Health industries quarterly insights: Q1 2024

We are pleased to present our quarterly industry insights for entities in the pharma, life sciences, medtech, and health care sectors. This edition includes a summary of PwC’s recently released industry publications about what’s next in pharma and health services, an update on recently issued accounting standards, an update on recent SEC comment letter trends, reminders on the OECD’s Pillar Two global minimum tax, and highlights podcasts which address industry trends and topics impacting the health industries sector.

What’s next in pharma and health services

The Next in Pharma 2024 and Next in Health Services 2024 provide top C-suite agenda topics that will shape the year. Click below to explore more.

In the Pharma sector over the last year, we’ve seen breakthroughs in vaccine development, cancer treatments, GLP-1 drugs that are revolutionizing obesity management, gene therapy and gene editing technology for rare diseases and new treatments for complex diseases like Alzheimer’s. Yet the value problem persists, and investors are still coming up short. The sector continues to experience under-performance in capital markets relative to the broader market index. The 2024 operating environment faces continued risk from geopolitical tension, domestic political uncertainty and heated campaign rhetoric, and increasing attention on regulatory enforcement around the world. Whether pharma executives make planned strategic moves or take adaptive tactics in response to inevitable surprises, the industry can expect continued scrutiny of its actions — e.g., pricing decisions, M&A transactions, AI investments, workforce reductions — which means trust with stakeholders will remain a North Star.

To outperform in this environment, leading companies can seize this moment to “reinvent for returns.” Companies with foresight will see 2024 as the year of delivering impressive results for both patients and investors. Our Next in Pharma 2024: Reinventing for Returns publication discusses areas Companies could focus on:

  • Rethinking the innovation strategy
  • Accelerate growth through AI and analytics
  • Lower costs, for real, with bigger ambitions
  • Accelerate growth through M&A: Transact to transform
  • Building trust and protecting the enterprise

For the health services sector, 2024 will be a year of sustained economic compression. Our Next in Health Services 2024: Healthcare’s big squeeze and the way out publication discusses a number of Fit for Growth strategies such as:

  • AI and managed services at the point of reinvention
  • Digital delivery of technology
  • Workforce transformation
  • Deals to transform
  • Customer advocacy and trust, reinforced by strong risk safeguards

ESG for health organizations

Healthcare providers and pharmaceutical and life sciences organizations have historically embraced the social pillar of environmental, social and governance (ESG) efforts, caring for patients and creating medications, vaccines and devices that improve human health and save lives. PwC’s Health Research Institute (HRI) analyzed the ESG efforts of 45 health systems and payers and 32 pharmaceutical and life sciences companies, finding health organizations could reap additional rewards by also embedding more of an environmental and governance focus into their overall strategy. You can see the full report of their findings here.

Recently issued rules

SEC adopts climate-related disclosure rules

On March 6, 2024, the SEC adopted final rules designed to enhance public company disclosures related to the risks and impacts of climate-related matters. The new rules include disclosures relating to climate-related risks and risk management as well as the board and management’s governance of such risks. In addition, the rules include requirements to disclose the financial effects of severe weather events and other natural conditions in the audited financial statements. Larger registrants will also be required to disclose information about greenhouse gas emissions, which will be subject to a phased-in assurance requirement.

The final rules differ in several respects from the initial proposal, most significantly in changes to the financial statement footnote disclosures as well as reductions to the scope of and number of registrants subject to the greenhouse gas emission disclosures. Please see our In Brief and In Depth for additional details of the final rule. Listen to our podcast in which insights are shared on the SEC’s new climate-related disclosure rule.

Segment reporting

New guidance

The new segment reporting standard issued by the FASB in 2023 is effective for public calendar year-end companies in their 2024 annual financial statements, and mandates additional disclosures about segment expenses. However, it does not change the definition of an operating segment, the method used to determine operating segments or the criteria for aggregating operating segments into reportable segments. Refer to our In depth for additional details of the new requirements.

Changes in segments

Reassessment of operating segments usually takes place in the event of significant acquisitions or dispositions, or changes to the organizational structure. This includes any changes to the chief operating decision maker (CODM), modifications to the individuals reporting to the CODM, the information reviewed by the CODM, or the methods used by the CODM to allocate resources and assess performance.

A change to reportable segments is generally reflected in the period of change by recasting the segment footnote for all periods presented. In addition, any information in Management's Discussion and Analysis (MD&A) that pertains to individual reportable segments will need to be updated accordingly. Changes in segments that occur after period end, but before issuing the financial statements, are treated as an nonrecognized subsequent event. While a company may disclose that the change has occurred, the segment disclosures would continue to reflect the segment reporting structure that was in place during the reporting period for the financial statements.

In the event the segment change occurs during an interim period, companies are not required to immediately recast the segment disclosures for the prior interim periods in the current year or the annual segment information for prior years. Typically, prior period comparative segment information is recast as the subsequent interim or annual periods are presented in future interim or annual financial statements.

As a reminder, as noted in the SEC’s Financial Reporting Manual (13300), if reportable segments change after the most recent annual financial statements have been issued and annual financial statements are required in a registration or proxy statement that includes subsequent periods managed on the basis of the new organization structure, the annual audited financial statements included in the registration statement or proxy statement should include a revised segment footnote that reflects the new reportable segments. The registrant’s Description of Business and MD&A should be similarly revised. The revised annual financial statements and related disclosures may be included in the registration or proxy statement or in a Form 8-K incorporated by reference.

Impact on goodwill

When an operating segment change occurs, companies should also assess whether their reporting units, which is the level at which goodwill is tested for impairment, have also changed. Depending on the entity’s business, reporting units may be the same as operating segments or one level below the operating segments. If the composition of one or more reporting units changes, the company’s assets and liabilities should be reassigned among the affected reporting units before allocating goodwill. Then, goodwill should be reassigned, or allocated, to the new reporting units using a relative fair value approach. In turn, any changes to the composition or carrying amount of a reporting unit’s net assets will trigger the need to perform a goodwill impairment test.

Income tax disclosures

In December 2024, the FASB issued a final standard requiring additional disclosures about income taxes. The new disclosures focus primarily on two specific areas: additional disaggregation of the factors driving an entity’s effective tax rate and additional details about income taxes paid. The standard is intended to be responsive to investors’ calls for more detailed income tax disclosures that would be useful in making capital allocation decisions. Read our In depth for more information on the requirements.

For many companies, particularly those with an international presence, the level of disaggregation required will likely result in significantly more reconciling items being disclosed in the effective tax rate reconciliation. In addition, for the first time, entities will be required to disclose the specific jurisdictions where they are paying income taxes. In many cases, complying with this level of disaggregation will require data to be compiled, analyzed and summarized in ways not currently available with existing systems, processes, and controls. Our “Policy on Demand” video series discusses the new standard and what companies should be thinking about now as they begin to prepare for the adoption of the new rules, which are effective in 2025 annual financial statements for calendar year-end companies. Because the guidance will be applied prospectively (with the option to apply it retrospectively) companies should be thinking now about the potential lack of comparability if they adopt prospectively, and how that may influence how they are disclosing and communicating their effective tax rate drivers to their investors.

Required SEC disclosures about recently issued accounting standards (SAB 74)

As a reminder, SEC registrants are required to include disclosure when a new accounting standard has been issued but is not yet effective. These disclosures should provide meaningful disclosures based on known information. The disclosures to be made include:

  • A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier
  • A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined
  • A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made
  • Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged

As is the case with the new segment reporting and income tax disclosure standards, certain new standards require new, comprehensive footnote disclosures that may be significant to the financial statements and require significant judgments. Accordingly, registrants should consider the full scope of a new accounting standard, which covers recognition, measurement, presentation, and disclosure.

New SPAC rules

On January 24, 2024, the SEC adopted new and amended rules and guidance that will impact initial public offerings (IPOs) by special purpose acquisition companies (SPACs) as well as the subsequent merger between a SPAC and private operating company (deSPAC transactions). The rules aim to enhance investor protection by requiring additional disclosure and aligning reporting requirements for SPAC IPOs and deSPAC transactions with traditional IPOs of operating companies. Read our In Brief for more information on the requirements.

Regulatory updates

SEC comment letter trends

Our analysis of SEC comment letters has been updated for letters made public through December 31, 2023. It identifies the top five comment letter trends for companies in the health industries sectors and provides comment examples.

Questions about the appropriate application of the accounting guidance for consolidations entered the top 5 trends. The Staff’s comments in this area focused on asking registrants to clarify how they determined whether they are, or are not, the primary beneficiary of a variable interest entity (VIE), asking registrants to provide disclosures required by ASC 810-10-50 for consolidated entities that were determined to be a VIE, and providing disclosures about accounting for potential changes in the redemption value of redeemable non-controlling interests.

Consistent with the prior quarter, Non-GAAP measures and accounting and disclosures about research and development (R&D) activities continue to be the top two comment letter trends and continue to be areas of focus for the SEC Staff. In the non-GAAP space, the Staff frequently asks for a better understanding of certain adjustments that appear to be normal, recurring expenses and why these items are not related to the registrant’s ongoing operations. The Staff also continues to reference the Non-GAAP C&DIs that were updated in December 2022 as part of their comments.

With respect to R&D, the Staff continues to ask registrants to provide a breakdown of R&D expenses by product candidate or project. To the extent that these costs are not tracked by project, registrants are typically asked to disclose that fact, provide an explanation for how R&D costs are managed, and how they are reported within the organization. Further, for any R&D costs not allocated by product candidate, the Staff instead may ask for a breakout by the nature of expenses.

Revenue recognition and business combinations remain in the top 5, with the nature of the comments generally similar to the prior quarter’s summary.

Key reminders

Pillar Two compliant laws are effective in a number of jurisdictions in 2024. Therefore, companies with operations in, or nexus to these jurisdictions, must include an estimate of any incremental GloBE minimum taxes in their annual effective tax rate.

For more on the first quarter implications, from disclosures to what happens as the global tax legislative landscape continues to evolve, refer to our latest edition of The quarter close where we answer pressing Pillar Two questions that companies are asking.

In addition, please listen to two recent podcasts, Getting ready for OECD Pillar Two and US Guidance Update: Pillar Two and more discussing Pillar Two, foreign tax credits, the U.S. corporate alternative minimum tax, and other topics.

In October 2023, the U.S. Department of Education (ED) reissued regulations which contain requirements for related party disclosures above and beyond what is required by US GAAP (see ED regulation 34 C.F.R 668.23(d)(1)). ED has stepped up enforcement of these regulations and has rejected certain educational institutions’ eZ-Audit filings (an online compliance submission of the financial statements and other items) for lack of a related party disclosure in the audited financial statements. The reissued regulations, which were originally introduced in 1996, require the audited financial statements to include a related party note which describes all related party transactions without regard to materiality and “a level of detail which would readily enable the Secretary [of ED] to identify the related party.” Institutions which are required to furnish audited financial statements to ED should evaluate their related party disclosures.

Podcasts

In case you’ve missed them, PwC has a podcast series for the Health Industries sector. See past episodes here.

Hear PwC specialists discuss strategies to reinvent the pharma business model and drive growth in the pharmaceutical industry.

Tune in to hear PwC Deals leaders discuss preparing for deals in 2024, exploring the current state of the deals market and sharing valuable insights from their newly released 2024 deals outlook.

Listen to hear PwC specialists discuss their recently published article: How a local-first strategy in China can help global pharma and life sciences players reduce risk and drive growth.

Or find these podcasts of using GenAI in health care or the pharma life sciences industry.

Contact us

Laura Robinette

Global Engagement Partner, Health Industries Trust Solutions Leader, PwC US

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