future.

Notes:

(1) The survey included the UK, Germany, Spain, Sweden, the Czech Republic, Poland, Belgium, Austria and Italy.

The information herein does not constitute legal advice or opinion. Legalis will not be held re-

sponsible for any liability arising from the use of any information provided in this publication. PAGE 15

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dr. Eszter Tőrők

dr. Judit Miskolci

dr. Gergő Budai

dr. Ildikó Csák

dr. Dóra Petrányi

dr. Helga Bíró

dr. Gergely Riszter

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