The Life Sciences guide provides expert legal commentary on the key issues for businesses involved in the life sciences sector. The guide covers the important developments in the most significant jurisdictions.
Last Updated July 19, 2018
Over the past few years there have been a number of major trends that are developing and disrupting the traditional ways of doing business and how healthcare companies operate. Changing business models, the impact of geopolitics and trade, regulatory convergence, data as a new battleground, flourishing deal activity, compliance and anti-corruption and pricing and reimbursement are some of the overarching themes and issues that many in-house legal teams and law firms are working together on to address.
Changing business models
Cost and the need for innovation are important drivers for many changes in the business models we are witnessing today. The need for efficiency and cost savings are leading to consolidation in healthcare systems and integrated healthcare models. It is also leading to significant changes on the supplier side with pharmaceutical and medical devices companies rationalising supply chains and operational excellence, investigating the possibility of direct distribution models and increasingly engaging in localisation of manufacturing for better market access. Public-private partnerships (PPPs), managed services, companion diagnostics, convergence with food and cosmetics, access to treatments and new therapeutic products and pre-approval pathways are some of the specific trends to note over the past year.
Healthcare PPPs have been around since the 1980s and, in the past, were mostly big infrastructure projects for building new or updating existing infrastructure. These types of projects have not gone away but the new wave of healthcare PPPs presents itself quite differently. Projects come in all shapes and forms and do not necessarily involve infrastructure. Today’s PPPs may relate to managed services for healthcare facilities, educational programmes or even R&D activities. Governments around the world are keen to rely on the private sector to make healthcare facilities more efficient, provide better quality, reduce costs and transfer know-how.
An example of one of the hottest emerging PPP markets is Saudi Arabia. The Saudi government is looking to privatise some public sector hospitals and seeking partners to make the public health sector more efficient as part of its economic reforms. PPP projects are often complex projects and challenges include the lack of a comprehensive legal framework, long-term nature of the contract and changing environment, difficulty defining the scope of the project, monitoring performance, interface between the public and private parts of a healthcare facility and compliance risks. Committed government support, careful contract negotiation, good governance structure and communication channels underpin successful PPPs.
Medical device companies are increasingly moving into managed services. With a view to offer holistic solutions, some device companies are offering expertise to private and public customers to finance, design, construct, furnish, maintain or even operate labs, operating rooms and equipment. Managed services are not limited to infrastructure or equipment only: they can relate to the provision of medical or administrative staff, stock management or fulfilling training needs of healthcare facilities. Strategic partnerships are also considered in instances where not all necessary skills are available internally. Affecting both horizontal and vertical relationships, competition issues need careful navigation and other legal issues including tax, healthcare services regulations, procurement, compliance and liability should also be considered on a country-by-country basis.
The new paradigm of "putting the patient at the centre" means that an array of supporting services are being developed around the product and the patient to improve health outcomes. In some cases, this has brought together players from different sectors. For instance, the model of companion diagnostics in oncology, where a genetic test will help determine if an oncology treatment will be useful for a given patient or not, implies complex regulatory and contractual arrangements. This could include linking the marketing authorisations for the drug and medical device.
In addition, new cross-border models are emerging. To continue using the example of companion diagnostics, it could be that the confirmatory tests are conducted in the US, while the patients, test results (information) and therapeutic treatments are located and given in Mexico. While commercially attractive, this adds customs and privacy law considerations to the model, including determining whether or not the biological samples from the patients require an export permit, and identifying potential restrictions for the processing, control and transfer of personal data.
At the same time, cross-border and collaborative models are increasingly coming with segregated or outsourced components, making it difficult to determine, for example, if for regulatory purposes there is a health service being provided locally and if this requires a licence or permit (eg lab testing). For law firms, this requires integrating commercial law, regulatory law, customs law and privacy law. For companies, this demands more intense interaction between functional teams (including legal) and outside counsel.
Convergence with food and cosmetics
For some time, there has been a convergence between food products and pharmaceuticals, which results from the fact that the dietary regime of a patient influences its healthcare outcome. This has previously led to the inclusion of dietary supplements in the product portfolio of many pharmaceutical and nutritional companies.
Today, after having invested in food science, traditional food companies are producing the required clinical data to support new products that fall at the boundaries between food and medicines (eg medical nutrition). Other pharmaceutical companies in niche markets, such as dermatology, also have a history of commercialising additional products, such as cosmetics. Moreover, there is a trend to explore the full potential of the microbiome, going from its therapeutic potential to its use in food products and cosmetics. In this regard, promising clinical trials are offering relevant evidence.
These convergences signify a trend that has now taken shape, to move from lower regulatory categories (eg dietary supplements), which tend to be exempt from marketing authorisations but subject to advertising and labelling restrictions, to higher regulatory categories (eg specialised nutritional products or over-the-counter drugs), which offer more labelling and advertising leeway, while being subject to marketing authorisations.
Access to treatments
Healthcare companies are facing increasing levels of complexity to add products to private and public formularies, used by private and public payers. Different health technology assessment methodologies are used in different jurisdictions to take these decisions. However, in some regions a real problem is found in public formularies. For instance, in Latin America, where most countries have public health systems and public procurement mechanisms, products still have to be added to a Basic Formulary and one or more Institutional Formularies, before being included in public tenders. This is in addition to the first product approval where quality, safety and efficacy are evaluated. This is referred to as the "access process." These additions to formularies are decided on pharmaco-economic (efficiency) grounds and could typically take three to four years to complete, significantly delaying access to the most advanced treatments for patients in the public health system.
Besides the move towards value-based pricing and innovative pricing strategies, other challenges exist, including compliance risks related to value-added services based on outcomes: How much can you pay the nurse who monitors patient outcomes? Do certain solutions offered cross over into the practice of the medical profession?
Companies and law firms have to develop particular expertise in this field, integrating teams with experience on regulatory affairs, public procurement and administrative litigation.
New therapeutic products and pre-approval pathways
Recent evidence and price factors are driving growing interest in new therapies, particularly for orphan drugs and advanced or regenerative medicine. However, only some jurisdictions have issued specific provisions and regulatory pathways for rare diseases and gene/cell/tissue therapy.
This is amplified by the increasing intention to facilitate early access to new therapeutic products, which requires exploring and aligning import mechanisms available for expanded access programmes or compassionate use. Companies and law firms should consider the regulatory, compliance and foreign trade implications in relation to this area.
Impact of geopolitics and trade
The pervasive nature of the healthcare industry and related regulations stems from fundamental concerns at stake – where some form of oversight is needed when factors as essential as health and life are involved. Therefore, it is important to understand how various policies and trade agreements like Brexit, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, which is the revamped TPP) and the Pacific Alliance may affect business.
On 29 March 2019 the UK will formally leave the European Union (EU). Provided the UK and the bloc will be able to find an agreement on the final withdrawal treaty, a transitional "standstill" period will run until the end of 2020. At the time of writing this, such an agreement has not yet been reached and some broader political issues such as Northern Ireland are proving to be more difficult to resolve. As with any other industry, the healthcare sector will need to follow the progress being made between negotiators while putting contingency plans in place.
The potential impact of Brexit is significant. Considering decades of integration of pharmaceutical regulation and oversight at the EU level, the UK’s withdrawal from the EU system will be felt on both sides. The European Medicines Agency (EMA), the EU regulator approving the most innovative medicines, will move to Amsterdam by March 2019 amidst fears for staff retention. However, the relocation decision is being challenged by Milan (which narrowly lost out) in the Luxembourg-based European Court of Justice and a decision has yet to be taken.
For marketing authorisation-holders of medicines in the EU, the impact is no less: Companies need to consider if marketing authorisations and orphan drug designations need to be transferred. Pharmacovigilance and batch-release functions may also need to be moved and duplication considered. The EMA has released guidance to help companies navigate Brexit and is encouraging companies to submit the necessary regulatory filings.
For the medical devices industry, Brexit presents its own unique challenges considering the implementation of the new medical devices regulations which will become applicable in 2020 and 2022. The new regulations present a major overhaul of the medical devices regulatory framework in Europe, requiring extensive planning and preparation. While the main message to UK companies is to implement the regulations, Brexit uncertainty represents challenges in the details of the implementation.
On 7 March 2018, 11 nations signed the CPTPP in Santiago, Chile. The agreement gives country members access to 500 million people with a combined output of USD10 trillion and marks a collective commitment towards greater trade liberalisation. Following a decision by the US to withdraw last year, the CPTPP suspended or changed 22 provisions that the US rigorously promoted, in particular regarding manufacturing and drug-specific articles. Some see it as a missed opportunity for US trade and pharmaceutical companies, as the new deal does not include key parts to improve IP and regulatory data protection – more specifically, an annex that was geared toward helping pharmaceutical companies and would have given more incentives to develop new medicines.
With the potential to become Latin America's largest economic bloc, the Pacific Alliance (composed of Chile, Colombia, Mexico and Peru) represents the eighth largest economy in the world. The treaty includes a paradigm on health regulatory harmonisation, as described below, along with various market access, customs, trade and e-commerce considerations. Staying abreast of related developments and understanding the objectives of the agreement can help healthcare companies navigate risk, explore new opportunities and capture business value.
In contrast to other fields, the international field of health law and health regulation is not harmonised. Each country has its own regulatory framework with its own specific requirements, which significantly increases the cost of bringing products to the market and patients.
However, an important development in international law has taken place in relation to human health and trade law, which is likely to have a positive impact on domestic frameworks. For the first time, provisions disciplining aspects of human health regulation have been directly incorporated in Free Trade Agreements (FTAs). This normative innovation could have a similar impact to the major shift that took place when IP was first incorporated into international trade law, which resulted in a large and effective process of harmonisation.
What is noteworthy is that this paradigmatic change in FTAs has been carefully introduced through a dual mechanism, comprised of a softer and a harder approach. Combined, they represent the most advanced form of regulatory convergence.
The softer approach is to add a Chapter on Regulatory Improvement (CRI), which refers to an array of procedural tools aimed at reducing regulatory divergences and promoting regulatory coherence, including transparency, inter-institutional co-ordination, public consultation, best regulatory practices and international co-operation.
The harder approach consisted first in framing human health regulation, not as a sanitary and phytosanitary (SPS) issue, but rather as a technical barrier to trade (TBT) issue; and second, in identifying and agreeing Product-Specific Annexes (PSA), which contain an array of substantial tools to promote regulatory coherence, such as introducing common definitions, eliminating certifications and setting common labelling requirements.
This full dual mechanism of regulatory convergence was first incorporated into a regional FTA with the Pacific Alliance and was exported to the larger Trans-Pacific Partnership. However, earlier versions were previously incorporated to other bilateral FTAs. The procedural tools of regulatory coherence were first introduced to the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada and an earlier version of the dual mechanism, containing both procedural and substantial tools, were incorporated to the FTA between the EU and South Korea. This FTA event incorporated five PSAs, but: (i) these were not yet anchored directly or linked explicitly to the TBT chapter; and (ii) the harmonising effect was achieved through an indirect reference to international standards rather than agreeing directly to bilateral harmonised rules.
Remarkably, to date the products covered in PSAs include pharmaceuticals, medical devices, cosmetics, organic produce, information technology products, food products, alcoholic beverages and chemicals. Considering that most of these products are regulated under health law instruments, this normative development has a particular significance for the international regulation of life sciences. This development will forge and demand closer interaction between foreign trade and regulatory experts, both within functional areas of companies and within law firms.
Considering the elements described above, and the way they have evolved to date, the most advanced version of this form of regulatory convergence is the one contained in the Pacific Alliance and the CPTPP. By incorporating both a CRI and PSAs, and framing this directly as a TBT matter, these treaties are most likely to constitute the fresh template for a new generation of regional FTAs. The new model incorporates significant provisions disciplining aspects of human health regulation, offering the best chances so far to allow the birth of a new era of regulatory harmonisation, and with it, the possibility to restructure and reshape supply chains.
New data privacy challenges
Pharmaceutical and medical device companies have traditionally been significant users of the privacy system, given its historic participation in clinical trials, which has generated a great amount of personal data from participating subjects. At the same time, this meant that only those functional teams who were closely connected to clinical trials were exposed to handling data privacy aspects – which has now changed.
There is now a synergy between medical technologies and information technologies that has resulted in a new era of digital health. Innovations such as medical apps, wearables and portals for patient communities have created a world of opportunities by closing the gap between the industry and the patient/user. Conversely, as privacy rules apply to more projects developed by pharmaceutical and medical device companies, new challenges and regulations have surfaced which dovetail the responsibilities of functional and legal teams. For companies developing new digital health models, it is important to understand the interconnectivity of various legal issues, including cybersecurity and privacy laws, intellectual property, corporate and contract law, as well as regulatory aspects which may vary by region or country.
Impact of the EU GPDR
The European General Data Protection Regulation (GDPR) became applicable on 25 May 2018. Despite being a European piece of legislation, it is having effects beyond the EU: any entity outside the EU that is processing personal data of EU residents under certain circumstances (eg, where the EU is targeted in connection with offering goods and services to data subjects) will need to comply with the GDPR.
The healthcare industry processes a large amount of personal data, some of which are considered sensitive (eg patient data, clinical trial data, and pharmacovigilance). The GDPR will apply to personal data collected through an app (with the targeting of the EU market) from a patient based in Sweden and transferred to a server in the US. Any company relying on the services of an EU-based healthcare professional and processing a person’s data indirectly (at the least) falls within the scope, as the EU-based healthcare-provider needs to comply with the EU GDPR.
The new measures that need to be implemented under the EU GDPR are significant. They include: increased informed consent and transparency requirements, appointment of an internal data-protection officer under certain circumstances, privacy impact assessments that need to be performed, reporting of data breaches within 72 hours and the right to be forgotten except in the case of scientific research or narrowly defined exceptions related to public health (with the interpretation of the term “scientific research” not yet being clear; eg, the question of whether and to what extent scientific research is conducted with an aim to make profits, etc).
While the EU GDPR presents itself as a unified piece of legislation, a challenge is that it provides the possibility or even the necessity of national deviation in many instances. The fines for non-compliance are hefty (up to 4% of global turnover). This and the fact that the European data protection authorities have been vocal about a more active enforcement strategy makes the consideration and implementation of the EU GDPR a key priority for healthcare companies.
New forms of data
The technological innovation behind digital health has also brought the capacity to generate, monitor and use new forms of data from patients more easily, including real-world data and adherence information. This is part of the new resources that could help improve the provision of healthcare and increase health outcomes.
What is less clear from a regulatory perspective is the precise relationship between real-world data and adherence on the one hand, and pharmacovigilance, safety and efficacy – the last two being the gold standard criteria for regulatory approvals – on the other. Should new data only be supportive to safety and efficacy, or could it in some cases act as a surrogate? This has been discussed in the context of digital health products, including medical apps. If that line of thought is further recognised, this could simplify and accelerate the regulatory pathway for medical devices. Furthermore, if this accumulates to the ongoing initiatives in many jurisdictions to limit what is considered a medical device, this could represent a significant overhaul of the sector, which is consistent with its faster life cycle. At a minimum, this could remarkably differentiate the regulatory framework for drugs and medical devices.
More assets are being acquired at earlier stages of development for a variety of reasons – most obviously because promising late-stage candidates have already been acquired, which forces companies to look earlier in the product pipeline. Many of these early-stage deals today are contingency deals to mitigate the buyer's risk, and the seller accepts a lower upfront payment in return for larger payments upon the completion of defined milestones and a greater percentage of eventual profits. Conversely, the availability of high-quality early-stage assets is growing, especially with the influence of technology.
Due to the recent US tax reform at the end of 2017, repatriation of cashback could lead to US healthcare companies having significantly increased cash that could be deployed in returns to stockholders, M&A (especially domestic transactions) and other investments. Several healthcare CEOs have emphasised that US tax reforms and cash repatriation does not mean a change of capital allocation strategy, and disciplined investment is the key word. This may also lead to higher valuations for target companies – particularly in the oncology and rare-disease sectors, which may attract outside interest from investors.
A recent report by Baker McKenzie and Oxford Economics predicts global healthcare M&A to rise to USD418 billion in 2018, up 50% from USD277 billion last year. Transactions in North America will rise 66% to reach USD250.2 billion, accounting for more than half of healthcare transactions globally. Although deal values in Europe are forecast to rise only modestly, the region will still account for the highest levels of activity after North America, reaching USD105 billion. The total deal value in Asia Pacific will rise 80% over 2017 to USD55.1 billion, followed by Africa and the Middle East where transactions are forecast to triple to USD4.1 billion. Latin America transactions are forecast to double to USD3.7 billion.
Compliance and promotional practices
Amid constant pressure from governments to control inadequate promotional practices in some countries, companies have decided to reduce significantly or eliminate altogether interaction programmes with healthcare professionals (HCPs) and/or with patients and patients' organisations.
This is an area that is more closely framed as a regulatory issue in some jurisdictions, where in others is framed as one of compliance. The latter occurs where HCPs tend to hold positions or work at large in the public health system of their countries, and are therefore considered public officers for the purposes of anti-corruption law.
Growing concerns over interaction practices has increased the number of jurisdictions introducing transparency provisions, such as the one contained in the US Sunshine Act, which aims to make transparent the value channelled to HCPs by pharmaceutical companies. However, in other jurisdictions (eg, Mexico), data privacy of HCPs still trumps transparency in the balance of interests.
Many regions riddled with corruption are introducing new local rules, which are patterned after mature anti-corruption and anti-bribery regimes of the US and the UK. These new players, however, are finding it difficult to understand the need and value for the life sciences industry, HCPs and patients (to have in place educational programmes, for instance).
At the same time, the emphasis is moving from HCPs to patients, which is a less regulated area, either by mandatory instruments or voluntary codes of practice. This changing landscape requires companies and law firms to have specialised experts in different fields, including commercial, regulatory and anti-corruption.
Although there are no accurate figures, information from several stakeholders suggest that the problem of sub-standard and falsified medical products keeps growing, partly because globalisation and e-commerce have increased complexity of supply chains, providing multiple entry points for fake products. Industry estimates indicate that in developed countries, less than 1% of the medications sold are counterfeit. However, in developing countries, up to 10% of the medicines available have been counterfeited. Furthermore, in some Eastern European countries, the proportion of fake medicines can be more than 20%, and in some areas in Africa, Asia and South America, even 30%. It is also estimated that more than 50% of drugs sold online are counterfeit.
There are multiple mechanisms available to tackle this global public health problem, but these are not harmonised or co-ordinated. There are criminal, administrative, and civil law mechanisms, spanning from intellectual property, antitrust, customs law and regulatory law. The most advanced jurisdictions have in place IP border measures, which can constitute a highly effective way to prevent fake goods from entering the market to begin with.
This problem requires companies to co-ordinate different functional teams, including quality, supply chain, legal and intellectual property. In turn, law firms require integration of their own regulatory, information technologies, criminal and intellectual property teams.
Pricing, reimbursement and new questions for healthcare
Companies remain subject to historic pressures over pricing and reimbursement, which continue to promote the pursuit of alternative payment mechanisms, including risk-based and performance-based models (eg, Europe and the US). In other jurisdictions (eg, Latin America, in particular Mexico) where there is no reimbursement model but rather a public procurement system, new models are also being developed, including price negotiating mechanisms and consolidated tenders.
At the same time, in some jurisdictions with public health systems, alternative models are emerging to manage budget constraints. This includes substitution strategies, through which the prescription of the most expensive medicines is assessed and controlled. Health institutions, however, are finding that, without the proper evaluation tools, substitution strategies may only be a cost-saving mechanism without the improvement of healthcare outcomes, which does not place patients at the centre.
These issues are being raised as relevant questions during new forms of litigation where the right to protection of health is being pursued in courts by patients, in order to get access to the treatments they need. In Latin America, the increase of these litigations is now referred to as "judicialisation" of the right to protection of health. When these are supported by pharmaceutical companies, some governments are regarding these forms of litigation as illegitimate ways to combat either their budget management policies or their official promotion of subsequent entry products, and therefore are finding ways to frame them in some instances as violations of competition laws. This has led clients and law firms to integrate teams of litigators, regulatory and antitrust lawyers.
Supporting healthcare companies is becoming increasingly more complex. Digitalisation and evolving business models are creating opportunities for existing and new corporate players in the industry, notwithstanding some of the challenges that go hand in hand. While regulatory regimes often lag behind innovation, more stringent laws such as the EU GDPR have implications for pharmaceutical, medical devices and healthcare services companies worldwide. Although globalisation continues to fuel deal activity and trade, protectionism has become more prevalent, which may have implications for a multi-dimensional industry like healthcare. Emerging markets trying to emulate mature market regimes also face challenges in terms of governance, structure, communication and enforcement. Many of these trends are interconnected, which not only broadens the scope of corporate in-house legal teams’ involvement with other business divisions, but also requires external legal advisers to provide a combination of interdisciplinary legal expertise and business acumen.