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By: Reb Wheeler, Mayer Brown LLP
LEXIS PRACTICE ADVISOR RESEARCH PATH: Mergers & Acquisitions > M&A by Industry > Life Sciences M&A
THE LIFE SCIENCES INDUSTRY HAS BEEN AMONG THE MOST active sectors for mergers and acquisitions in recent years. There are a variety of issues that are uniquely or particularly relevant to life sciences companies and their products that will have important implications for evaluating, structuring, and negotiating transactions in the industry. It is especially important that counsel working on life sciences M&A deals understand these issues when conducting due diligence. While some aspects of legal due diligence in these deals will be more or less the same as in any M&A transaction, there are certain areas of due diligence that tend to assume particular significance in a life sciences acquisition. This article explores a number of such considerations, including (1) product-specific issues, such as intellectual property, marketing approvals, post-marketing obligations, and licensing and collaboration relationships; and (2) enterprise-level issues, such as compliance and supply chain considerations.
For present purposes, the “life sciences” sector is generally considered to include pharmaceuticals, health-oriented biotechnology products, and medical devices. Not all of the considerations discussed in this article will be relevant (or relevant in the same way) to participants in these different industry segments. This article is also focused on U.S.-specific issues in transactions involving U.S. targets. Many U.S. life sciences companies, of course, conduct business and have personnel and assets in multiple countries; international and cross-border issues will therefore often be an important focus in life sciences M&A deals as well.
Pharmaceutical companies and biotech firms often think about their products in terms of their life cycle. In the most common case, in the United States, a novel pharmaceutical or biotech product’s life cycle begins during its development— well before its approval by the FDA—and proceeds through a period during which the product enjoys an exclusive position in the marketplace and into a phase in which market share is ceded to competing generic or “biosimilar” products that can be substituted for the innovator product. The goal of innovator or “brand” companies is to maximize the period during which the product enjoys market exclusivity and to delay entry of generic or biosimilar competition for as long as possible. These considerations inform many aspects of a pharmaceutical or biotech company’s business and products, as the discussion below illustrates. It is often helpful, therefore, to bear these life cycle considerations in mind when undertaking product- focused due diligence on a life sciences target.
The most significant factors bearing on market exclusivity are intellectual property rights and regulatory exclusivity periods. Practitioners advising participants in life sciences M&A deals need to understand these different sources of rights in order to help their clients properly assess a product’s legal positioning and negotiate and document transaction structures, different approaches to consideration, and other terms that appropriately take into account these key factors that bear on a product’s life cycle.
Life cycle management is less of a consideration for medical device companies. Medical devices do not benefit from the kinds of regulation-based market exclusivity that is available to drugs and biologic products and thus do not face generic competition in the same way that drugs and biologics do. Patent and trade secret protection can, however, have significant bearing on a medical device’s market posture.
The intellectual property (IP) underlying a drug, biologic, or medical device, and the legal rights associated with that IP, are key determinants of whether and how long a product is likely to enjoy an exclusive market position. Relevant intellectual property rights include:
Diligencing intellectual property issues associated with a drug, biologic, or medical device can become very technical and complicated. Any such effort should focus on a number of factors, including the following:
The nature and validity of the intellectual property and the target company’s rights in the IP. Among other things, consideration should be given to the following:
Freedom to operate. Particularly for product candidates that have not yet reached the market, it is important to assess the risk that the product’s manufacture and/or commercialization might infringe a third party’s intellectual property rights. Although it may not be practical to conduct fulsome freedom to operate analyses for each of a target company’s products and product candidates, such analyses may be warranted for the most important products or candidates. Due diligence should also focus on any past or pending claims or allegations that the target is infringing a third party’s intellectual property and the terms of any settlement or other resolution relating thereto.
Third-party rights. An important part of conducting due diligence on a target company’s IP is tracing the heritage of that IP and confirming that the target possesses all the rights it purports to possess in that IP. Practitioners should be on the lookout for the following situations:
Regulatory Exclusivity Periods
In the case of drugs and biologics, the other key determinant of a new product’s prospects for market exclusivity in the United States, in addition to its patent coverage, is the regulatory exclusivity afforded to it in relation to its FDA approval. Developing new drugs and biologics commonly takes many years and involves enormous investments of money and resources. At the same time, innovators often apply for patents early in the development process. As a result, it is not uncommon for a number of years of the term of the patents covering a novel product or related process to have elapsed by the time the product is approved for sale. Congress has passed legislation to address this issue and ensure that innovators will have some period of exclusivity during which they will be able to market novel products free of generic competition in order to recoup their investment in a product’s development. One such legislative fix is the patent term extension program provided for under the Hatch-Waxman Act, as described above. Other legislation has provided for additional periods of statutory exclusivity during which the FDA may not approve (and in some cases, may not accept) applications for competing generic or biosimilar products. It is important for counsel to understand these different possibilities for market exclusivity in order to assess (1) what forms of market exclusivity attach to a given product, (2) how much time remains on such exclusivity terms, and (3) whether there are possibilities for obtaining additional forms of exclusivity.
In the United States, pharmaceuticals and biologics must, in most cases, be approved by the FDA before they can be marketed to the public. Novel pharmaceutical products are typically approved pursuant to a new drug application (NDA). Generic pharmaceuticals are typically approved through a more streamlined process pursuant to an abbreviated new drug application (ANDA). In the case of conventional drugs, several types of statutory exclusivity are available, as follows:
Existing exclusivity and patent terms applying to marketed conventional drugs can be assessed relatively easily by referring to the FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”), which is accessible online through the FDA’s website. See http://www.fda.gov/ Drugs/InformationOnDrugs/ucm129662.htm. The Orange Book is searchable in a variety of ways and identifies the types of exclusivity attaching to listed drugs and when that exclusivity, as well as patent coverage, expires.
In the case of products in development for which an NDA has not yet been approved, a buyer will need to assess the current state of development efforts, when the NDA is likely to be filed (if it has not yet been filed) or where it stands in the approval process (if it has been filed), and whether an orphan drug designation or pediatric exclusivity may be available.
Biologics are approved pursuant to a biologic license application (BLA), and biosimilar products are approved pursuant to an abbreviated BLA process. The Patient Protection and Affordable Care Act of 2010 (124 Stat. 119, 111 P.L. 148, 124 Stat. 119) (the “Affordable Care Act”) established a separate regulatory exclusivity regime for biologicals. Under that regime, a biologic using a novel biological structure is entitled to data exclusivity for 12 years, meaning that the FDA will not accept an application for a biosimilar product claiming comparability to the applicable innovator biologic for a period of 12 years from approval of a BLA in respect of the innovator biologic. As with “small molecule” drugs, biologics can be eligible for a six-month extension with qualifying pediatric studies and can receive orphan designations.
The FDA has recently released the “Purple Book” (the formal name is Lists of Licensed Biological Products with Reference Product Exclusivity and Biosimilarity or Interchangeability Evaluations), which, in some respects, is to biologics what the Orange Book is to traditional drugs. See http:// www.fda.gov/Drugs/DevelopmentApprovalProcess/ HowDrugsareDevelopedandApproved/ApprovalApplications/ TherapeuticBiologicApplications/Biosimilars/ucm411418.htm. The Purple Book is significantly more limited in its scope, however. Accordingly, for now, practitioners will need to evaluate the BLA and patents covering biological products in order to assess exclusivity.
Unlike pharmaceuticals and biologics, medical devices do not benefit from any regulatory market exclusivity provisions. Accordingly, market exclusivity for medical devices will typically be determined by intellectual property and other barriers to entry, as discussed above.
As a public policy counterweight to market exclusivity for pharmaceutical and biologic products and the benefits exclusivity affords innovator companies, U.S. law has established pathways for generic and biosimilar products to reach the market once patent protection and regulatory exclusivity of the innovator, or “reference,” product has expired and sometimes earlier. As noted above, the timing of generic or biosimilar competition will almost always be a key consideration for buyers when assessing the value and prospects of a pharmaceutical or biologic product. It is therefore important for counsel to understand and be able to evaluate the prospects for and timing of generic competition for products involved in an acquisition.
In the case of pharmaceuticals, the Hatch-Waxman Act permits manufacturers of generic versions of approved drugs to utilize more streamlined applications for marketing approval. Most generic drugs are marketed under an ANDA. An ANDA filer is not required to carry out either animal or human trials to demonstrate safety or efficacy; rather, it must demonstrate that the generic product is “bioequivalent” to the reference product in that it performs the same way as the reference drug. This is typically established through far more limited clinical trials than are required for new chemical entities.
As noted above, there are two key barriers to generic competition for pharmaceuticals: regulatory exclusivity and patents protecting the innovator drug. As discussed above, the type of regulatory exclusivity attaching to a particular innovator drug will dictate whether and when the FDA can accept or approve an ANDA in respect of a generic version of that drug. Applicants must address the issue of patent coverage by certifying in the ANDA one of the following with respect to the patents protecting the reference drug: (1) that no patent covering the reference drug was submitted to the FDA; (2) that all patents covering the reference drug that were submitted to the FDA have expired; (3) that the applicant seeks approval only once the applicable patents covering the reference drug expire; or (4) that the patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the drug product for which the abbreviated application is submitted (a “Paragraph IV certification”).
The Hatch-Waxman Act requires that an ANDA filer must notify the holder of the NDA for the reference drug of its filing and further provides that the act of filing an ANDA with a Paragraph IV certification is an act of patent infringement such that the NDA holder has standing to initiate a patent infringement suit against the ANDA filer. If the NDA holder does so within 45 days after notice of the ANDA filing, the Hatch-Waxman Act establishes a 30-month stay during which the FDA cannot approve the ANDA unless the patent at issue expires or a court rules that there is no infringement or that the patent is invalid. If none of these occurs prior to the expiration of the 30-month stay and the regulatory exclusivity period covering the reference drug has lapsed, the FDA will be permitted to approve the ANDA for the generic product. If patent infringement litigation is still pending at the time of approval, however, any commercial launch of the generic product would be deemed “at risk” in that the generic company would face a substantial damages award in the event that it ultimately loses.
The Hatch-Waxman Act provides an important incentive for generic manufacturers to find their way through these regulatory and patent hurdles. The first manufacturer to file an ANDA for a generic version of a particular reference drug is generally awarded a 180-day marketing exclusivity period during which no other generic version of the same reference drug can be sold in the United States. This gives the “first-to- file” generic company a distinct advantage in terms of both pricing and market share over future generic entrants.
Given the high stakes involved in the timing of generic competition for a given drug, it is important that M&A practitioners understand the various dimensions of the generic approval process so that they are able to assist buyers in determining how to appropriately factor the specter of generic competitors to a target’s key products into their assessment of those products’ value and future prospects. The existence or prospect of generic competition may also be taken into account in various deal terms, as discussed below.
Biosimilar products are to biologics what generics are to traditional “small molecule” drugs, but obtaining FDA approval of a biosimilar is a significantly more time consuming, costly, and uncertain undertaking than obtaining approval of a generic drug. As the name implies, biosimilars are not exact replicas of the innovator biologic products. This creates a complicated situation for regulators endeavoring to develop streamlined approval pathways for biosimilar products while still ensuring their safety and efficacy are equivalent to that of the innovator biologics. This is a relatively new and still evolving area of law and policy in the United States and other countries.
The legislative basis for an approval pathway for biosimilars in the United States was established as part of the Affordable Care Act in 2010 and the FDA has published guidance relating to the approval of biosimilars in 2012 and 2014. Under this guidance, manufacturers are permitted to rely to some extent on safety and efficacy data filed in respect of the reference biologic, but the biosimilar still must be shown to have no significant clinical differences from the reference biologic. Because a biosimilar will never be exactly the same as an innovator product, demonstrating the requisite level of similarity will typically require a combination of structural analyses, functional assays, and data from animal and human studies. The FDA has significant discretion over what it will require for a particular biosimilar.
There are other differences between the approval process for a traditional generic product and a biosimilar. For example, biosimilar applicants are not required to make patent certifications and are not subject to an automatic 30-month stay if infringement litigation is initiated. They are, however, required to provide certain notices to the holder of the BLA for the reference product. As with generic products, the first applicant for a biosimilar version of a particular reference biologic is, however, entitled to a period of marketing exclusivity during which no other biosimilar based on the same reference product may be sold in the United States.
Because of the evolving nature of the approval process for biosimilars and the challenges associated with obtaining FDA approval for a biosimilar, competition from biosimilars is not yet the threat to biologic products as competition from generics is to traditional drugs. It seems inevitable that will change, though, as regulators catch up with the science of biotechnology and manufacturers become more adept at replicating and manufacturing biosimilars. It therefore also seems inevitable that M&A practitioners will need to understand and keep up with this important and developing dimension of the life sciences industry in order to assist clients pursuing acquisitions of biotech targets in properly evaluating and planning for the likelihood and potential timing of biosimilar competition.
In-licensing of intellectual property and product development collaborations in various forms are very common in the life sciences industry. Such arrangements can give rise to a range of considerations and traps for the unwary acquirer. Among other things, as part of due diligence, buyers and their counsel should assess the following in the context of in-licensing and collaborative development transactions:
Bringing a new drug or biologic and certain types of medical devices to market is typically a very lengthy process fraught with legal and regulatory pitfalls. In addition to assessing the prospective market exclusivity the product is likely to enjoy once it is approved, there are a number of elements of the development process that acquirers and their advisors should be mindful of during the due diligence process, including the following:
Requisite Approvals. Before a developer can begin clinical trials for a drug or biologic product involving human subjects, an investigational new drug application (IND) must be submitted to the FDA. Clinical studies of medical devices require a comparable filing called an investigational device exemption (IDE). Due diligence should include a review of target’s open IND/IDE applications to ensure that ongoing clinical trials are being conducted in accordance with valid INDs/IDEs and that the target is adhering to the terms of such INDs and IDEs.
Completing development and achieving FDA approval or clearance is in many ways just the beginning of a product’s regulatory life. Life sciences companies are subject to a wide range of regulatory requirements specific to their products. It is important to involve regulatory specialists in any due diligence investigation of a life sciences target. A discussion of all the possible regulatory issues that can bear on a transaction is beyond the scope this practice note; however, the following are among the more significant considerations:
Product liability claims are, of course, a big concern for companies in the life sciences industry. Evaluating existing product liability claims and potential sources for future claims should be an important part of any due diligence effort for a life sciences transaction. Where there is a history of claims or significant concern over future claims, it may be worthwhile to get the perspective of a product liability litigator as part of the diligence process. Things to consider include the following:
Class Actions. Are any claims arising from similar circumstances likely to be aggregated into one or more class action suits?
In addition to the regulatory hurdles that life sciences companies face in shepherding their products through the regulatory approval process and complying with product- focused regulations after approval, industry participants are also subject to extensive regulation of their operations. Various compliance regimes address a range of issues likely to be relevant to a target company, including how its sales force markets its products, its manufacturing operations, its pricing and price reporting in relation to different health care payers, and how it handles patient information. Non-compliance can be costly in terms of not only fines, but also restrictions on a target company’s activities and increased regulatory oversight. Regulatory compliance matters a buyer should assess during due diligence include the following:
Sales Force Considerations. One of the biggest sources of potential liability for a life sciences company is compliance missteps by its sales force. Among other potential problems, issues can arise in the form of:
Due diligence of these kinds of compliance issues should include, among other things:
Requirements of Physician Payments Sunshine Act. The Physician Payments Sunshine Act (42 USCS § 18001) imposes public reporting obligations on many life sciences companies in relation to any transfer of anything of value to physicians or teaching hospitals. Disclosure must include the nature of the transferred items, the reason for the transfer, the identity of the recipient, and the reporting entity’s product associated with the transfer. Non-compliance with these reporting obligations can result in the imposition of significant fines. Moreover, such required disclosure may reveal instances of violations or potential violations of the federal Anti-Kickback Statute or the False Claims Act, paving a smoother path for investigations and enforcement actions. Acquirers should carefully assess a target’s policies and procedures for complying with these requirements, any instances of non-compliance, and the results of any compliance audit by the Department of Health and Human Services (the agency charged with enforcing these rules).
HIPAA Considerations. The Health Insurance Portability and Accounting Act (45 CFR 164.502) (HIPAA) imposes stringent requirements for the handling of Protected Health Information or “PHI,” as well as civil and criminal penalties for non-compliance. HIPAA and related privacy regulations are a significant area of concern for life sciences companies that are privy to health information of individuals, particularly as their requirements converge with the issues associated with data security in the era of “big data.” Due diligence should include an assessment of:
Inspections. The FDA carries out various types of inspections of facilities engaged in the manufacture of drugs, biologics, or medical devices. They can be routine or “for cause” and they can be narrowly focused or fulsome. An important part of due diligence is reviewing the reports of these inspections and particularly any notices of identified non-compliance with FDA requirements, which are reported on Form 483. To the extent that a manufacturer has received Form 483s, it is important to review subsequent communications between the company and the FDA to confirm that the identified problems were adequately resolved or are on a path to resolution. Form 483s are publicly available on the FDA’s website. More serious issues or continued deficiencies can lead the FDA to issue a warning letter, which can be the predicate to more serious enforcement action, including mandating the shut-down of a facility. Warning letters are also publicly available on the FDA’s website.
Adverse Event Reporting. Drug and biotech companies are obligated to implement systems to monitor adverse events involving their products that are reported to them and others with whom they do business. Once identified, the company must report the adverse event to the FDA Adverse Event Reporting System (FAERS). Medical device manufacturers are subject to a similar regime—medical device reporting (MDR)—in respect of malfunctions, deaths, and serious injuries involving their devices. The FAERS system is accessible to the public. Similarly, MDR reports are accessible through the FDA’s Manufacturer and User Facility Device Experience (MAUDE) database. Due diligence should include a review of the nature and extent of adverse events reported in respect of the target’s products on the FAERS system or MAUDE, as applicable. Extensive and/or a series of adverse events could signal a risk of product liability claims or regulatory action, such as a required labeling change. It is also important to evaluate a target’s compliance with its adverse event reporting obligations as part of an overall assessment of the effectiveness of its compliance functions.
Settlements with Regulators. In the highly regulated life sciences industry, it is not uncommon for participants to enter into settlement arrangements with regulators as part of the resolution of investigations or enforcement actions. Such settlements, which often take the form of Corporate Integrity Agreements (CIAs), can impose a range of different limitations or specific requirements on the company’s operations, as well as increased regulatory oversight through audits and reporting obligations. Acquirers should carefully review the requirements imposed under settlements of regulatory investigations or claims, as well as the target’s experience and performance under any CIA to which it may be subject. What policies and procedures have been implemented to comply with the requirements of the CIA? Has the target’s compliance been audited? If so, what was the outcome? Counsel should also evaluate any implications the CIA or any other settlement may have on the target’s ability to consummate the contemplated transaction.
New Frontiers. In the current environment, as pharmaceutical and other life sciences companies search for new ways to expand their offerings and justify the cost of their products to payers, many are finding themselves enmeshed in new areas of regulation and, in some cases, finding that the regulatory landscape for some new products and services is undefined at best. For example, many companies are becoming involved in patient assistance and monitoring programs for patients using their products. Such programs often give rise to questions of whether the company is practicing medicine or nursing within the meaning of state laws and whether additional licensing may be required. Many medical device companies are faced with a host of new issues associated with the wealth of data generated by biometric devices that access the Internet. Data privacy issues become particularly salient in that context. There are many other examples of changes like this that are resulting in a blurring of the boundaries between life sciences and healthcare, and giving rise to new regulatory questions and challenges that counsel should be mindful of.
A functioning supply chain is part of the lifeblood of most life sciences companies. Manufacturers of not just finished products, but also active ingredients, excipients, and packaging components are subject to extensive FDA regulation. As a result, switching from one supplier to another is often not as simple as it would be in other industries. Switching suppliers, or even to a new facility of the same supplier, will often necessitate establishing the new site with the FDA as an approved supplier for the product or component involved, which can be a complicated and time consuming process. There can also be practical difficulties associated with transferring the technical process for producing a product or a component. Manufacturing antibodies for a complex biologic is often not something that is easily replicated by a new manufacturer in a new facility, for example. For these and other reasons, it is very important that due diligence in a life sciences M&A transaction include a careful review of the third-party relationships and agreements involved in the target’s supply chain. Particular attention should be paid to the following:
Life sciences companies and their products are subject to a variety of legal issues and regulatory regimes that are distinct from those in other industries. In order to conduct an effective due diligence exercise for an acquisition in the life sciences sector, it is important for counsel to understand the product-specific and enterprise-level considerations described in this article.
Reb Wheeler is a partner at Mayer Brown LLP and is global co-chair of the firm’s Life Sciences industry group. His practice focuses on mergers & acquisitions, joint ventures, private equity, securities, and other transactional matters. Reb has extensive experience advising participants in the pharmaceutical, biotech, and medical device sectors, ranging from new ventures and investors to some of the world’s largest pharmaceutical and biotech firms.