By Dr. Felix von Bredow, Sidley Austin LLP, Frankfurt am Main
[Editor's note: This is part two of a two-part guest column. Part one, which focused on the due diligence process, appeared in EuroPharma Today on April 13, 2009.]
Structuring M & A Transactions in the Pharmaceutical Industry
After completing the due diligence process without significant findings, potential investors in German companies will need to examine how they will structure the merger or acquisition transaction. The acquisition of a company or business will typically be structured either as a share deal or an asset deal. Alternative transaction structures under German law include, without limitation, the acquisition of new shares in the target company created by capital increase or the acquisition by way of merger or spin-off, as provided for in the German Transformation Act (Umwandlungsgesetz – UmwG). The following discussion focuses on share and asset deals.
Share Deal
Generally, the share deal does not raise any regulatory concerns, because the target itself as an independent legal entity is transferred. A share deal leads to a change in the shareholdings (change-of-control), but generally does not affect existing legal relationships entered into by the target (e.g., assets owned, contracts, liabilities, licenses and permits). However, Germany state aid, for example, may be affected by a share deal; a share deal may lead to a loss of the target’s entitlement to state aid, if it loses its status as an SME (micro, small and medium-sized enterprise).
Asset Deal
Asset deals in Germany include several steps underpinning the transfer of marketing and manufacturing authorizations and the sale of existing inventory, which can add complexity to these types of transactions.
Transfer of Marketing Authorizations
In case of an asset deal, any public authorizations or permits must be transferred to the acquirer individually. Although it is not very complicated to transfer a German marketing authorization by assignment (under civil law) and by notifying the competent authorities about the change, the transfer of marketing authorizations under other legal regimes may be more complex.
For example, the transfer of a (centralized) European Community marketing authorization requires that the holder of this authorization must submit an application to the European Medicines Agency (EMEA). The EMEA will submit an opinion concerning this application to the holder of the marketing authorization, to the person to whom the transfer shall be granted and to the European Commission. The actual transfer becomes effective as of the date of the notification by the European Commission, which amends the existing authorization. Thus, in order to transfer the European Community marketing authorization, the closing of the M&A transaction may need to be closely coordinated with the relevant European authorities.
Transfer of Manufacturing Authorizations
The Germany manufacturing authorization will only be granted if the acquirer has the required personnel (e.g., the qualified person pursuant to Section 14 of the AMG, the production manager, and the quality control manager) on staff. If the business transfer is not associated with any change regarding the responsible personnel and business operation, then applying for a new manufacturing authorization should not be critical, except with regard to the timing of the M&A transaction. This may require advance coordination with the authorities in order to ensure that the manufacturing authorization is transferred concurrently with the closing of the transaction.
Sale of Existing Inventory
After the identity of the pharmaceuticals producer changes following the closing of the asset sale, products marketed in Germany must identify the acquirer as the new marketing authorization holder. The AMG does not provide for an interim solution (other than in the case of a change in the name of the medicinal product, where Section 29(2) of the AMG allows the producer to continue to sell the products in the old packaging for a period of one year). Depending on the circumstances, there are different ways to address this issue. This includes prior coordination with German authorities or having the seller continue to hold the market authorization on a fiduciary basis even after the closing date until all relevant inventory has been sold; both solutions may lead to a continuing liability risk for the seller for which it may need to be indemnified.
Representations and Warranties, Covenants, Transitional Services
The purchase agreement also should provide for industry-specific representations and warranties as well as covenants (in particular, if there was neither time nor opportunity to conduct a thorough due diligence review). Representations and warranties or covenants should address, for example, product liability risks, compliance with law (e.g., to address distribution practices that are either in violation of statutory law or industry self-regulation rules such as the Code of Conduct on the Collaboration with Healthcare Professionals of the association “Voluntary Self-regulation of the Pharmaceutical Industry” (Freiwillige Selbstkontrolle für die Arzneimittelindustrie e.V.) or the Code of Conduct of the association “Pharmaceuticals and Cooperation in the Health Care Sector” (Arzneimittel und Kooperation im Gesundheitswesen e.V.) which are monitored and sanctioned by the respective self-regulatory bodies, if the target is a member of such organization), and issues like “pipeline stuffing,” where a seller artificially increases its sales, for example, by granting unusual rebates. Where a business is carved-out of a business unit, it may be required to enter into transitional service agreements (which again must comply with applicable regulatory law), if the acquirer is not able to immediately render all services formerly performed by the seller group.
Conclusion
Since 1989, various reforms of the German pharmaceutical and health insurance sector were aimed at and have recently been successful containing the constant growth of pharmaceutical expenditures. It can be expected that future reforms of the health care sector will further reduce phamaceutical prices in Germany, which will make it more challenging to invest profitably in the German pharmaceutical industry. On the other hand, German retail prices for pharmaceuticals are still relatively high by international standards. Moreover, foreign investors can rely on a secure economic, political and legal investment framework, a highly skilled workforce and comparativley good infrastructures. All in all, it can be expected that sophisticated investors will be able to profit from the relatively stable performance of German pharmaceutical companies in the near future.
