Assume that GSK (UK) sells Zantac to its subsidiary in Switzerland. Swiss pharma

Question

Assume that GSK (UK) sells Zantac to its subsidiary in Switzerland. Swiss pharmaceutical prices are determined by a governmental agency. The maximum price it allows for a pharmaceutical is based on the average price of the product in a group of reference countries (Germany, UK, Denmark and Netherlands) and the product’s therapeutic and economic value compared to older products of the same therapeutic group. Would you use the dollar-equivalent price to the Swiss entity, adjusted for differences in shipping costs, to transfer Zantac from GSK (U.K.) to GSK (U.S.)? Why?

Explanation / Answer

In this case, GlaxoSmithKline (GSK)'s UK division is selling a drug to its subsidiary in Switzerland. This can be considered as a case of transfer pricing where one unit or division of a large multinational company sells to another unit or division.

In cases of transfer pricing, comparable prices are used to determine the amount of transaction where two units of the same company is involved. To determine comparable prices, the dollar equivalent price should be determined. This will make for easy comparisons. The dollar equivalent price will need some adjustments, besides the differences in shipping costs. As GSK operates in the branded pharmaceutical market, there should be adjustments for business realities. Emphasis should be given on factors that are involved in transactions where dealing is done at arm's length.

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