Contents - AL-Tax

6.1 Summary of Key Facts 91the degree of support that it receives from its own vendors, the efficacy of FDA oversight,etc., USP’s inventories of FS’ in-hospital monitoring devices may be reduced.It is anticipated that FS will market and sell a small number of USP’s in-hospitalpatient monitoring products in European markets as well. It will sell these productsdirectly to end-users in Germany and to stocking distributors elsewhere in Europe.The products will bear USP’s trademarks and names.6.1.2 Business Unit B: Outpatient Monitoring DevicesUSP’s Business Unit B encompasses products designed for use in outpatient settings.These products are already well-established in the U.S. market. Because FShas historically specialized in the design, manufacture and sale of in-hospital monitoringsystems, and has few products that would compete directly with USP’s outpatientproduct lines, it will likely import such products in significant volumes. FS willresell these products directly to end-users in Germany and to stocking distributorselsewhere in Europe, in both cases under USP’s trademarks and names.USP has historically sold approximately 80% of its outpatient monitoring devicesin its domestic market (principally through agents) and 20% outside the UnitedStates (primarily in Europe, Australia and Japan). It has relied on stocking distributorsto market, promote and maintain inventories of these products in foreignmarkets and has gradually built up an extensive distribution network. At the outset,USP encountered significant difficulties in building up its distributor base incertain foreign markets. In most cases, its products were (and remain) a comparativelysmall part of foreign distributors’ overall business. Additionally, reimbursementrates in many European countries are lower than U.S. reimbursement ratesand reimbursement policies are applied more unevenly. For these reasons, Europeandistributors have historically been charged lower prices than U.S. distributors.USP’s foreign distributors typically seek discounts of 45%–50% from list price; aspreviously noted, U.S. distributors are given a standard discount of 40% from listprice. 2FS also has an extensive network of stocking distributors throughout Europe(although it sells direct in Germany, as noted). In most instances, individual countriesare not large enough to support two distributors. Hence, USP will need toconsolidate the Group’s established base of European distributors.As previously noted, USP relies on Company X, an independent subcontractor,to manufacture its outpatient monitoring products. USP provides Company Xwith product specifications; the latter procures raw materials, performs fabricationfunctions and delivers the finished product. Company X requires a fairly long leadtime, ranging from 8 to 16 weeks, in part due to its ongoing commitments to other2 This does not necessarily translate into resale margins of 45%–50% and 40%, respectively, inthat the distributors’ actual selling prices may be higher or lower than their list price, and cost ofgoods includes other items, in addition to the purchase price of product.