A group decision support system for transfer pricing in the pharmaceutical industry

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A GROUP DECISION SUPPORT SYSTEM

FOR TRANSFER PRICING

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FOR TRANSFER PRICING

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A GROUP DECISION SUPPORT SYSTEM

FOR TRANSFER PRICING

IN THE PHARMACEUTICAL INDUSTRY

PROEFSCHRIFT

ter verkrijging van de graad van doctor aan de Technische Universiteit Delft,

op gezag van de Rector Magnificus, Prof. Drs. P.A. Schenck, in het openbaar te verdedigen ten overstaan van een commissie

door het College van Dekanen daartoe aangewezen, op dinsdag 12 september 1989 te 16.00 uur

door

MICHAEL BARTHOLOMEUS MARIA VAN DER VEN

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Promotiecommissie

Prof. Dr. H.G. Sol, Technische Universiteit Delft, promotor Prof. Dr. A. Bosman, Rijksuniversiteit Groningen

Prof. Drs. B.K. Brussaard, Technische Universiteit Delft Prof. Dr. H. Koppelaar, Technische Universiteit Delft Prof. Dr. F.A. Lootsma, Technische Universiteit Delft Prof. Dr. Ir. CA.Th. Takkenberg, Rijksuniversiteit Utrecht

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"Transfer pricing in pharmaceuticals is more of an art than a science"

Otto Nowotny

The writing of this thesis is in gratitude dedicated to my wife Eugenie, my parents and my parents-in-law.

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Michael van der Ven p.o. Mosheuvel Molenbochtstraat 76 5014 ER Tilburg The Netherlands Tel. +31(13)365309 or +31(13)359429 Cover:

Piet van Zwieten Print:

Gianotten BV, Tilburg

The following names are registered trade marks: Comshare IBM Lotus 1-2-3 MAUD MS-DOS Personal Wizard System W

The author was supported by a grant under the Ministry of Education "National Facility for Informatics" programme (project NFI-1).

CIP-DATA, Koninklijke Bibliotheek, The Hague Ven, Michael Bartholomeus Maria van der

A group decision support system for transfer pricing in the pharmaceutical industry / Michael Bartholomeus Maria van der Ven. - [S.l. : s.n.]. - 111.

Thesis Delft. - With index, ref. - With summary in Dutch. ISBN 90-9002887-0

SISO 385.9 UDC 681.3:[338.5:334.71:615.2](043.3)

Subject heading: group decision support systems / transfer prices / pharmaceutical industry

ISBN: 90-9002887-0

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission of the author.

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1 BACKGROUND AND RESEARCH QUESTIONS

1.1 Introduction

As a result of the post-war expansion of foreign direct investments, trade is increasingly dominated by multinational companies, so called "multinationals". An increasing part of this trade is intra-firm trade in the sense that the seller and buyer belong to the same multinational group of companies.

According to Murray [1981, p. 2] around 40% of the exports of multinationals based in the major Western industrialized countries were intra-group transfers and these figures are rising. According to the report of the Independent Commission on International Development Issues, intra-firm trade makes up over 30% of all world trade, see Brandt et al. [1980, p. 188]. Although these figures should be handled with care, they give a good indication. Besides the internal sales of goods, other transactions take place extensively between the different parts of these enterprises, for example the granting of loans, the licensing of technology and the provision of services. The price which is set for the transfer of goods and services between two companies belonging to the same group, is called "transfer price". For the purpose of this project, a more specific definition will be introduced in chapter 3. "Transfer pricing" is defined as the process of deterrnining transfer prices. It is related to decision making.

Within large multinational companies, decentralization is necessary as centralization of decisions at headquarters would become counterproductive: it would overtax the time and energy of top management. The background of transfer pricing can be found in this decentralization principle in decision making, see chapter 3. Sheer size and the resulting complexity of multinationals argue against centralized management. Secondly, vesting the decision-making responsibility with the local manager allows for a more flexible response to local circumstances which can vary enormously, see Plasschaert [1979, pp. 23-24].

Decisions concerning transfer prices may reflect legitimate business concerns of a company, but they are also capable of being used in order to shift profits from high to low tax countries or to get around exchange or price-control regulations. Such practices; although pursued in the best business interest of a company, may conflict with the interest of host countries. This is not to suggest, according to Brandt et al. [1980, p. 189], that as a class, multinationals have been using such practices. Plasschaert [1985, p. 263] states that, with regard to over- and underpricing the evidence is meager and he points to the dangers of undue generalizations. He protests against the connotation that multinationals "are the villains" and points to the sometimes negative effects of government measures concerning transfer prices. Nevertheless, caused by the increased size of intra-company trade of multinationals and the negative publicity on the subject in the seventies, see for example Vaitos [1974],

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government interference has increased. So the multinational has to operate in an increasingly strict legal framework which has remained national. It has therefore to conform with the varied and sometimes conflicting national laws in countries in which it operates, see OECD [1979, p. 7]. The increased governmental interference in its turn causes a growing interest in the various aspects of transfer pricing from business as well as from governmental side.

In order to demonstrate the complexity of the issue, literature on international transfer pricing often presents examples from the pharmaceutical industry, see for instance Verlage [1975] and Plasschaert [1979]. According to Nowotny [1987] and Von Grebmer [1987a], transfer-pricing problems are especially poignant for the pharmaceutical industry. This is caused, amongst others, by their relatively high degree of internationalization in combination with centralized production and research facilities. In other words: high centralized costs need to be covered by international intra-company sales. The position of the pharmaceutical industry will be explained in more detail in chapter 2.

In all phases of the decision process, the problem of international transfer pricing, especially in the pharmaceutical industry, is considered to be highly ill-structured. Sol [1982, p. 5], discusses various definitions of ill-structuredness. One of these definitions is taken from Uhr [1973, p. 274]: "Ill-formedness in problems seems to be closely related to issues of vagueness, ambiguity, flexibility, and creativity about all of which little is known." With Sol, Takkenberg [1983a, p. 10] notes that many the existing definitions of ill-structuredness are vague. To avoid ambiguity, we use the definition of Sol [1982, p. 5]. Sol starts with the definition of a well-structured problem: "A problem is well-structured if the following conditions are met:

1. the set of alternative courses of actions or solutions is finite and limited,

2. the solutions are consistently derived from a model system that shows a good

correspondence,

3. the effectiveness and efficiency of the courses of action can be numerically evaluated" Problems that do not fulfil these requirements are defined as ill-structured.

In literature on decision support, many authors have stressed the importance of supporting decision making with regard to ill-structured problems. Attempts at supporting decision making in ill-structured problem situations have focused on the development of so called "decision support systems". The aim of these systems is the use of computers to aid decision makers, see Sol [1985b] and Bosman [1987a]. During the last decade, decision support systems have gained dramatically in popularity. Research on decision-making and decision support systems has increased likewise, see McLean and Sol [1986]. According to Sol [1987b, p. 203], experiences with decision support systems are not always positive: "... [We] observe that empirical evidence on the effectiveness of decision support systems is not overwhelmingly positive, and often conflicting", see also Sol [1987a]. On the basis of laboratory experiments, Van Schaik [1988, p. 127] concludes that "teams using a decision support system do not perform better than those without."

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Sec. 1.1 INTRODUCTION

With reference to DeSanctis and Gallupe [1985] we define a decision support system as an interactive computer-based system which facilitates solution of ill-structured problems. Not that this definition does limit itself to computer support only: other elements of the organization, like data, procedures and organizational members can also be included, see also Bots and Sol [1988].

Confining ourselves to the pharmaceutical industry, we see the following: on the one hand, we have an ill-structured problem of increasing importance to the pharmaceutical company, namely international transfer pricing. On the other hand we have a relatively new research area, namely decision support systems. We expect that decision support systems are useful for determining international transfer prices within the pharmaceutical industry.

As will be explained in more detail in chapter 2, the environment of the pharmaceutical industry is complex, hostile and turbulent, especially with regard to transfer pricing.

The environment is complex as many actors are involved: consumer groups, various governmental bodies from many countries, supra-national organizations like the World Health Organization and the European Community, health insurance companies and last but not least the competition. The high degree of internationalization and the division between prescribing, using and paying for drugs are amongst the causes of the complexity of the environment.

Hostility of the environment is not only caused by the competition but also by the

groups that oppose current price levels and international price differences. According to De Jong [1981] "the industry, which earlier contributed to the conquest of many diseases, is no longer in favor with the general public", see also Breuk [1985]. It is under scrutiny from health-care authorities and consumer groups. Books with titles like "Corporate crime in the pharmaceutical industry", see Braithwaite [1984], give an impression of the hostilities the industry has to face. In the book we just mentioned, a special section is dedicated to transfer pricing.

The environment is turbulent as constantly new regulations are issued by the authorities involved. The developments with regard to the common market and changing measures with the aim to contain health care costs are examples, see Scrip [1988]. Moves of competitors also need to be monitored closely.

According to Huber and McDaniel [1986, p. 577], complexity, hostility and turbulence are the three main characteristics of the organizational environment in the post-industrial society. For this kind of environment, Huber and McDaniel propose the "decision-making paradigm". Like Simon [1973, pp. 269-270], Huber and McDaniel consider decision making as the organization's central activity. In view of this, improving decision making in organizations should be the focus of attention of the organizational sciences. According to Huber [1984a, 1984b], one of the elements that can contribute to improved decision making of post-industrial organizations are

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so-called "group decision support systems". These are decision support systems explicitly designed to be used by groups of decision makers.

With regard to transfer pricing, pharmaceutical companies find themselves in a complex, hostile and turbulent post-industrial environment. Following Huber, group decision support systems should be useful in such a setting. In other words, transfer pricing in the pharmaceutical industry seems a "perfect" example to test the concept of group decision support.

To put it more formally: it is our hypothesis that group decision support systems are helpful for improving decision making with regard to the determination of transfer prices in the pharmaceutical industry.

1.2 Research questions and research approach

In this section, we cover some issues that are related to our research approach. According to Fitzgerald et al. [1985, p. 5], information technology is still so new, that not one adequate research approach for scientific progress exists but that pluralism needs to be accepted. Our basic presumption is that these fundamental issues must be answered within the context of a particular research setting. That is to say, a research approach is neither appropriate nor inappropriate until it is applied to a specific research problem, see Downey and Ireland [1979, p. 630]. This holds also for the two research questions which we try to answer. These research questions are:

A: What are the characteristics of a group decision support system designed to support and improve organizational decision making with regard to transfer prices within the pharmaceutical industry?

B: What are the effects of the use of this designed group decision support system on decision making within the organization?

Following Huber and McDaniel [1986], we consider decision making as the organization's central activity. In the literature, various approaches towards decision making exist. One of these approaches is based upon "bounded rationality", see Sol [1982, p. 7].

In our research approach we take the paradigm of bounded rationality as point of departure. This implies that we do not presume that decision makers have all relevant information and an unlimited capacity to process this information. Our point of departure is that decision makers operate "in their own environment with own definitions and limited scopes on accessible data", see Sol [1982, p. 7]. Simon [1976, pp. 65-86] considers behavior bounded rational "when it is the outcome of appropriate deliberation. [Bounded rationality] depends on the process that generated it." Discussing bounded rationality, Takkenberg [1983a] states that "it is impossible to define unambiguously what is rational. ... Rational is now also determined by the multitude of circumstances that influence the decision maker".

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Sec 1.2 RESEARCH QUESTIONS AND RESEARCH APPROACH

In order to determine the multitude of circumstances that influence a decision maker, we need to analyze the existing situation, see Bosman [1986, p. 315] and Takkenberg [1983b, p. 258]. On the basis of this analysis, we make a description of the decision process, as it takes place. We define this description of the "as-is" situation as the descriptive empirical model, see also Sol and Van der Ven [1989]. This model is descriptive in the sense that the actual ("as-is") situation is described. No normative elements are included. This first model is empirical in the sense that it describes an actual situation which exists within one specific organizational group. Names of organizational members, financial figures and other specific details will be included. On the basis of one or more descriptive empirical models, a descriptive conceptual model is constructed. This descriptive conceptual model is "data void", see Bosman and Sol [1985, p. 82]. This model is still a description of the "as-is" situation, but now at a higher level of abstraction: the essential characteristics of the various empirical models are transformed into a possibly more generic description which provides global insight in the existing situation. The level of abstraction is such, that this model can be used for other organizations which are in a similar position.

On the basis of this latter descriptive model, literature research and other explorations, a third model comes into existence: the prescriptive conceptual model. The prescriptive conceptual is a combination of "description and design principles", see Bosman [1987b, p. 32]. It is prescriptive in the sense that it contains normative elements, see Takkenberg [1983a]: using this model for decision making should lead to an improved decision process.

When elaborating on our first research question, we will determine three of the four model categories as presented in exhibit 1-1. In this exhibit, the numbers 1-4 indicate the order of the activities that we follow. These four activities precede the construction of the corresponding model.

empirical model conceptual model descriptive model 1: data collection concerning the existing situation 2: abstraction prescriptive model 4: implementation of the improved model 3: analyses and improvement of the model

Exhibit 1-1. Categories of models.

The prescriptive conceptual model is our answer to the first research question. In order to elaborate on the second research question, we need to perform a test in the form of experimental use of the system. Experimental use of the system requires

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the set up of one or more empirical models on the basis of the prescriptive model that we designed. This latter model is defined as the prescriptive empirical model. The use of this empirical model in the daily practice of a pharmaceutical company provides the desired insight on the effect of the group decision support system on decision making. By means of analysis of the effect of the prescriptive empirical model, we evaluate our prescriptive conceptual model.

Now we explained various categories of models, we can rephrase our two research questions:

A': What are the characteristics of the prescriptive conceptual model?

B': What are the effects of the use of the prescriptive empirical model on organizational decision making?

With regard to organizational decision making, Mintzberg [1979, p. 584] states the following: "...It seems that the more deeply we probe into this field of organizations, the more complex we can find it to be, and the more we need to fall back on so called exploratory, as opposed to 'rigorous' research methodologies." To obtain a prescriptive conceptual model, Mintzberg [1979, p. 587] proposes research within one organization, sometimes even for years, as: "We need to be 'in touch'. Increasingly in our research we are impressed by the importance of phenomena that cannot be measured: by the impact of an organization's history and its ideology on its current strategy, by the role that personality and intuition play in decision making. To miss this in research is to miss the very lifeblood of the organization. And missed it is in research what by its very design, precludes the collection of anecdotal information." DeSanctis and Gallupe [1987, p. 593] propose longitudinal research specifically for research in the area of group decision support systems. Our research activities should be regarded as one of the "pilot testing" activities, see DeSanctis and Gallupe [1985, p. 8], that are required to progress in the area of group decision support.

We explicitly choose to answer these questions by means of a real-life case study, see Sol and Van der Ven [1988a]. This choice is based upon the following considerations, see Benbasat et al. [1987]:

- little research exists which integrates all aspects of international transfer pricing, - the project has a revelatory character, see Yin [1984, p. 47] as not much is known

about the way transfer-price decisions are taken in practice,

- as improvement of "real-life" decision making is one of the aims, close cooperation with the industry is imperative.

It should be realized that "case study" as used above does not mean that the researcher is watching the organization from the sideline. He is actively involved in the design of the prescriptive conceptual model and should be regarded as a member of the organization.

In order to analyze the existing situation with regard to transfer pricing and to test a pilot system, we decide to cooperate with a large pharmaceutical company for a period

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of five years. For the definition of "large pharmaceutical company" in this respect, see Van der Ven [1989a]. In this thesis we name this company "Europhar". In research terms, five years is a relatively long period of "on-site" analysis. Our research is of an explicit exploratory nature.

On the basis of this on-site research, the descriptive empirical model and the descriptive conceptual model will be created. In general, decision makers do not know

how they reach a decision. Usually, they only know the outcome, the decision itself.

Therefore the descriptive conceptual model will be based on long "on-site" observations, direct involvement in organizational activities, open interviews and video-taped meetings. The exploratory approach that we choose to follow is described by Conklin [1968, p. 172] as involving "a long period of intimate study and residence in a well-defined community employing a wide range of observational techniques including prolonged face-to-face contact with members of local groups, direct participation in some of the groups activities, and a greater emphasis on intensive work with informants than on the use of documentary or survey data".

Strong involvement in an organization, however, will not be sufficient for the development of a prescriptive conceptual model. It is necessary to observe the organization from a (mental) distance as it "would hardly be a fish who discovers the existence of water", see Wolcott [1975, p. 115]. For us, the involvement in literature research will provide this distance. Literature research will be concerned with the areas of transfer pricing and decision support. Information on the pharmaceutical industry will be gathered.

On the basis of literature research and the descriptive conceptual model, we will design a prescriptive conceptual model. Based on this latter model, a prescriptive empirical model for one subsidiary company of Europhar will be made.

This prescriptive empirical model should be regarded as an experimental system and not as a full system, see Keen [1986, p. 51]. Our explicit aim is to demonstrate the feasibility of the group decision support approach for international transfer pricing. The development of the experimental system is regarded by Europhar as a low-risk research and development venture, especially as a substantial part of the costs are borne by various Dutch research institutions. Such an experimental "version 0" is defined by Keen [1986, p. 50] as "an initial small system which is complete in itself, but may include limited functional capability". The aim of the system, in our case the prescriptive empirical model, is to establish the value of the proposed concept. For this experimental system, we need to select one subsidiary of Europhar International. For reasons discussed in chapter 5, Europhar UK Ltd in London will be selected. In the research project decision making concerning Europhar UK plays a dominant role and will be described in detail, see exhibit 1-2.

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information on the pharmaceutical industry transfer-pricing literature decision-support literature description decision process Europhar UK (before) descriptive empirical model Europhar UK descriptive conceptual model prescriptive conceptual model

question A': what are the characteristics of the prescriptive conceptual model?

question B1: what is the impact of the prescriptive empirical model on organizational decision making?

information on Europhar UK ' ' prescriptive empirical model Europhar UK ' ' description decision process Europhar UK (after) comparison

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It should be realized that the analysis of various other decision situations, for European as well as for third-world countries, will contribute to the construction of the descriptive conceptual model, although they will not be described in detail.

The "real-life" use of the experimental system (after implementation for the UK), together with the description of the already existing decision-process (before implementation for the UK) will form the basis for the evaluation.

1.3 Outline of the thesis

This thesis can basically be divided into two parts: the chapters 1 to 4 provide a theoretical background. In the chapters 5 to 8, the Europhar case study is discussed. The outline of the thesis is as follows:

In chapter 2 we discuss the pharmaceutical industry. It is explained why we limit ourselves to the European pharmaceutical industry.

In chapter 3, we explain the research limitation to international transfer pricing. We will introduce a framework for analyzing financing and transfer-pricing issues. In chapter 4, backgrounds, possibilities and recent developments in the area of group decision support systems are discussed. The possibilities are related to transfer-pricing problems and lead to the design guidelines of the prescriptive conceptual model. In chapter 5, we present the Europhar company and describe the descriptive empirical and conceptual model.

In chapter 6, we discuss the design of the prescriptive conceptual and empirical model. In this chapter, the use of the experimental system during six months is discussed. In chapter 7, various approaches to the evaluation of information systems are discussed. Interviews are the main basis of the evaluation of the pilot system. Outcome of the interviews and anecdotal evidence are discussed.

Chapter 8 presents the conclusions and possible areas for future research.

The pharmaceutical industry, transfer pricing and group decision support are in itself complex issues. In the chapters 5, 6 and 7, these three areas come together in the descriptive models, the prescriptive models and the evaluation. For a proper understanding of what is presented in these chapters, the background knowledge as presented in chapters 1 to 4 of the thesis is essential.

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2 THE EUROPEAN PHARMACEUTICAL INDUSTRY

2.1 Introduction

As stated in the previous chapter, we limit ourselves to transfer-pricing problems for the following category of multinationals:

The European-based innovative pharmaceutical industry which develops, produces and sells human ethical drugs.

All aspects, of this limitation are now described below. We shall explain the rationale behind this limitation.

"Human ethical drugs" are drugs intended for human use. Use by the patient is only allowed upon a prescription by a medical practitioner. This in contrast with so called "over the counter" drugs like Paracetamol. For over the counter drugs, no prescription is needed. By this limitation, veterinary products are also excluded. We limit ourselves to this part of the pharmaceutical industry, as interference by governmental health care organizations is especially intense for these kinds of products. As will be explained in this chapter, governmental interference in this area influences transfer-price decisions.

With "Europe" in this respect, we mean all countries that participate in the European federation of pharmaceutical industry associations "EFPIA". Besides the current member countries of the European Community (except Luxembourg), Austria, Finland, Norway, Sweden and Switzerland participate in this organization, see EFPIA [1987]. By "European-based" companies we mean those companies which have their headquarters in Europe. As far as the pharmaceutical industry is concerned, outside Europe, only Japan and the United States need to be considered, see IMS [1988]. We exclude these non-European based pharmaceutical companies as decision making may be different due to sharply different circumstances on the home market. This holds for both Japan and the United States, see Burstall [1985, pp. 125-127] and Reinshagen [1988]. In general, it can be said, that the Japanese and American firms have another approach to decision making than European firms. This is due to cultural differences, see Nath [1988]. It is possible that these cultural differences influence vital presumptions of our approach, like team setting. (Team setting will be discussed in more detail in the next chapter).

That we decided to include all European countries is because of the information we received from the European-based industry. Like Burstall [1985, p. 2], we noted that European companies are more "notable for their degree of uniformity than divergence". Partially, information on the industry was systematically gathered, see Van der Ven [1989a]. For another part, we received feed-back in informal contacts with industry representatives during company visits, conferences and alike. It is interesting to note

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that Nath [1988] treats European firms as one class. This in spite of the differences that exist within Europe.

The limitation to innovative companies excludes those companies which only produce and sell so-called "generics". Generics are drugs which are usually sold under a chemical name instead of under a brand name. They are copies of good selling human ethical drugs developed by innovative pharmaceutical companies. These copies are brought on the market after the patent period is expired. As for the generic producers the product and the market are already developed, marketing and research expenditure are much less than for the research-based industry. In this chapter we shall explain how high fixed marketing and research costs influence organizational decision making. The exclusion of generic producers, however, does not imply that innovative companies never produce and sell generics. The difference with non-innovative companies is that generics only form a minor part of their sales. Within innovative companies sales of generics contributes to research cost.

To give a global impression of the size of the pharmaceutical industry in EFPIA countries, the following figures for 1986 are presented, see EFPIA [1987]:

- production: 43,000 million ECU, - employment: 450,000 people.

(In the beginning of 1986, the value of the ECU was 2.46 Dutch guilders.)

When in the remaining part of this thesis we discuss "the European pharmaceutical industry", we mean those companies as indicated by the description above.

2.2 Some characteristics of the European pharmaceutical industry

Lorsch and Lawrence [1970] demonstrated the interaction that exists between organization and environment leading to the contingency (or situational) approach to organizational design. As environmental characteristics may influence the organizational structure of a company, market structure, governmental interference and cost structure will now be discussed.

Market structure: separate therapeutic areas

The pharmaceutical market is in itself subdivided into many self contained therapeutic areas, see Burstall [1985, p. 5]. For instance, in 1985 the Dutch market was divided in 24 submarkets which each contained between 2% and 7% of the market, see Nefarma [1985, p. 18]. Examples of these submarkets are the market for psychotropics and the market for anti-asthmatics. Diversification within the industry is low as a company needs to concentrate on one or a few of these therapeutic areas. Following Eccles [1985, p. 272] we use the term diversification to refer to the number of different businesses in which the company competes and how different these businesses are from each other. Costs of finding and developing a new drug are extremely large, according to Von Grebmer [1987b] about 100 Million ECU for every newly-introduced medicament. According to Von Grebmer [1987b], there are technical and economic limits to decentralization of these research activities. This centralized research

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Sec. 2.2 SOME CHARACTERISTICS OF THE PHARMACEUTICAL INDUSTRY

expenditure is directed to one or a few therapeutic areas and this expenditure can only be recovered by sales on this small part of the total pharmaceutical market. This implies that the submarket needs to be covered worldwide to recover research costs. Hence, strong internationalization is a common characteristic of these pharmaceutical companies. It should be realized that size and other characteristics of a certain part of the market may vary widely depending on the country and the therapeutic area that are serviced. In 1982, for example, over 40% of sales from the pharmaceutical industry of the European Community was realized outside the common market, see Burstall [1985, p. 115].

Governmental interference

Due to the involvement of governmental authorities in health-care matters, sales of pharmaceuticals is subject to an "unusual degree of government regulations", see Burstall [1985, p. 14]. Despite a general tendency towards deregulation, recent trends do not point to any significant reduction in the stringency of drug regulations, see Hansen [1987].

Pharmaceuticals are closely linked to the issue of human health care, which is considered to be one of the prime governmental responsibilities. Many of these regulations are related to the drug safety and efficacy issues. Human health care is very sensitive as far as public opinion is concerned. The issues at stake require careful distribution and monitoring. This implies that the distribution of pharmaceutical products cannot be delegated to a third party with the instruction to "just get the product sold". Should something go wrong, hostile publicity and legal pursuits would force the company involved in a difficult position. Therefore strict control on quality and logistics is needed. Secondly, training and instruction of representatives is of vital importance to assure proper use of new and existing products. Well trained representatives are important to assure two way communication between the industry and prescribing doctors, which is necessary from a marketing as well as from a medical point of view, see ABPI [1985, p. 32]. Regulations require, for example, that the company that develops, produces and sells a drug keeps closely in touch with the market in order to pick up any adverse drug reactions (post-marketing surveillance). To assure this proper two way flow of information between the parts of the company that are in touch with the local market, and the head office, a strong "vertical integration" is needed. Following Eccles [1985, p. 272] we use the term vertical

integration to refer to the inclusion of activities within the firm that could be obtained

externally, such as raw materials, distribution channels and staff services. So within the pharmaceutical industry one finds that fundamental research in search for a new product as well as the final instruction of medical professionals in a remote country is done by people of the same multinational company within a framework of strict control to the board of management, see also Von Grebmer [1987a]. This strict control reinforces centralization.

Regulations do not only pertain to registration of new products or quality control matters. Price regulations are involved as well. This will be discussed in the next

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Cost structure: high fixed costs

According to Von Grebmer [1987b, p. 233 and 234], "knowledge of the specific cost structure of the research-based companies is the key to understanding their market behavior when considering their pricing strategies ... On average, not more than 30 percent of the cost can be allocated directly to individual products, the remaining costs and the profit margin have to be covered by contributions from total sale of the whole product range." In other words, judgement of profitability of a pharmaceutical company should take place at the aggregate, total company, level and not on the disaggregate, individual product, level. Selling prices at the disaggregate level are unavoidably based upon a more or less arbitrary allocation of fixed costs.

As the relatively high fixed costs are made anyway, the total financial contribution that a local marketing subsidiary brings in, is of greater importance than its local net profit. So it is vital that the energy of the sales force is spent on the sales of in-house developed products and not on the sales of other products which might produce, in the short run, better results for one local subsidiary of the company. This cost structure contributes to a high vertical integration and centralization of decision making. In other words, within the industry, the delegation of power and responsibility to lower organizational levels (decentralization) is relatively limited.

The various items discussed above, make up the organizational environment for the European pharmaceutical industry and determine the main characteristics of the industry: strong internationalization and centralization, strong vertical integration and low horizontal integration, see also Von Grebmer [1987b, p. 240]. In exhibit 2-1, we present the structure of a typical pharmaceutical company. The arrows indicate the flow of goods. national border < parent company ' subsidiary company ' management center shareholder supplier research center ' subsidiary company < ...other subs companies marketing company

Exhibit 2-1. Organizational structure of a typical pharmaceutical company.

The parent company takes care of research, production, financing and marketing support. The parent company is the shareholder of the local subsidiary. The main task of the subsidiary company is to market the drugs, which are developed and

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Sec. 2.2 SOME CHARACTERISTICS OF THE PHARMACEUTICAL INDUSTRY

produced by the parent company, on the local market. (Other words for subsidiary company are "local company" or "daughter company").

2.3 Relationship with national health organizations

Governmental interference in the supply of pharmaceuticals takes place in many countries all over the world, see for example Bouee [1987] and PBPA [1988]. In this section we will discuss the developments within Europe as an example. This is because Europe constitutes the home market of the industry.

In the European pharmaceutical market, a three-tier demand system exists: the physician prescribes the product, the patient uses it, and national health organizations pay the bill.

Background of the increasing interference in pricing of pharmaceuticals is the aim to contain health-care costs. Health-care costs are in most countries a part of collective expenditure, which in general suffer from large deficits. This pressure from public health services is a matter of great concern to the industry as "control over aspects of pharmaceutical company operations do not in general result from a considered view of the industry as a whole", see Burstall [1985, p. 14]. Governments and the European-Community authorities are under pressure of consumer groups to force down prices, see for example BEUC [1984]. In the annual report of the Netherlands-based multinational Akzo [1985], this concern is expressed as follows:

"The need for constructive talks between authorities and innovative pharmaceutical companies is growing. As we have argued on previous occasions, there is an ever-present danger that, in their understandable desire to control expenditures, the authorities will accept the prices charged by the producers of generics (drugs not protected by patents and trademark registration) as the bench mark for national health insurance payments. Were they to do so, there would be little or no margin left to conduct time- and money- consuming research for the new, better drugs so urgently needed. Such research, after all, is funded out of the revenues generated by the sale of established products. While this issue especially concerns the industry, it is also a significant public health matter. We are prepared to join with the authorities in looking for ways to reconcile these divergent objectives".

Within Europe, various ways to control prices exist. A basic difference between these price-regulation schemes is their approach to the issue of aggregation and disaggregation. Aggregate level price-regulation schemes control total-company profit of a specific subsidiary company. The disaggregate level pricing schemes control prices by fixing the selling price of individual pharmaceutical products. For an overview of the various approaches, see Van Cayseele [1987].

In view of the realization of the European common market, initial steps with regard to harmonization of the pharmaceutical market are being made by the European

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the various member states. As far as reimbursement systems are concerned, these attempts stress above all the importance of transparency in the operation of national systems so that importers can verify that objective criteria are genuinely being applied and all relevant factors are being taken into consideration by member states. Given the different medical traditions of the member states, however, the European Community authorities realize that it would appear unrealistic to seek to lay down a completely harmonized community price structure for pharmaceuticals, see Hankin [1988]. Besides the transparency in procedures followed by member states, a first step is made to increase transparency on prices themselves. By the European Commission, a database will be set up which, amongst others, contains ex-factory and retail prices, see EG [1989]. Although the registration of transfer prices was considered by the Commission, it was decided that these would not be included in the database as transfer-pricing information was considered to be of a confidential nature.

The involvement of a multi-state framework like the European Community in pharmaceutical pricing and reimbursement issues, poses additional problems for the industry. The directive concerning transparency represents only the start of a much wider debate on pricing, transfer pricing and reimbursement. The industry is, on the one hand, still faced with individual sovereign governmental policies. On the other hand it is confronted with a multi-state framework committed to the goal of a unified market, see Owen [1988].

2.4 The approach of the British National Health Service

In the previous section, governmental interference with (transfer) prices has been discussed globally. In this section, one price-regulation scheme is worked out in more detail to provide insight in the practical consequences of such a scheme for the companies involved. We choose the British scheme as, according to Burstall [1985, p. 152], "there is a general feeling among the major [European] drug companies that, if prices must be controlled, then the British system is the most acceptable. It also commands interest and respect in official circles elsewhere."

The scheme is limited to branded human ethical drugs paid for by the National Health Service (NHS). Generics are excluded. For further details see DHSS [1986]. The main purposes of the NHS scheme are to:

- secure the provision of medicines for the National Health Service at reasonable prices,

- to promote a strong pharmaceutical industry capable of sustained research expenditure.

Note that "reasonable prices" are not the only aim of the scheme. The NHS authorities (the "Department of Health and Social Security") also act as sponsor for the industry, on behalf of the British government. Aspects that are relevant for the authorities as part of their "sponsor" responsibilities are the size and quality of employment in the United Kingdom and the size of exports. According to the Association of British

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Sec. 2.4 THE APPROACH OF THE BRITISH NATIONAL HEALTH SERVICE

Pharmaceutical Industries, for example, recent changes in the regulations encourage the development of research and production facilities in Britain, see Scrip [1987a, p. 5]. The "Pharmaceutical Price Regulation Scheme" provides a set of regulations for the calculation of profit (the "Annual Financial Return"). This profit calculation forms a basis for negotiations between each individual pharmaceutical company and the NHS authorities. Focal point is the profit that the company makes on sales to the NHS. The NHS-profit calculation of each company needs to be completed annually and submitted to the NHS authorities. All costs claimed are examined critically by the health service. In principle most of the costs are allowed, but there are however some special constraints. If the health service considers that profits of a company are excessive under the terms of the price-regulation scheme, price reductions or cash repayments are sought to the extent necessary to reduce profit to an acceptable level. The negotiations between pharmaceutical companies and the authorities have been described as "tough but fair", see Scrip [1987b, p. 2]. The target profit on which price increases or repayments are based, are established by taking the average return on capital of British industries in other public sector business, like aircraft-building companies. This target profit is influenced by the state of the public finances and subject to negotiation with each individual company.

NHS sales

-\- transfer prices (landed costs) -\- manufacturing costs -\- manufacturing overhead gross margin -\- distribution costs -\- information costs -\- promotional costs operating performance -\- royalties -\- general overheads

profit before interest and taxation

Exhibit 2-2. First part of the NHS-profit calculation.

Usually the target profit is expressed as a return on capital. This return on capital is the focal point during the negotiations between the authorities and the individual company. If the actual return on capital is greater than the target, defined as an "excess", a repayment to the NHS might be the consequence. In case the actual return on capital is smaller than the target, defined as a "shortfall", a price increase might be the consequence. The calculation basically exists of three parts:

- calculation of the "profit before interest and taxation", starting from the NHS sales, - calculation of the "total adjusted profit", starting from the profit before interest and

taxation,

- calculation of the "excess/shortfall on the target return on capital", starting from the total adjusted profit.

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The global outline of the first part of the NHS-profit calculation is presented in exhibit 2-2.

In exhibit 2-2, the sign "-\-" stands for "minus". The gross margin, for example, is calculated by subtracting transfer prices (or landed costs), manufacturing costs and

manufacturing overhead from the NHS sales. We presume that lump-sum royalties are

paid to the mother company and the mother company is the only supplier. All figures are expressed in British pounds sterling (GBP). This set of figures is made up for NHS sales as only these sales are controlled. Generic sales in Britain or exports are excluded in the profit calculation. When costs are directly related to activities (like distribution, information and promotional costs), there is no need for allocation. In cases that costs cannot be precisely apportioned between NHS sales, generic sales and exports, an artificial cost allocation has to be made. Possible bases for allocation are: - net sales,

- local manufacturing costs (added value),

- costs of goods (costs of goods equal the sum of landed costs and local manufacturing costs).

The first step of the NHS-profit calculation is to calculate the gross margin. The

distribution, information and promotional costs are subtracted from the gross margin

to obtain what is defined as the operating performance.

The scheme makes a strict distinction between allowable and non-allowable costs. Allowable information costs include for example expenses on samples for identification purposes and medical symposia. Allowable promotional costs include among others literature, representatives, administration and advertising. Gifts are not allowed as a promotional cost on the profit calculation.

Both royalties and general overheads are subtracted from the operating performance to obtain the profit before interest and taxation. The authorities are only interested in the profit before interest and taxation. The companies are not allowed to include taxation costs and interest costs in the profit calculation because the different financing structures of the companies would distort the comparison between companies. Now follows the second part of the NHS calculation. The profit before interest and taxation, as calculated above, is the basis for the calculation of the "total adjusted profit" as presented in exhibit 2-3.

profit before interest and taxation + add-back injected costs

+ add-back promotional costs -\- export discouragement correction

total adjusted profit

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Sec. 2.4 THE APPROACH OF THE BRITISH NATIONAL HEALTH SERVICE

An add-back for royalties and transfer pricing (defined as add-back injected costs) is added to the profit before interest and taxation, when the sum of transfer prices and royalties exceeds a certain percentage, considered acceptable by the NHS, say x%. In this case the NHS authorities consider the "injected costs" (cost transferred from the mother company) too high and demand a correction on profit before interest and taxation. So the formula for the add-back is as follows:

add-back injected cost =

(allocated royalty + NHS transfer price) -\- x% of NHS sales

Here we can clearly see how transfer pricing decisions and regulations of health-care authorities interfere: the value of the add-back on injected cost equals the difference between transfer prices added to royalties and x% of the total net sales. This x% is a negotiated figure and differs per company. It is important to note that there exists only an add-back for transfer prices and royalties. Where the local picture does not satisfy the authorities, they then consider the consolidated picture. If, however, the sum of transfer price and royalties is lower than the negotiated percentage, no action is taken. In other words, there is no symmetry in the approach of the authorities in this respect. They only adjust the figures where this is to their advantage.

Say, for example, that a British subsidiary of a multinational company has liquidity problems and that a transfer-price decrease is considered. In case this company should decide to lower the sum of transfer prices and royalties to a percentage lower than the agreed x%, it artificially increases its profits. This high profit could ultimately result in a repayment to the national health service. This example clearly illustrates the interference of transfer-price decisions with health care regulations.

The NHS sets a maximal sales-promotion allowance. Not only are some costs unacceptable, when a company spends more then this allowance, the amount overspent

(add-back promotional costs) has to be added to the profit before interest and taxation.

Also a cash repayment of the amount overspent is requested. For more details on the background of this punishment for overspent promotional costs, see Haayer-Ruskamp and Dukes [1986].

A strict apportionment of capital and costs between home and export markets may in some circumstances produce an unfair result. High export sales may result in a smaller part of capital allocated to the NHS. This is called the export discouragement (or "disincentive"). As on the other hand, the authorities are concerned with balance of payments and employment effects, a correction mechanism is applied. So an

export-discouragement correction is deducted from the profit before interest and taxation. A

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The concepts used in the third and final part of the NHS-profit calculation are: - negotiated target return on capital, percentage,

- average capital employed (NHS sales), in GBP, - average capital employed (total), in GBP, - actual return on capital, percentage, - excess/shortfall on target, in GBP.

The first step is to calculate the actual return on capital. The size of the acceptable return on capital earned by individual companies on NHS sales is a matter of negotiation with the NHS authorities. The negotiated target return on capital depends on the nature and scale of the company's relevant investment and activities and the associated long-term risk. Eventually the negotiated target return on capital is assessed by the authorities.

In order to obtain the actual return on capital first the average capital employed for NHS sales has to be calculated. The sum of the net-capital employed on the opening and the closing balance sheet is divided by 2 to obtain the total average capital

employed. The average capital employed for NHS sales is calculated by allocating the total average capital employed according to one of the allocation methods mentioned

earlier in this section. The actual return on capital (ROC, sometimes also called "return on investment") is a division of the total adjusted profit by the average capital employed

for NHS sales multiplied by 100. In formula:

total adjusted profit

actual ROC = * 100% average capital employed (NHS sales)

The excess or shortfall on target can now be calculated by subtracting the negotiated

return on capital multiplied by the average capital employed for NHS sales from the

total adjusted profit. In formula: excess/shortfall =

total adjusted profit -\- [negotiated ROC * average capital employed (NHS sales)] This final excess/shortfall calculation is not only influenced by the levels of transfer prices. Changes in royalty payments, changes in intracompany payment terms and intracompany cost charges also influence the excess/shortfall. This implies that of all these financing instruments, the impact on the profit calculation needs to be determined.

In this section we explained the British price-regulation scheme. Their approach to pharmaceutical pricing is one amongst many, both within Europe and worldwide. In most countries, Eke in Britain, interaction exists between transfer pricing and reimbursement. By means of the example given above, we demonstrated what such a relationship might look Eke. All transfer-pricing issues that relate to the relationship with the health-care authorities, wiU be referred to as the commercial aspects of transfer pricing.

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Sec. 2.5 CONCLUSION

2.5 Conclusion

Three conclusions can be drawn from this chapter.

In chapter 1, we stated that the pharmaceutical industry finds itself in a complex, hostile and turbulent environment, see Huber [1984b], certainly as far as pricing and transfer-pricing issues are concerned. In this chapter we elaborated on this statement. Secondly, great similarities exist in the way European pharmaceutical companies operate. As the environment of the industry is for an important part determined by governmental regulations and interest groups, the environment is alike for most companies. As a consequence, many European pharmaceutical companies are structured in a similar manner. This similarity is confirmed by the research of Burstall [1985] and by our own experience, see Van der Ven [1989a]. This conclusion is of relevance when possibilities for a more general use of the prescriptive conceptual model will be discussed in chapter 8.

Thirdly, the European pharmaceutical industry can be described by the following characteristics: a high degree of internationalization and centralization, a high degree of vertical integration and a low degree of diversification. These characteristics are relevant for our discussion of the various approaches to transfer pricing in the next chapter.

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3 TRANSFER PRICING: A COMPLEX ISSUE

3.1 Introduction

Transfer pricing is a subject that seems favorite amongst economists, as an abundance of literature can be found, see for example Eden [1985], Kassicieh [1985] and Hirschleifer [1956]. Not only scientists like the subject. Transfer pricing appears to be a rather preferred choice of masters-degree students in economics, see for example Mostermans [1982] and Van der Plas [1983]. It struck us that so many of these publications seem irrelevant for the problem at hand. Although a profound ability in mathematical modeling is demonstrated, practical relevance for our analysis is small. As will be discussed in section 3.2, the publication of Rasch [1980] is a notable exception. In general, scientists are aware of this limitation, see for example Meijboom [1986].

Transfer-pricing studies that provide a picture of most aspects involved are for example Verlage [1975], Plasschaert [1979] and Krens [1979]. The relevant aspects can be divided into two categories. The first category deals with what is defined as "management-control" issues, see Krens [1979]. Planning of corporate resources and performance measurement are the two main aspects of management-control transfer pricing. These will be discussed in the next section. The second category is of importance in the case of international transfers and is concerned with international financing, tax issues, duties, foreign-exchange controls and alike. These will be discussed in section 3.3. Pharmaceutical price-regulation schemes as discussed in chapter 2 are related to this "international" aspect. In section 3.4 we will apply the various concepts to the situation in the pharmaceutical industry.

In the remaining part of the thesis we decide to concentrate on transfer prices for

goods. Transfer prices for services are excluded. As will be explained in section 3.3,

this is not to say that payments for services, like management fees and royalty payments, do not relate to the transfer-pricing problem, see also OECD [1979].

3.2 Management-control transfer pricing

For a better understanding of management-control transfer pricing, we should go back to micro-economic theory. According to Adam Smith, individuals should pursue then-own interest and by doing so, they promote the interest of society, see Landreth [1976, p. 39]. Presuming competitive markets, individuals are led by an invisible hand when pursuing their own interest, according to Adam Smith. This invisible hand leads individuals by means of prices for goods, services, capital and labor. As stated in section 3.1, we concentrate on the prices of goods.

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A relatively high price for a good that an individual produces and sells, leads to a relatively high income and hence to relatively high spending power. In other words, the individual is rewarded by society for offering goods that are relatively scares. Below, we will relate this aspect to "performance measurement".

This rewarding mechanism influences the decision that the individual makes: he will

plan the use of his resources in such a way that he is able to offer those goods on

the market that are relatively scares. Below we will relate this aspect to "planning". It should be realized that above, we only discussed external prices. External prices that are set between independent parties operating on their own behalf on a competitive market. We now discuss the use of a price-mechanism for use within large organizations.

According to Chandler [1977, p. 1], modern business enterprises partially "took the place of market mechanisms in coordinating the activities of the economy... In many sectors of the economy the visible hand of management replaced what Adam Smith referred to as the invisible hand of market forces". Cause of this replacement, according to Chandler [1977, pp. 6-7], is that modern companies "... continued to grow by setting up or purchasing business units that were theoretically able to operate as independent enterprises - in other words, by internalizing the activities that had been or could be carried on by several business units..." From the point of view of the organization, a side-effect of this growth is an increase in management problems. Allocating limited resources to alternative uses can be expressed as a mathematical problem for which various formulations and solutions exist. In case of linear constraints and a linear target function that expresses company objectives, linear programming can be used, see Lee and Shim [1986]. As Bosman [1977] and Verlage [1975] explain, detailed knowledge on all units which constitute the organization is required for successful use of this technique. All technical parameters, for example, should be known. If this approach is followed, an optimal solution is presented allocating the resources to the final products. Given this solution, so called "shadow prices" of the resources can be calculated. Both Bosman [1977, p. 241] and Verlage [1975, p. 185] reject the use of shadow prices as a coordination mechanism for large complex organizations.

An alternative approach to the problem of allocation of resources is divisionalization, combined with the "right" transfer prices. Divisionalization can be defined as decentralization plus delegation of divisional profit responsibility to lower organizational levels at which decision making also exists, see Verlage [1975, p. 5]. Splitting up in divisions is an attempt to combine many of the advantages of a big company with many advantages of a small one. Such a system replaces detailed planning and evaluation decisions by top management. Another possibility which will be discussed later in this section, is to split up an enterprise into smaller units without strictly adhering to the profit-center concept. Transfer pricing that is related to divisionalization issues is defined as "management-control transfer pricing", see Krens [1979].

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Sec. 3.2 MANAGEMENT-CONTROL TRANSFER PRICING

Transfer-price decisions have great influence on the distribution of profit of the divisions involved. Take for example a multinational A. X and Y are two divisions of A, each with own profit responsibility. The intermediate product z is produced by X and then sold to Y. When the transfer price of product z is increased, the divisional profit of X will increase, to the expense of Y's divisional profit. Divisional management considers the maximization of its own divisional profit as its main target. The divisions "compete" with each other to obtain the highest divisional profit. As the divisional management is judged (and compared) on the basis of this divisional profit, a shift of cost is of great importance to divisional management. So a correct approach to transfer pricing is a prerequisite to make the profit-center concept work.

According to Verlage [1975], a transfer-pricing policy should serve the same two roles that are performed by external prices: performance measurement and planning. From a point of view of profit measurement (ex post), transfer prices must ensure that divisional profit, as it is measured, is the same as the controllable profit for all divisions involved. So divisional profit should not be influenced by decisions taken by other divisions and reflect only the impact of decisions made by the own division. A transfer price which possesses this quality is defined as "neutral". From a planning point of view (ex ante), transfer prices must ensure that, when divisional management bases its decisions on these prices to maximize its own divisional profit, the profit of the enterprise as a whole is maximized. A transfer price which possesses this quality is denned as "optimal". Verlage [1975] concludes that a transfer-pricing policy based on market prices is the only system that meets both requirements. A prerequisite for such a system, however, is that a competitive market for intermediate products exists. The concept discussed above deals with a really divisionalized enterprise. We now turn to another approach. It is possible that decision making in the organization takes place by means of teams and that no internal competition between divisions exists. This approach of decision making in groups relates to the "behavioral theory of the firm", see Verlage [1975, p. 19]. According to the behavioral theory of the firm, company goals are the result of interaction between organizational members. Rasch [1980, p. 65] defines a team as a group of people with a common goal. People at different positions within the organization may have different information and hence may take different decisions based on that information, but there is no incentive problem. There is no conflict of interest between team members. Under the condition of team setting, the transfer-pricing policy does not have an impact on company goals. Rasch's proof of this statement is of a mathematical nature. Under the premise that the individual decision maker has knowledge of the impact of his decision on the organization as a whole, the transfer price is an internal mechanism for the firm and as such it has no impact on the overall objectives. This result can be anticipated by the realization that the decision makers are attempting to achieve corporate objectives which are derived from an overall perspective based on external (market) conditions. The internal transfer price is merely a means for liquidity transfer and does not affect the performance of the organization as a whole. The decentralized team-decision policy is independent of transfer pricing and the determination of a transfer-pricing policy should not be based on its effect on the decentralized decision-maker's actions, according to Rasch.

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Rasch [1980, pp. 100-103] even states that, given team setting, the expenses involved in working out a transfer-pricing policy may be avoided and an increase in efficiency might be realized.

Several approaches to planning and performance measurement exist. The "divisionalization" approach discussed above takes divisional profit as the central item and a guideline for divisional decision making and performance measurement. The "team setting" approach as described by Rasch [1980], takes the concept of teamwork as the central means to achieve company goals.

On the basis of empirical research, Eccles [1985, p. 274] relates these two approaches to company and market characteristics, see also Lorsch and Lawrence [1970]. According to Eccles, the transfer-pricing policy depends on the type of organization and, consequently, the environmental setting in which the organization finds itself. The two main factors which determine the transfer-pricing policy according to Eccles, are vertical integration and diversification.

The term vertical integration refers to the inclusion of activities within the firm that could be obtained externally, such as production of raw materials, distribution channels and staff services. Vertical integration creates mutual dependencies between the various units like divisions, corporate line management and staff functions of the enterprise. The term diversification refers to the number of different businesses (or markets) in which the company competes and how different these businesses are from each other. The larger the number of products and markets in which a company competes, the greater the diversification, according to Eccles. In exhibit 3-1 three types of company are shown. A high x (cooperative) degree of vertical integration low x (competitive) I ^.

low degree of high diversification

Exhibit 3-1. Eccles' contingency approach to management control.

Of these three types, two are relevant for our research: the cooperative and the competitive type. These will now be discussed in more detail. The following descriptions are based upon Eccles [1985, pp. 276-277].

X

A group decision support system for transfer pricing in the pharmaceutical industry

A GROUP DECISION SUPPORT SYSTEM

FOR TRANSFER PRICING

FOR TRANSFER PRICING

A GROUP DECISION SUPPORT SYSTEM

FOR TRANSFER PRICING

IN THE PHARMACEUTICAL INDUSTRY

Contents

1

BACKGROUND AND RESEARCH QUESTIONS

1.1 Introduction

1.2 Research questions and research approach

1.3 Outline of the thesis

2

THE EUROPEAN PHARMACEUTICAL INDUSTRY

2.1 Introduction

2.2 Some characteristics of the European pharmaceutical industry

2.3 Relationship with national health organizations

2.4 The approach of the British National Health Service

2.5 Conclusion

3

TRANSFER PRICING: A COMPLEX ISSUE

3.1 Introduction

3.2 Management-control transfer pricing