Contents - AL-Tax

92 6 Intercompany Sale of Medical Devicescustomers and its “first-come first-served” policy. Therefore, USP routinely plansaround a 16-week lead time, and builds in an additional cushion of 1 month. Whilecarrying excess stocks is undesirable, the more important objective is to avoid theworst-case scenario, in which a physician would like to use USP’s product, but noneare available and he or she resorts to a competitor’s product.With regard to outpatient monitoring devices destined for non-U.S. markets, USPwill formally engage Company X. However, the latter will ship product directly toFS, and FS will bear the costs and risks associated with ocean and inland transport.Moreover, it will not have return privileges. With FS interposed between USP andindependent foreign distributors outside of Germany, the latter will not be requiredto carry exceptionally large stocks. Rather, FS will carry sufficient inventories toensure that demand for USP’s outpatient products in European markets can be meton a timely basis, taking into account both Company X’s comparatively long leadtime and the additional time required to ship product. FS will also be primarilyresponsible for advertising and promoting USP’s products in Europe, and will overseethe performance of independent European distributors.FS manufactures three outpatient monitoring devices that USP could potentiallysell in the United States. At present, none of these products are FDA-approved. Twoof the three products serve the same medical purpose as certain of the productsalready manufactured and sold by USP. Both have certain design features that arenot well-accepted in the United States. 3 Thus, USP will probably not market andsell these two products domestically. If USP ultimately decides in favor of doingso, it would have to obtain FDA approval. Because these products would likely beconsidered Class II medical devices, and there are substantially equivalent predicatemedical devices currently on the market, USP could obtain such approval relativelyquickly and at limited expense. 4USP does not currently manufacture or market a product that would competedirectly with FS’ third outpatient monitoring device. However, by virtue of certaindesign features, this product may be considered a Class III device, requiring a muchmore arduous FDA approval process. The approval process for Class III medicaldevices, referred to as “PMA,” requires extensive clinical trials to demonstrate safetyand efficacy. If the product is manufactured with new materials, animal tests are alsorequired.3 A competing product with similar design characteristics was previously sold in the United States;as a result of unacceptably high failure rates, the product was ultimately withdrawn from the marketsome years ago.4 Medical devices not used in applications that can potentially be life-threatening may be approvedunder a process known as “5–10(k)”; the supplier of such a device is only required to demonstratethat its product is substantially equivalent to a device currently on the market, which has beenshown to be safe and effective.