For biotechs, success involves a several year hike through mazes of complex, cross-border, business, scientific, financial and regulatory issues. During this year’s BIO2018 conference in Boston, McDermott gathered a panel of industry leaders and McDermott practitioners and led a case study assessment of cross-border biotech M&A, linking life sciences hubs in Europe, Asia and North America. I had the opportunity to moderate our panel as we walked through the structuring and closing of an M&A transaction that involved the auction of a fictional US biotech company that has oncology platform IP/technology. While the company described in the case study was fictional as such, the company and its circumstances were a composite of McDermott’s actual deals.

Our panel’s examination of this case study yielded valuable insights into the context, cross-border dynamics, practicalities, opportunities and challenges underlying the growing volume of international life sciences M&A deals. For example, here are six takeaways.

  • Take a good look in the mirror. First, differentiate between your company’s wants vs. its needs, said Greg Benning, managing director and head of financial advisory at Back Bay Life Sciences Advisors. Review your company’s access to resources, particularly its near term funding, to make sure you can accomplish your development objectives regardless of whether your M&A aspirations are achieved. Next, conduct an in-depth analysis of the company’s platform and its asset portfolio, and assess how third parties will view it. This process should yield a realistic assessment of actionable alternatives. “Having defined the playing field, we can start to look at the position of different alternatives more objectively and clearly,” Greg said.
  • Map out your IP strategy early. Your IP strategy must be optimized from the very beginning, said McDermott partner Kristina Bieker-Brady. Do not wait to do this until you suddenly wish to market the company or to raise funding. And don’t be too enamored of broadly scoped patents–narrowly designed patents may generate more defensible and credible IP, and in the case of platform IP, can result in a discrete, valuable assets that you can sell and/or commercialize (and use to prosecute infringers) without jeopardizing your company’s core platform. You then optimize your ability to structure for optionality in your future–preserving the luxurious ability to postpone to the future the decision of whether it is best to sell your whole company all at once, or perhaps to sell/outlicense your IP on an asset by asset basis?McDermott partner Linda Ji also recommended that a US company’s early patent strategy should include China. This enables the US company to make the most of opportunities to sell or outlicense to Chinese life sciences investors and companies, which will not be as interested in an IP asset that lacks IP protection in China. Remember that China’s middle class market alone is roughly equal to the size of the entire USA.
  • Prepare to jump through extra hoops for overseas buyers.Investment and acquisition activity in the United States by EU and Chinese companies continues to increase year over year,” I noted. But before Chinese investors can execute international transactions in the US, they must secure exchange control approval from the Chinese government, which can take several months. Also, on the US side, EU, Chinese and other foreign buyers and investors transactions will often need approval from the Committee on Foreign Investment in the United States (CFIUS). Recently, the US government has taken a broader view of what types of transactions implicate “national security,” and there are reasons to expect dramatic expansion of the CFIUS rules. In particular, we believe that biotechnology itself will be regarded as one of the industries in which investment and acquisition will require approval. This could affect both M&A activity and also venture capital and private equity investments. In response to such examples of China and USA government regulation of deal-making, transaction parties might start to explore various risk mitigation measures, for example, a reverse break-up fee payable by the party that cannot obtain the government approval; or multi-staged closings of investment deals to permit some investors to close before other investors; or dual-level investor rights so that some investors have greater rights than certain other investors. And, it would be interesting to determine if the commercial appetite for representation and warranty insurance might also begin to extent to similar insurance be obtained to cover risks from exchange control or CFIUS non-approval.
  • Parallel processing–aka, keeping options on the table. Most companies will prepare themselves for parallel paths to maximize value, be it another private financing, an IPO or an M&A deal. Even if short-term gain via M&A is a goal, preparing an S-1 for a prospectus to go public can serve as leverage to maximize private M&A bids. “The more options you can keep on the table longer, the more likely you are to have an outcome that you like,” said Henry Skinner, senior vice president at Tekla Capital Management.
  • Early on, avoid the back-to-school blues. If at all possible, when a company is in its early stages of building its IP portfolio, it should avoid or amend in-licenses that grant a university or scientific institute the authority to approve all transactions (such as M&A deals). Such a license undesirably “shifts most of the leverage to the university,” said Michael Mano, lead counsel, business development, at Biogen, Inc. Also, he counsels against university licenses that contain poorly drafted exclusivity provisions that saddle a potential buyer with non-commercial restrictions that–though sensible for a really small, really young biotech–make no sense for a large pharmaceutical company bidder. For example, if a potential buyer has a competing program that runs afoul of that exclusivity, your M&A deal could face significant structuring and risk-allocation headaches before it can close.
  • Don’t let your know-how walk out the door. Patents don’t leave a company, but people do, and they take their valuable know-how with them. Retaining valuable people requires being sensitive to cultural differences among staff, and also requires appropriately structured incentives, said Jeff Lu, co-founder and CEO of Engine Biosciences. A biotech company’s management can play a key role in aligning the employees’ equity incentives with the selling investors’ interests.

As the health care and life sciences fields experience ever-increasing levels of disruption, diverse entities across the industry are teaming up to embrace and foster innovation. These new pairings are shaping the future of health care, as organizations come together to tackle the industry’s most pressing issues with redoubled agility and pooled resources.

In an environment of change and uncertainty, this trend of Collaborative Transformation is yielding improved financial outcomes, increased operational efficiencies, and a fresh infusion of diverse talent and perspectives—all of which result in enhanced quality of care.

This is where the McDermott Health and Life Sciences team comes in. As a top-ranked US health law practice and a leader in life sciences with decades of experience advising the leading players in US and cross-border health and life sciences, we have the skill, market insight and ingenuity to partner with you wherever your innovation takes you. Whether you are forming innovative alliances across borders and industries, creating or implementing groundbreaking technologies and services, or restructuring investments to position your organization at the cutting edge of the market, our team can work alongside yours to achieve excellence.

Click here to learn more about McDermott Health, our recent work executing collaborative transformations on behalf of our clients and how we can help your organization form innovative business relationships.

It has now been one month since the US Department of Health and Human Services (HHS) Office of the National Coordinator for Health Information Technology (ONC) sent its proposed information blocking rule to the Office of Management and Budget (OMB) for required review.

We expect OMB to approve the much-anticipated proposed rule and ONC to release it soon with the usual opportunity for public comment. While we wait, there are some things that health information technology developers, health information exchanges, health information networks and health care providers who may be subject to the information blocking prohibition and enforcement actions can do to prepare for the upcoming comment period. But before we get to comments, let’s remind ourselves about how we got to this point.

By way of background, Congress asked ONC to produce a report describing the extent of information blocking and a strategy to address it. ONC submitted that report to Congress in 2015 (the 2015 Report) noting, among other things, enforcement authority gaps and indicating that successful information blocking prevention strategies would likely require congressional intervention. In the 21st Century Cures Act, which became law in 2016, Congress granted the HHS Office of Inspector General investigative and enforcement authorities for prohibited information blocking conduct. The Cures Act defined information blocking as a practice that “except as required by law or specified by the Secretary…, is likely to interfere with, prevent, or materially discourage access, exchange, or use of electronic health information [(EHI)].” As part of the law, Congress tasked the Secretary of HHS with issuing rules that identify “reasonable and necessary activities” that will not be considered prohibited information blocking. This is one purpose of ONC’s proposed rule.

At this point, we do not know precisely what kinds of activities ONC will propose to permit by carving them out of the broad information blocking prohibition. However, from the Cures Act we do know the types of practices Congress believed “may” be information blocking, namely:

  • restricting authorized access, exchange and use of EHI for treatment and other permitted purposes, and
  • implementing technology in ways that are:
    • nonstandard and likely to substantially increase the burden or complexity of access, exchange and use of EHI;
    • likely to impede EHI with respect to exporting complete information sets and in transitioning between health IT systems; or
    • likely to lead to fraud, waste and abuse, or impede innovation and advancements in health information access, exchange or use.

These track closely to the types of practices ONC identified as raising information blocking concerns in the 2015 Report, which also provided a few illustrative examples, including: Continue Reading ONC Expected to Release Proposed Information Blocking Rule Soon

McDermott is gearing up for an exciting week of programming during the 2018 BIO International Convention. A number of McDermott partners will on the ground as panelists and moderators across a range of programs during BIO and we hope to see you there!

Thursday, May 31 | Al Sokol will moderate a panel discussion on “Getting and Leveraging Funding” at Mass Life Sciences Innovation Day.

Friday, June 1 | Dale Van Demark will co-moderate the panel “Digital Health – Hospital of the Future” during the IBA 6th Annual World Life Sciences Conference.

Saturday, June 2 | Emmanuelle Trombe will moderate the panel, “Biopharmaceutical Market: Collaboration vs. M&A,” and Al Sokol will be a speaker on the panel “Hot Topics in Venture Capital Investments,” during the IBA 6th Annual World Life Sciences Conference.

Sunday, June 3 | Emmanuel Trombe will moderate, and Veleka Peeples-Dyer will be on the panel, “What is Your Regulatory Strategy?” during the Boston-Paris Biotechnology Summit.

Monday, June 4 | Byron Kalogerou and Jennifer Bock will speak to business investors about the legal issues involved with establishing or expanding an operation in the United States during the SelectUSA FDI Seminar at BIO 2018.

Roger Kuan and Kristina Bieker-Brady will present “Operation Valuation: Maximizing the Value of your Asset Portfolio” during the Redefining Early Stage Investments (RESI) Conference.

Tuesday, June 5 | Sarah Hogan will moderate “Paths to Success in Life Sciences: A Conversation with Women Leaders,” a panel discussion with women executives from across the Life Sciences industry. The Women’s Executive Breakfast will be held at McDermott’s Boston office.

Wednesday, June 6 | Join us for “Connecting the Dots: A Cross-Border Mergers and Acquisitions Case Study, Linking Life Sciences Hubs in Europe, Asia and North America.” Our panel, led by Al Sokol, will connect the dots between the structuring and closing of a cross-border life sciences transaction, focusing on a hypothetical case study involving the auction of a US biotech company with platform technology. The panel will discuss the context, cross-border dynamics, practicalities, opportunities and challenges, underlying the growing volume of international life sciences transactions. Register here.

Immediately following, we hope you’ll join us for an evening of live music by Men In Black, fun in the sun, and networking with life sciences executives during the McDermott Beach Bash. RSVP here.

#BIO2018

Specialty pharmacy is not going away any time soon – by 2020, it’s expected that the pharmacy industry’s revenue will exceed $483 billion, with almost all growth as a result of specialty drugs (high-cost medications used to treat chronic conditions, such as cancer). It’s also estimated that the next generation of pharmaceutical “blockbusters” will be primarily specialty products. As the make-up of the pharmaceutical market shifts, we’re also seeing changes with the role of pharmacy benefit managers and other medical groups in the process. How are these shifts in specialty pharmacy impacting the health care system as a whole?

We asked Karen Gibbs, McDermott partner and former VP and Senior Counsel at CVS, to share her expertise on the subject and her thoughts on what’s to come.

Q.  Investments in niche sectors of pharmacy services, specialty pharmacy and pharmacy benefit management have gained huge traction recently. What’s driving the shift away from more traditional pharmacies?   

A.  Traditional pharmacies are retail establishments and have been suffering from the same earnings pressure that all retail establishments have endured. Pharmacy benefit managers (PBMs) typically own mail and specialty pharmacy operations, which generate revenue in a manner complementary to that derived from the pharmacy benefit management services. The margin on specialty pharmacy and PBM services is significantly more than retail pharmacy. Continue Reading Q&A: Shifting Trends in Specialty Pharmacy to Continue in 2018