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Beyond the Patent Cliff



The past year saw an unprecedented increase in strategic alliances, as the pharmaceutical industry sought to overcome the much-feared patent cliff. How will the industry respond to continuing challenges as 2012 progresses? Over the last decade, there has been almost $700 billion dollars worth of deals in the pharmaceutical sector and, despite the gloomy economic backdrop, M&A activity looks set to increase in 2012. While major structural shifts in new R&D take place and intellectual property is financed, the life sciences sector provides a rare bright spot in the pervading economic gloom.

Industry Investment

Historically, the risk involved in R&D has led private equity (PE) firms to avoid large pharmaceutical companies and the biopharmaceutical industry in general. Recently, some small deals have linked PE and venture capital (VC) with biotechnology, as we see investment in a number of diverse projects in different areas of life sciences. This ensures that PE firms can manage the high levels of risk in R&D to balance their portfolio carefully. This has been demonstrated by growth in the total number of PE/VC deals over the last four years in the US small medical devices sector, with smaller start-ups benefitting most significantly.

Emerging markets continue to receive significant life sciences PE investment, with China and India gaining the most. Some experts believe that this will stimulate PE funding across the industry more widely in 2012 and beyond. This growing trend is already playing out in Europe – according to the European Private Equity and Venture Capital Association (EVCA), the total investment in life sciences in Europe increased from €3.4 billion in 2009 to €5.7 billion in 2010, while the total venture investment in life sciences accounted for 30 per cent of the total investment in Europe in 2010. Such funding is likely to increase, as the cash-rich life sciences sector is seen to be ‘recession proof’.

2011 was also a busy year for Japanese pharmaceutical M&A. Looking at all sectors, cross-border acquisitions by Japanese companies nearly tripled compared to 2010. Liquidity among Japanese pharmaceutical companies has remained strong, as has demand for prescription medicines from an ageing population, enabling Japanese companies to enter into deals at a time of intense competition for intellectual property in the industry. During 2011, Takeda Pharmaceutical Company Limited, the largest Japanese pharmaceutical company, undertook a €9.6 billion (debt-free, cash-free) acquisition of Swiss drug company Nycomed A/S. On the back of this transformative deal, we expect the industry to undertake more M&A activity in the Japanese lifesciences sector in 2012. Factors such as the economic climate, demography and the state of R&D pipelines should see more Asian acquisitions of European patented drugs.

We are likely to be at the start of a fresh cycle of M&A activity in the pharmaceutical sector. Throughout 2011 and into 2012, the industry has seen low R&D productivity, which has resulted in a lack of blockbuster drugs coming through the pipeline. Major blockbuster patent expirations loom on the horizon, notably Plavix and Seroquel, following on from the expiries of Lipitor and Zypreza last year. Large pharmaceutical companies recognise that M&A offers an alternative way to maintain profits and cover loss of revenues from a broken business model which relies on blockbuster drugs. Many companies are being driven to enter emerging markets (such as Brazil, Russia, India and China (BRIC), south-east Europe and Turkey), where their portfolios remain weak.

The Patent Cliff

In Europe, the patent cliff has been fast approaching and 2012 looks set to be the year we peer beyond the brink. Many investors have been eagerly anticipating companies looking to diversify their pipelines or develop replacement products to help them weather the storm of products coming off patent. However, most companies have struggled to make a return on the expensive R&D costs pumped into prospective pipelines. Legislation such as Supplementary Protection Certificates (SPCs) will play a significant role in assisting companies facing the expiry of major patent portfolios and provide more protection for companies investing heavily in R&D. EU patent offices have long been able to grant SPCs if there has been a large gap between a company filing a patent application and gaining authorisation to market the drug. However, there are a number of issues regarding how SPCs apply to medicines that contain more than one active ingredient. In a landmark case in November 2011, the Court of Justice of the European Union said that there is no reason why SPCs may not be granted for a single active ingredient that is specified in a patent, where the marketing authorisation also contains other active ingredients. This (and other recent cases regarding SPCs) is likely to have further ramifi cations in battles between generic and pharmaceutical companies into 2012. Equally, in the US, the outcome of the Mayo versus Prometheus case will also be watched keenly to understand how patents will be impacted across the industry.

In the UK, the government is currently finalising new Patent Box legislation. When it comes into force in April 2013, Patent Box will reduce UK Corporation Tax on patent profits to 10 per cent, giving a welcome boost to R&D and providing incentives for companies to retain intellectual property in the UK. This will make the UK more competitive with other European countries, such as Ireland, Switzerland and Hungary, which have had similar systems in place for a number of years. While the existing system of R&D Tax Credits has given some relief for R&D expenditure, there has until now been no similar incentive for businesses to retain IP in the UK once it has been created.

New legislation will also have an impact on the pharma industry in the year ahead. Compliance with the Bribery Act 2010 will be an important consideration in the due diligence process during any future cross-border pharmaceutical M&A transactions – the implications of the Act, which came into force in July 2011, will become apparent during 2012. The Bribery Act 2010 has attracted much attention because of its reach and application across borders. What in one culture could be considered an accepted facilitation payment may be interpreted in the UK as a bribe. The breadth of the definition of ‘commercial organisation’ under the Act, combined with the concept of ‘associated persons’, means that UK pharmaceutical companies need to consider carefully their activities globally, whether carried out themselves, through a third party associated person, or through a subsidiary. Hospitality is also another area of concern. Both EFPIA (the European Federation of Pharmaceutical Industries and Associations) and Eucomed (an organisation representing designers, manufacturers and suppliers of medical technology) are continuing to develop a business ethics code and have taken steps for conference vetting procedures.

Marketing and Post-Marketing

The coming year may also herald significant changes to the way drugs are marketed. EFPIA in particular will be under the spotlight, as the implications of amendments to the advertising of medicines become apparent. Currently, the advertisement for a medicine must be in line with the product’s summary of product characteristics (SmPC). Hence, off-label promotion is not allowed. EFPIA has approved the amended code of practice on the promotion of prescriptiononly medicines to, and interactions with, healthcare professionals.

As social networking continues to grow and becomes part of the daily routine of many lives, we should be mindful that social networking and reporting is taking on rapidly increasing significance in the marketing discussion and exchange of information concerning pharmaceuticals. There are pharmacovigilance obligations at all steps of the lifecycle of a medicinal product and for the purposes of drug monitoring; the pharmacovigilance system will need to take account of this. This is the type of wider issue that we need to be aware of, especially as companies look to diversify into areas such as medical devices technology and eHealth, which can ultimately help to continue to drive the pharmaceutical industry forward. Increasing use of social media also poses interesting questions around geographical legal jurisdiction.

Regulatory Developments

The medical devices regulatory system is also undergoing a major revision, producing new challenges which have an increasing relevance and immediacy for UK industry. The revision process has already been subject to wide stakeholder consultation and is expected to address high levels of patient protection. Subjects to be addressed include: adjusting the scope of the rules to include non-active tissue products, cosmetic implants and genetic tests; strengthening controls on notified bodies; timely and uniform action in vigilance and post-market surveillance; improving clinical evidence requirements; and improving the rules for borderline products. We expect a particular focus on interoperability and safety issues related to the integration of medical devices in eHealth systems, especially personal health systems and mobile health systems, bearing in mind that the deployment of health ICT systems is entirely a matter of national competence. As part of the recast, the EU Commission will include a requirement for a system of unique device identification (UDI), following the introduction of UDI in the US by the FDA. A European Commission working group with the Member States has been established to progress UDI. The first proposals on the recast are expected in early 2012.

This is only one of several significant regulatory issues being debated in Europe. There are ongoing negotiations at a European level about the introduction of a directive that would require substantial changes to the regulation of clinical trials. In March 2010, the Chancellor of the Exchequer announced that the Government would review the UK’s implementation of the Clinical Trials Directive in order to reduce perceived gold-plating and to increase the proportionality of the system. The MHRA has stated that they intend to wait for the outcome of the European negotiations before reviewing and amending the UK legislation. It will be interesting to watch the development of another directive which aims to improve the EU pharmacovigilance system, simplify regulatory decision making, provide a legal basis for more proactive pharmacovigilance by both regulatory authorities and industry, and involve patients more closely in reporting adverse drug reactions. It was adopted in 2010, but compliance is not compulsory until 2012. The legislation will bring about the most profound change to the legal framework since 1995, when the EMA was set up. The European Commission, EMA and Member States have been carrying out work implementing the legislation, but companies still lack clarity on many of the new obligations. It is likely that the new requirements will be introduced in phases beyond the original July 2012 implementation deadline.

2011 was a landmark year in pharmaceuticals – and a huge one for us as lawyers – with deals like Takeda’s acquisition of Nycomed. Whether the pharma industry’s R&D pipeline can survive the structural upheavals of life post-patent cliffs, adapt and thrive, remains to be seen – as does whether IP and regulatory legislation will help or hinder pharma companies in rising to these challenges.

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Nick Beckett is a partner at CMS Cameron McKenna, where he heads the intellectual property practice and life sciences industry group. He represents high-profile companies in the life sciences sector, and also coordinates pan-European patent enforcement and other intellectual property advice for a number of clients. He advised Takeda on its €9.6 billion acquisition of Swiss drug company, Nycomed, in one of the largest multi-jurisdictional pharma M&A transactions of 2011, and advised Eli Lilly in the leading pharmaceutical parallel trade repackaging case before the European Court of Justice. Nick is also on the Research and Innovation Committee of the Association of British Healthcare Industries.
Nick Beckett
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