Legal considerations when acquiring or disposing of a pharma business

Buyers should be prepared to carry out extensive enquiries into the regulatory position of the target business. This will involve establishing that the business to be acquired holds all necessary licences and approvals from the MHRA. Where products are in development, an assessment should be carried out as to the likelihood and projected timescales of MHRA approval and the realistic market value of the approved product.

Sellers should address any gaps in regulatory compliance ahead of going to market because these will ultimately affect the valuation of the business and its future sustainability in a competitive marketplace.

Areas of interest to buyers will include 

• Whether products comply with marketing and labelling restrictions
• Previous compliance failures or regulatory interventions and how these have been addressed
• Internal safety and quality processes
• The strength and security of clinical and operational data and compliant documentation
• Compliance with relevant Good Practice Guidelines covering manufacturing, lab and clinical processes

Where products are sold overseas, buyers should also check compliance requirements in relevant jurisdictions, including European Medicines Agency rules and US Food and Drug Administration rules.

Finally, buyers of small research companies should note the increasing regulatory scrutiny of what are known as ‘killer acquisitions’ – where larger enterprises acquire smaller businesses to halt the target’s research, stifle competition, and protect the acquiring company’s core business. The fear that such tactics reduce competitiveness, innovation, and development means such acquisitions my not meet necessary regulatory approval standards.

In many pharma M&As the target company’s intellectual property is the most valuable asset. Often, the IP is the reason for the acquisition in the first place. Buyers will expect clear evidence of IP ownership of trademarks, patents know-how protection, confidentiality measures, and trade secrets – as well as ownership of the underlying technology.

In addition, sellers should provide details on how relevant IP is protected and how ownership rights are enforced. A Freedom to Operate report will usually be carried out to determine how straightforward it will be to commercialise particular products and assess the potential for infringement disputes with third parties.

Steps should also be taken to protect technical expertise and product know how. This will often lie with individual employees and researchers. Buyers should check how robustly this information is protected through confidentiality agreements and other measures. Where key technicians may depart the company post-completion, having this in place before any sale is critical.

A detailed analysis of all contracts to which the target company is a party should be carried out by the buyer. On the one hand, this ensures buyers are comfortable with any obligations they will be assuming as part of the deal and into the future. On the other, it is crucial to establish the extent to which any contractual rights acquired will be enforceable by the buyer post completion.

As we have mentioned, clarification should be sought over IP rights (and their application overseas where relevant). Other contracts include licensing agreements and R&D partnership agreements. Often built on close working relationships, how effective will these be after any change of ownership?

Many contracts in the sector will contain strict change of control provisions where consent to the sale may be required. In particular, research and collaboration agreements, clinical trial contracts, and joint venture agreements should be scrutinised for any termination rights that could potentially severely disrupt or jeopardise the entire deal.

Where this contractual review exercise raises issues of concern, individual contracts may have to be renegotiated or the rights under them formally assigned. A buyer may seek warranties from the seller or an adjusted deal price. Both sides should factor in the uncertainty and delay these factors can inject into the transaction.

The target company’s historic compliance record with all data protection law will be at the forefront of a buyer’s mind in any M&A transaction. Concern is particularly acute, however, in the pharma and life sciences sector because of the highly sensitive personal data processed. This ranges from health and genetic data to clinical trial results, which may identify individual data subjects. A thorough review of compliance with UK GDPR and, where appropriate, EU GDPR and any relevant US state data protection laws is, therefore, essential.

Sellers should expect to provide comprehensive documentation relating to

• Any previous breaches or regulatory interventions
• Details of all internal compliance processes, including ongoing staff training
• Identification of lawful bases for processing data and additional conditions for processing special category data
• Frameworks for patient consent
• Data retention policies
• International data transfers
• Compliance with rules relating to marketing approaches to healthcare professionals

Where shortfalls, breaches, or potential breaches are identified, then appropriate warranties and indemnities should be negotiated.

Valuations of pharma and life sciences businesses are prone to uncertainty and dispute. While agreeing a sale price in any commercial M&A is rarely straightforward, in the pharma sector, the nature of the underlying business means the process can be particularly difficult.

Valuations are often based on future product success, not current revenue streams. Success depends on a range of factors, from provable clinical efficacy to regulatory approval and licensing. ‘Milestone-based’ deal structuring is often used as a way to minimise buyer risk. In return for an upfront payment, the seller agrees to accept deferral of certain payments until specified future events occur.

Typical milestone events include

• Completion of clinical trial phases
• Notification of MHRA approval
• Successful market launch

Negotiation of these deferred milestone payments is complex and can often lead to disputes. If not handled pragmatically, these can lead to delays or threaten the overall deal. It is crucial that milestone terms are drafted with care, allocating risk between buyer and seller in a commercially sensible way. Events should be specified with clarity and provisions included to deal with any disputes over whether a certain milestone has been achieved.

We have outlined a selection of the legal and regulatory issues that can arise in pharma sector M&As. Other areas to be aware of range from government screening of any foreign investment in the sector, securing ownership of manufacturing facilities and the significance of any employment law or tax implications of the deal.

Our award winning M&A team continues to grow in strength and has developed particular expertise in the life sciences sector. We are ideally positioned to advise on every stage of the transaction, from initial valuation and marketing of the business to intensive due diligence and negotiation, and drafting of all documentation necessary to complete the deal on time and within budget.

Our Sales, Acquisitions and Mergers lawyers are backed up by others working in areas such as Commercial Real Estate and Employment Law as well as Finance and IT.

For an initial conversation get in touch.