36-38 - LIFE SCIENCES: World in motion

Let’s take a look at some of the immediate implications and current trends in terms of financing, M&A, antitrust, litigation and technology within the life sciences sector.

Early on, exemptions from various working-from-home mandates were made for critical infrastructure and essential workers in the US, UK, Europe and elsewhere, which included the pharmaceutical supply chain. While the definition of supply chain was at first unclear, it was established that development stage research facilities or early-stage preclinical faculties would remain open and operations were duly maintained.

There were, however, a range of implications for product development activities as a result of COVID-19. Those in clinical developments grappled with challenges to the conduct of ongoing trials, such as delays in enrolments and following up with patients. Regulators had to respond to an increasing number of requests for amendments to protocols for ongoing clinical trials and other urgent regulatory matters, while working remotely.

Changes in the timelines for many early-stage companies saw budgetary implications and the need for additional financing. Although few would have anticipated it, throughout 2020 and 2021, the capital markets and the financing resources available were robust. Meanwhile, 2020 was a record-breaking year for venture capital investment in the life sciences space and there continues to be a great deal of interest in the UK from Asian investors.

There was an increase in the number and percentages of very early-stage companies seeking access and getting access to the public markets much earlier in their life cycle than has historically been seen. For example, at least 22 preclinical stage companies went public in 2021 – more than each of the last three years.

At the beginning of the pandemic, many buyers put a halt to pending transactions or implemented a go-slow strategy while the new environment became clearer. There was a rise in buyers considering potential future litigation, with key points of conflict including Material Adverse Change (MAC) clauses, the use of frustration, force majeure provisions and alleged breaches of pre-closing covenants.

From the first part of 2021, time frames began to speed up and deals were expected to be completed in a condensed period. Buyers were spending an increasing amount of time on due diligence as an evaluation of the pandemic impact unfolded. Buyers were also paying particular attention to the use of government funding and furlough schemes to ensure that any utilisation was compliant with the terms of the funding.

In addition, there was also a significant increase in the use of warranty and indemnity insurances as a key part of M&A deals, even in highly regulated services, such as life sciences and financial services. Many insurers are willing to consider underwriting COVID-19 risks following thorough due diligence on a transaction.

When a large or dominant firm acquires a nascent competitor, from a regulatory standpoint, there is the potential for competitive harm and the stifling of innovation. In the EU, the European Commission merger control regime entails a worldwide, EU and national threshold, and if those thresholds are met one filing is necessary. The substantive test is that mergers will be prohibited where they significantly impede effective competition in the common market.

The UK has a broader test which stipulates if the parties supply 25% or more of a particular product or service in the UK – or makes over £70m in revenue – it could be subject to merger controls. In the UK, although filings are voluntary, the Competition and Market Authority has a duty to investigate which mergers are taking place and may freeze integration during their review.

Given the flexibility of the UK test, the CMA has reviewed many more acquisitions than the European Commission. As a result, in March 2021, the European Commission published guidance stating that it will reignite use of Article 22 which fell into disuse for over 20 years. This enables a member state to refer a transaction to the European Commission if it felt that there was an effect on competition, and it did not have the power to review it, even when it does not meet national thresholds.

As such many are considering fail-safe provision noting that parties cannot exclude the possibility of an Article 22 referral. Indeed, we have seen the Article 22 referral play a part in an increasing number of pharma-related acquisitions.

Another key area has been foreign direct investment which has largely arisen from geopolitical tensions. The EU introduced a framework regime whereby EU member states and the European Commission exchange information and are able to comment on ongoing foreign direct investment screening. When planning deals, it is important to consider various FDI regimes around the world.

There have been very significant levels of investment into AI within the life sciences sector. It looks likely that spending on intelligent drug discovery with artificial intelligence could reach nearly $4bn by 2023 (it was sitting at below $200m in 2018).

During 2020, 70% of all patient interactions in the US occurred on a virtual basis and this has been linked to the 103% increase in spending on digital health funding.

There is prospective AI-specific legislation in the European Union, being consulted on currently, which will affect any company which is utilising AI in any sector, and which will have significant application in the life sciences sector.

This will bring considerable regulatory compliance obligations in respect of the development and implementation of AI technology and solutions. It will also become a material consideration for any operator of AI – or company looking to invest in AI – within the EU.

With changes to policies happening all the time based on case rates, it is important for employers to conduct risk assessments which are tailored to their businesses, and address safety considerations for their population, employees and visitors.

To the extent that employers do want to implement hybrid working, it is important to have policies in place to educate the workforce as to what the expectations are, particularly in order to meet regulatory and data security concerns, and to have technology to allow people to operate effectively.

Some employees may request to work from another country giving rise to tax considerations and additional, perhaps more onerous, employment rights. Employers should also be mindful of litigation risks and have in place whistle-blowing policies to ensure that concerns are escalated and managed appropriately.

The impact of Brexit on employment law has been limited, as in the UK most of the European rules remain in place and the landscape is similar. There are significant challenges, however, in relation to employee mobility in light of the restriction of movement of workers between the UK and the rest of Europe.

Work permits are now required to work in the UK as an EU citizen and vice versa, meaning that employers must undertake additional steps to ensure they are able to employ skilled talent which no longer has an automatic right to work in a particular jurisdiction.

Data privacy continues to be a dynamic and an increasingly important topic for many organisations, including in the life sciences sector that holds vast amounts of sensitive personal data. UK GDPR and EU GDPR are far-reaching. UK GDPR will apply if a company has an establishment in the UK but also if it is offering goods and services to individuals in the UK, irrespective of whether payment is required.

Among other considerations, there is a prohibition on transferring any personal data to any country that does not have adequate levels of data protection. To send information to a country that doesn’t have adequate levels of protection, one option is to use binding corporate rules, but this can be burdensome, complicated and expensive to put in place.

Another option is to use standard contractual clauses and we are expecting the final version of the UK list to be published soon. Permitted derogations is another method for exporting data but only where it is strictly necessary to rely on that derogation (such as consent).

It is also important to ensure that a proper data breach notification response team is already in place, sufficient training is provided and the authorities are notified in a timely manner in case of a cyber-attack. The data protection authority considers a lack of adequate policies and training when taking enforcement action.

A myriad of regulations govern the European pharmaceutical and medical devices industries and those that operate within them.

As part of its vision to build a European Health Union, the European Commission last year initiated its new pharmaceutical strategy for Europe that was adopted in November 2020. This proposed various initiatives for legislative reforms and is intended to improve innovation, access and affordability of medicines.

More immediately, existing proposals include the new pharmaceutical clinical trials regulation, which was introduced on 31 January 2022, which will result in a partially accessible centralised database of trials and single approval hub for cross-border trials, viewable to the public.

Additionally, following a consultation exercise, a revision of the EU’s regime on orphan and paediatric medicine is also underway and the Commission will seek to publish its proposal for new legislation in early 2022. Finally, the EU’s draft legislation on Health Technology Assessment proposes creating centralised reviews and member state cooperation from 2026 following a transition period.

As to devices, May 2021 saw the implementation of the EU’s new medical device regulation. It is much stricter than previous legislation and makes not only manufacturers but also others in the supply chain responsible for medical devices. A similar framework for the EU’s In Vitro Diagnostics Directive is also soon to be gradually implemented.

Following Brexit, there is now no mutual regulatory recognition of the UK for either pharmaceuticals or medical devices, hence the UK is effectively a third country for the EU. The UK has already instituted some of its own rules but has much to do in order to develop a comprehensive suite of equivalent legislation. The key issue will be the extent to which the UK decides to align with EU laws or diverge.