By Dr. Felix von Bredow, Sidley Austin LLP, Frankfurt am Main
Despite the general slump in merger and acquisition (M&A) activity due to the global financial crisis, the pharmaceutical industry has fared comparatively well in the financial turmoil of the past months and can be expected to use its funds in 2009 to actively invest where opportunities present themselves.
This situation is presenting a unique opportunity for industrial investors: at least for now, financial investors largely have disappeared as competing bidders in M&A transactions and are more focused on their portfolio management due to the “credit crunch.” Moreover, many pharmaceutical companies are losing patent protection for their top-selling products in the next few years and, therefore, will be trying to secure further growth by changes in strategy, including, for example, external growth through acquisitions of generic drug producers or biotechnology companies. Last but not least, the high cost of new product development (with average development times of 12-14 years) inevitably will lead to further market concentrations.
Germany is Europe’s largest national market for pharmaceuticals and ranks as the third-largest market for pharmaceuticals globally. In addition, it is one of the world’s leading pharmaceutical producers and ranks second in the world in terms of biopharmaceutical production. As such, the German market may be ripe for acquisitions.
German pharmaceutical companies operate in a highly regulated market environment and must comply with various industry specific German national and federal state laws and ordinances, including, for example, the German Medicinal Products Act (Arzneimittelgesetz – AMG), the Act on Advertising for Health Products (Heilmittelwerbegesetz – HWG), the Ordinance for the Manufacture of Medicinal Products and Active Pharmaceutical Ingredients (Arzneimittel- und Wirkstoffherstellungsverordnung - AMWHV), or the Medicinal Products Price Ordinance (Arzneimittelpreisverordnung - AMPreisV). Moreover, various European Community regulations apply directly in addition to German law, which are also subject to constant legislative changes. In addition, pharmaceutical companies increasingly undertake to comply with industry-specific self-regulation codes.
To add to these complexities, the responsibilities for the authorization of medicinal products for human use as well as the supervision of pharmaceutical companies are shared by different German authorities on the national and federal state level. Depending on the type of medicinal product, either the Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte – BfArM) or – in particular, in case of biopharmaceuticals – the Paul-Ehrlich Institute is competent to issue marketing authorizations, while German manufacturing authorizations will be issued by the competent authority in the respective German federal state where the pharmaceutical company is domiciled, which is in most federal states the regional council (Regierungspräsidium). The Regierungspräsidum is also competent for the supervision of the manufacturing and marketing of medicinal products. In other cases, authorization of medicinal products will be granted by the European Commission in a centralized authorization procedure.
Steering through this complex legal regime and system of competencies is a challenging task when carrying out M&A transactions in the German pharma industry.
Due Diligence
Because the pharmaceutical industry is a highly regulated and know-how-intensive industry, M&A transactions will differ significantly from transactions in other industries. This requires particular care with respect to the planning and conduct of a legal due diligence review. In addition, special attention must be paid to regulatory issues when structuring a transaction. The following discussion focuses on selected issues of outstanding relevance for German M&A transactions in the pharmaceuticals industry.
Regulatory Due Diligence
When conducting regulatory due diligence for a German company, investors must examine the legal status and marketing authorization of products involved in the potential transaction, review off-label uses and prescription status of products, and determine the products’ reimbursability and regulatory compliance standing. The particulars of these measures are addressed specifically here.
Qualification of Products
As a first step of the legal due diligence review, it may be necessary to clarify the legal status of certain borderline products when it is uncertain whether they qualify as drugs, i.e. “medicinal products” within the meaning of the AMG, medical devices, food products or cosmetics. The difference, for example, between medicinal products and medical devices is of great importance for the manufacturer, because medicinal products only can be marketed after a marketing authorization has been granted.
To obtain a marketing authorization, the manufacturer (or importer) of medicinal products must undergo a lengthy and costly authorization process. Most marketing authorizations are granted by a national competent authority of a Member State of the European Union (e.g., Germany) and are limited to that Member State’s territory. Only where a marketing authorization for pharmaceuticals has been granted by the European Commission using the centralized procedure, is a “Community marketing authorization” valid in the entire European Economic Area (EEA) (the European Union (EU) plus Iceland, Liechtenstein and Norway).
Medical devices, on the other hand, must undergo only a conformity-assessment procedure which is faster and less costly than medicinal product authorization. Because medical devices are classified in different risk classes, the risk class of the device will determine what is needed to prove conformity; conformity can be proven either by the manufacturer itself or with the involvement of a so-called notified body.
After successfully completing the conformity assessment, the medical devices manufacturer is entitled to affix the CE (Conformité Européenne) mark on the product. Any medical device marked in such a way may be marketed in the entire EEA without requiring any further licensing or authorization process.
Marketing Authorization
If a relevant product qualifies as a medicinal product, the due diligence process should identify whether the target company is its marketing authorization holder. For example, if the target company markets a product only through a distributor in another country, then the distributor (and not the target) may hold the marketing authorization; this may result in an undesired dependency on the local distributor.
Due diligence review should show whether all marketing authorizations have been extended without any objections. And, if no marketing authorization for a particular product exists, do any exceptions (e.g., compassionate use or named patients programs) apply? Further issues relate to the continued validity of the authorization: Has the marketing authorization been prolonged in due time? Has the authorized product been placed on the market in due time or has the target subsequently ceased to market the product for a certain period of time? Without extension, the marketing authorization in Germany expires pursuant to Section 31(1) No. 1 of the AMG (so-called sunset clause) if there is a three-year delay or gap in marketing activities.
Off-label Use
The legal review of the marketing authorization situation should further identify whether the product is only marketed in accordance with the scope of the marketing authorization or whether the target company tolerates or actively promotes any off-label use of the pharmaceutical product. Off-label use can be associated with increased liability risks both for the pharmaceutical manufacturer and the medical practitioner which are still subject to controversial discussions in German legal literature.
Product Status
The acquirer should be aware of the current status of the target’s products, i.e. whether the medicines may be sold to patients only by prescription, whether they are pharmacy-only medicines, or whether they are freely available. Depending on the product status, the target should have different distribution organizations, because prescription-only medicines may not be advertised to the general public in Germany.
Correspondingly, in order to market prescription-only medicines, the target should have established separate distribution channels and good contacts with expert opinion leaders within the scientific community. Freely-available medicines can be advertised directly to the general public, under certain conditions.
Pricing, Reimbursability and Contracting with Health Insurance Funds
The reimbursability of the target’s products has a very significant financial impact on the success of the product’s marketing. Depending on the national market where the products are sold, different pricing and reimbursement policies can apply. In Germany, for example, prices for pharmaceuticals are not fixed directly by the authorities. However, distribution margins for reimbursed drugs are regulated, and the listed retail price of a reimbursed product must be the same for all of Germany.
Moreover, maximum reimbursement amounts in Germany (known as reference prices (Festbeträge)) apply to a large part of the pharmaceutical market covered by statutory health insurance funds. Further instruments of “cost controls” are, for example, contracts between health insurance funds and manufacturers for rebates on listed prices. Therefore, the due diligence review should show which rules apply to pricing and reimbursability of relevant products in all relevant jurisdictions and whether any regulatory changes are to be expected in the near future.
Regulatory Compliance
Another focus of the due diligence review for German companies should be regulatory compliance; such review should include an examination of the pharmacovigilance system, the quality assurance and quality control systems, the process for legal review of marketing material, compliance with Good Manufacturing Practice (GMP), etc. If the target company manufactures medicinal products at its own facilities, it must hold a valid manufacturing authorization issued in most German federal states by the local regional council (Regierungspräsidium).
The company also should be able to provide a GMP certificate to prove that it has been successfully audited for GMP compliance by the relevant competent authorities.
Commercial contracts (e.g., toll manufacturing agreements, R&D agreements, distribution agreements) need to be reviewed in regard to their compliance with regulatory particularities. For example, Section 9 of the AMWHV requires that the outsourcing of any production, auditing or marketing steps must be concluded in written form and must clearly set out the respective responsibilities of the contractual parties.
Intellectual Property Rights
The development of new pharmaceuticals is extraordinarily time consuming and expensive, so it is particularly important to carefully examine the scope of protection of the investments in new technologies and medicines by intellectual property rights. Typical issues to be examined include the following:
[Editor's note: This part one of a two-part guest column. Look for the second part in a future issue of EuroPharma Today. Interested in submitting a guest column? Email our editors at j.berlin@elsevier.com]
