Life sciences M&A activity during the global pandemic
COVID-19 has severely disrupted the lives of many people around the world. In this article, corporate partner Theo Godfrey and competition partner Russell Hoare from the life sciences team at law firm CMS Cameron McKenna Nabarro Olswang LLP consider some issues related to COVID-19 that have impacted life sciences merger and acquisition (M&A) activity or that may affect its recovery.
WHILE THE life sciences sector is working to provide testing, therapies and vaccines to help halt the COVID-19 pandemic, it has also been subject to shocks that could adversely affect business continuity, supply chains and the willingness or ability of parties to execute strategic transactions. The sector has seen a sudden drop in M&A activity and it is too early to predict how it will recover in the medium term.
Availability of willing buyers
There has been a noticeable decline in M&A activity since the start of the pandemic. Buyers, sellers and target businesses are likely to be focused on crisis management issues rather than strategic transactions. If buyers are willing to transact, they may have different priorities with a new focus on, for example, anti-infectives and anti-viral treatments. However, it is possible that poor performance in other sectors of the economy (such as retail and leisure) will attract interest in the life sciences sector from new investors, particularly private equity. This is likely to be focused on established, profitable and lower risk support businesses, such as CROs, CMOs and API manufacturers, rather than R&D or clinical stage businesses.
Availability of attractive targets
Competition authorities across Europe are warning of potential delays to their assessment of M&A transactions during the pandemic”
R&D is likely to be subject to a slowdown as organisations experience a higher proportion of staff working from home and potentially limited access to lab space. This may be an issue for early-stage businesses that are reliant on lab space at universities, many of which remain shut. Clinical-stage businesses may find that their trials are delayed due to patients being advised to stay away from hospitals and GP sites or being reluctant to travel, which may require deviations to protocol and standard operating procedures or other changes in processes. In the medium term, this could lead to a reduction in new drugs being approved, and therefore of attractive M&A targets. Conversely, these delays may highlight the need for faster and lower-cost drug development and more efficient clinical trials. This may shift buyers’ focus to businesses that are using technology to develop new drugs or repurpose existing drugs (eg, through AI) or to design and run smarter clinical trials.
Capacity constraints of regulators caused by the COVID-19 pandemic could adversely impact M&A activity if they slow down clinical trials or new marketing approvals – potentially reducing the attractiveness of the applicant businesses to potential buyers – or cause delays in M&A processes; buyers may have to wait longer, for example, for change of ownership applications to be approved or merger clearances to be granted. At the time of writing, the UK Medicines and Healthcare products Regulatory Agency (MHRA) and the US Food and Drug Administration (FDA) do not appear to be experiencing significant delays. However, the FDA has announced that, given it has many staff working on COVID-19 matters, it may not be able to maintain this level of performance indefinitely.1
Competition authorities across Europe are warning of potential delays to their assessment of M&A transactions during the pandemic. The European Commission (Commission) recently published a notice2 stating that it has implemented several internal measures to ensure the continued enforcement of the EU Merger Regulation, but due to the complexities and disruptions caused by COVID-19 it faces difficulties collecting information from the notifying and third parties in some cases. The Commission has encouraged parties to discuss the timing of notifications about transactions with the relevant case team and to use electronic means to notify their transactions, reiterating that it “stands ready to deal with cases where firms can show very compelling reasons to proceed with a merger notification without delay.”
In the UK, the Competition and Markets Authority (CMA) has published guidance on merger assessments during the pandemic.3 It highlights that the CMA’s approach to the substantive assessment of mergers remains unchanged, while acknowledging that the pressures of COVID-19 could have a material impact on its work. The French Competition Authority has indicated the potential for delays to mergers already notified and has asked companies to delay non-urgent merger plans over concerns that it will be unable to guarantee its usual deadlines. Similarly, the Danish Ministry for Industry, Business and Financial Affairs suspended merger review time limits until 10 May 2020. Several intellectual property offices have announced measures in view of the pandemic. For example, the European Patent Office has announced delays to some oral proceedings and extensions to some time limits.4 These measures could result in delays to obtaining legal certainty for patent protection, which could affect the willingness of some buyers to proceed with an M&A transaction.
Changes to foreign direct investment laws
There have been growing calls to increase the screening of foreign direct investment (FDI) during COVID-19 and several EU countries have already tightened their FDI regimes or are planning to do so. The Commission has published guidance5 encouraging all Member States to make full use of any FDI screening mechanisms over concerns about the use of FDI to acquire critical health infrastructures during the pandemic. Fourteen Member States currently have FDI screening mechanisms and other Member States are being actively encouraged to develop them. This comes as the full implementation of the EU FDI Screening Regulation is due in October 2020, which will create an EU-wide framework for co-operation and information-sharing mechanisms between the Commission and Member States on FDI. The EU Trade Commissioner has suggested that Member States should start co-operating under the mechanism provided for in the Regulation ahead of its implementation. Italy and France have also taken measures to broaden the scope of their FDI regimes and Spain has introduced new measures that require the prior approval of acquisitions of more than 10 percent in Spanish companies operating in strategic sectors. Germany is fast-tracking legislation to update its regime and, in the UK, the UK Parliamentary Foreign Affairs Committee has opened an inquiry into the Foreign and Commonwealth Office’s role in blocking foreign asset stripping of UK companies.
Clinical trials assessing interventions to treat COVID-19 are emerging at an unprecedented rate. Over 500 such clinical trials have been registered at various international and national clinical trial registry sites.6 In addition, there are six active clinical trials of potential vaccines and another 77 in pre-clinical development.7
There has been some discussion about governments using existing legislation, or passing new legislation, to enable suspension or compulsory licensing of patents in respect of a COVID-19 therapy or vaccine. Where a target is developing such a therapy or vaccine, a buyer would need to assess the risk that the related patents could be suspended or subject to compulsory licensing. The suspension of a patent or issue of a compulsory license (or the threat or likelihood of such action) would affect pricing decisions by the patent holder and, consequently, the value that a potential buyer would attach to the patent in a transaction.
In many jurisdictions, there is existing legislation that could theoretically be invoked to bring about such suspension or compulsory licensing and several governments have enacted new legislation for this purpose. In March, Israel issued a compulsory license under existing Israeli national legislation, allowing it to import a generic version of AbbVie’s Kaletra, an HIV therapy, from India for the treatment of coronavirus patients. AbbVie subsequently announced that it would not enforce patent rights to Kaletra for its use in patients affected by coronavirus.8 While suspension of patents or compulsory licensing is a possibility, the sheer number of therapies and vaccines in development suggests that, for now, it is not slowing work in the field.
New focus areas of due diligence
The scope and depth of due diligence carried out by buyers in M&A transactions could change while the pandemic continues. Buyers will want to ensure that supply chains are robust and will not be disrupted by the pandemic. This will require a review of the insolvency risk of key suppliers as well as an analysis of current and expected measures that may restrict the ability of suppliers to purchase raw materials, manufacture and deliver to the target. It will also be necessary to analyse supplier agreements for any “force majeure” clauses that may result in the supplier avoiding liability for failure to perform as a result of the pandemic, or other provisions that could allow a supplier to terminate on short notice or reduce its liability in the event of failure to perform.
Clinical trials assessing interventions to treat COVID-19 are emerging at an unprecedented rate”
Buyers will need to consider any business continuity measures taken by the target itself, including the ability of its IT systems to cope with increased remote working and how office and lab space can be refitted to allow for social distancing in the workplace. Where the target has a product on the market, a buyer may also have an increased diligence focus on the target’s cash flow and may wish to consider whether, owing to interruptions caused by the pandemic, any financial support may be required following an acquisition. In the medium term, a restructuring of API supply chains (including potentially to reduce reliance on China and India) could lead to M&A opportunities; financial investors or pharma may look to acquire API manufacturers based in lower-cost European and other Western countries.
Material adverse change clauses
Material adverse change (MAC) clauses allocate the risk of fundamental changes occurring between signing and closing of a transaction (where signing and closing are not simultaneous because, for example, a regulatory or competition clearance must first be obtained). MAC clauses entitle the buyer to terminate the sale agreement if a specific event materialises after signing but before closing. Such events are clearly defined in the contract and often are subject to extensive and detailed negotiations. Where parties signed a transaction prior to the onset of the pandemic, the buyer may have reasons for wishing to enforce an MAC clause and terminate the sale agreement rather than proceed to completion. The presence of an MAC clause that could be exercised as a result of the pandemic could also give a buyer a “lever” with which to try and agree a price reduction or other buyer-favourable change to the deal terms.
CMS conducts an annual analysis of key market trends in legal documentation in the UK and Europe and the 2020 edition of the study, which analysed deals from 2019, shows that MAC clauses were used in 16 percent of deals covered by the study. MAC clauses are, however, far more common in the US. A seller will usually seek to exclude specific unavoidable events from triggering an MAC clause so that the risk of any fundamental change is borne by the buyer, although our experience shows that sellers generally have difficulty in persuading buyers to agree to such exclusions. Exclusions for deterioration of overall and sector-specific economic conditions (seen in 22 and 17 percent of deals with MAC clauses, respectively, according to our latest deal study) and for force majeure or Acts of God (seen in 15 percent) would potentially prevent buyers from relying on an MAC clause in the current circumstances brought about by COVID-19. However, it would depend on the facts and also the specific drafting of the clause and exclusions. The English courts and, in respect of public M&A, the UK Takeover Panel have historically interpreted MAC clauses narrowly, so careful review of the drafting will be required to determine if the current circumstances do give rise to a termination right.
The authors would like to credit Madeeha Anthony, a competition associate, who assisted with preparing this article.
About the authors
Theo Godfrey is a corporate partner in the London office of CMS. He advises on a wide range of corporate transactions, including acquisitions, disposals, private equity and venture capital transactions and joint venture arrangements. He has a particular focus on the life sciences sector.
Russell Hoare is a competition partner in the London office of CMS. He advises on merger control, behavioural cases, compliance, market investigations, abuse of dominance, competition law litigation, public procurement, state aid and consumer protection law, both at EU and UK level, including within the life sciences sector.
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Available from: https://www.abbvie.com/coronavirus.html
AbbVie, Danish Ministry for Industry Business and Financial Affairs, European Commission (EC), European Patent Office, French Competition Authority, UK Competition and Markets Authority (CMA), UK Medicines and Healthcare products Regulatory Agency (MHRA), UK Parliamentary Foreign Affairs Committee, UK Takeover Panel, US Food and Drug Administration (FDA)