Investment in the Sector

Who’s Who Legal: Lawyers we spoke to noted a recent lack of private investment in the pharmaceuticals sector. Is this the case in your jurisdiction? How are clients responding to this and how do these changes affect the work for lawyers?

Andrew Shaughnessy: I generally focus on IP litigation in the pharmaceutical sector. The courtroom is a long way away from the boardroom for private investors. So, I posed this question to my colleagues Eileen McMahon and Cheryl Reicin. Eileen McMahon responded that she is seeing more licensing agreements, particularly between big pharma and biotech. Sadly, in 2009 she also saw a few more insolvencies. 

Cheryl Reicin said flatly that “Canada private investment was negligible in 2009.” Her clients looked to tap in to foreign investors (primarily US). She reports that US venture capital was available but was more selective than in prior years. US public markets in biotech opened up with restraint in summer 2009 with particular emphasis on registered direct offerings; however, there was anxiety as to when the window might close.

According to Cheryl, because of the pent-up demand for financing, companies and underwriters are gearing up for a busy 2010. The question is whether the public markets will cooperate: whether the US market will open wide and whether the Canadian market will open at all. She also notes that Canadian life science companies not looking to go public will need to court US private investors and find a strong local Canadian venture capital fund to serve as an anchor. Some of the larger US and Canadian life science venture capital funds are expected to close new rounds of funds shortly. Fresh funds will be available for the most strategic companies, but those trying a “me too” business strategy or less-than-cutting edge technology will be left in the cold. Cheryl says: “The easy money is gone, and investors will continue to sharpen their pencils.”

Marcos Levy: In Brazil, in spite of the existence of price controls for pharmaceutical products, we have not felt too much of a decline in investments in the sector. Although a lot of the investment seen in 2009 was made by local generic companies, some multinationals have continued their investments in the country; including some generics that have made offers for and taken over local companies. Also a few local companies have, in the recent past, made more investments in the R&D area.

Note that in Brazil the number of publicly traded companies in the pharmaceuticals sector can be counted on one hand. Another reason for the continued (although a little lower) investment in Brazil, is that it was less affected by the economic crisis.

The ghosts still haunting decisions on larger investments in Brazil, especially for biotech companies and companies producing (or distributing) high cost or high complexity drugs are price controls, which are based on imprecise legislation that is often subject to different interpretations; the power given to the regulatory agency some years ago to review and to consent to any patent for pharmaceutical products in Brazil; and the unpredictability of the regulations issued by the agency.

Andrew Shaughnessy: Price control is a thorny issue in Canada as well. In 2009, we continued to see the pricing authority aggressively pursuing its mandate of maintaining price control in Canada – against generic manufacturers and against foreign suppliers of drugs which were made available in Canada only via compassionate use programmes. By way of background, Canada wants to be in the middle of the road when it comes to pricing: we like to be the median price in the world, the “world” being a basket of eight developed countries. This is an unhappy state of affairs for investors when higher prices are realised in Europe or in the United States. 

Yuval Horn: Our practice (in Israel) has noted the opposite with respect to activity in the biomed sector in the second half of 2009. Pontifax, Israel’s largest dedicated biotech fund, initiated several investments together with additional investors and business incubators in several drug development companies. In addition, the Office of the Chief Scientist (OCS) allocates extensive funding for life sciences projects, which are backed up by private investment. 

The Technological Incubators Committee, led by the OCS, approved in the first half of 2009 support in the establishment of 48 new start-up companies, with the support of technological incubators (government-backed organisations to nurture innovation), granting 81 million New Israeli shekels of which 46 per cent was allocated to medical devices and 8 per cent to bio-pharma.

In 2008, 688 companies applied for funding under OCS R&D support tracks. Of these, 463 companies received an approved budget of US$2.7 billion; 24.5 per cent of funding went to the life sciences industry.

Recently, investors have had an appetite for early-stage drug development and device companies. Currently, 38 biomed companies are traded on the Tel Aviv Stock Exchange - approximately 4 per cent of the companies listed on the TASE.

In June 2009, Pontifax Investments entered into an agreement with Hofmann La Roche, under which Pontifax shall lead the process of identifying and investing in Israeli biotech companies that represent potential collaborative partners for Roche, with an initial focus on seed-stage and later-stage biotech firms. Pontifax is expected to provide management support, and to assist the technologies’ admission to an incubator affiliated with the fund. The joint investment will be complement funding through the OCS incubator programme. Under the agreement, Roche will assist the companies in their development and will have a right of first negotiation. The collaboration is a long-term commitment, and several transactions have been announced recently.

Our firm’s work has focused on licensing and funding of the companies. Companies have attempted throughout 2009 to locate licensing opportunities for the funding of their operations. Others opted for public and private funding. We have assisted companies on both types of transactions. 

Grace Chen: Overall there has been a decrease in the number of private equity and venture capital deals during this past year, not to mention significant drops in deal value. During this period, investors have also become more conservative and risk-averse in the current economic situation; they are more selective and cautious about identifying potential investment targets and, ultimately, about sealing the deal. Investors are being more critical in assessing whether the target companies have the innovative indigenous products that will allow them to deliver sufficient investment returns; problems uncovered in due diligence that would have been accepted as rational business risks in the past would now be viewed as sufficient reason to walk away from a transaction altogether.

The global economic recession has made investing in non-cyclical industries like pharmaceuticals attractive and China is no exception. With China’s economic recovery on the horizon, and increased emphasis on innovation by domestic companies due to greater maturity and incentives provided by government policies, we would expect that there will be increased interest in a high-growth potential industry sector such as life sciences from private equity and venture capital. The recent launch of China’s growth enterprise board will also influence the attractiveness of early- or mid-stage investments in China’s growing life sciences sector.

Levels of Consolidation

Who’s Who Legal: The financial crisis has hit smaller biotechnology companies particularly hard, and there has been greater consolidation in the sector. Have you noticed an increase in M&A? How will consolidation change the landscape?

Yuval Horn: We have noted several mergers or exclusive licence agreements relating to technologies that were no longer funded. Major mergers were noted in the medical device sector. Teva Pharmaceuticals has entered into several agreements during the recent years, as has Pontifax Investments. We have noted increased investment from incubators, rather than M&A activity, in drug development. In addition, several companies have opted for mergers into public shells, to provide the shareholders with additional liquidity. 

Marcos Levy: A lot of consolidation has been seen in Brazil over the past few years. Not only the local consolidation of subsidiaries of large multinationals merging (eg, Pfizer/Wyeth, Merck/Schering-Plough) but a lot of consolidation of local manufacturers of copies or generics. The consolidation of local companies in Brazil is a direct result of the creation of the generics market - which was practically non-existent in Brazil before 2002 - and the increasing competition in the market, with the coming to Brazil of generic companies from India, Israel and other countries.

Grace Chen: Notwithstanding the recent economic crisis, China continues to be a growing market with huge potential particularly in biotechnology companies and other players in the life sciences sector. After a slowdown in activity in 2008, 2009 has seen a number of M&A transactions, by domestic listed companies using capital proceeds from their IPOs to acquire other companies, foreign companies seeking local market expertise or wishing to achieve faster development than can be accomplished by organic growth, and by smaller companies recognising the need to reach critical mass to achieve economies of scale and to be fully functional in its field.

We would expect to see market consolidation in this sector. Current government policy and the industry environment favour the growth of the larger companies that are better able to bear the higher cost of market entry imposed by stricter regulatory controls, which will result in the survival of the fittest.

Andrew Shaughnessy: M&A had some impact on my litigation files (eg, the Pfizer/Wyeth merger and the Warner Chilcott acquisition of P&G’s pharma business), but its effect was mainly felt in transactional work. My colleague Cheryl Reicin notes that as blockbuster drugs came off - patent, big pharmas were keen to consolidate to protect revenue share in 2009. She believes that, to fill their pipelines in 2010, big pharmas will look to small and mid-sized biotech companies for licence, partnership and acquisition transactions, which the biotechs will be keen to do because of the liquidity crunch in venture capital. She also notes that depressed valuations of public biotech companies are making acquisitions more attractive and, ironically, even cheaper than licensing deals.

Cheryl predicts increased activity in 2010. She says that mergers and acquisitions will continue to be strong since pharmas’ needs are unquenchable. The real question is whether the deals will involve healthy or distressed entities. The answer will depend largely on how wide the capital markets will open as well as the alternatives available to potential targets. Another factor will be whether the competition for biotech deals among pharmas will increase or decrease with fewer players in the market. Medical device mergers will also continue at a healthy pace, although the acquirers will be more deliberate, she notes.

Dispute Trends

Who’s Who Legal: As companies increase their global reach, is life sciences litigation becoming more international? What disputes are coming to the fore?

Grace Chen: Yes, life sciences litigation in China has long been international in scope, especially in light of the fact that domestic Chinese companies have lagged behind their Western counterparts in terms of innovation and have for a long time been too reliant on generic products. The focus of such litigation has long been and continues to be patent infringement disputes, as the multinational companies view patent protection as being more effective in providing long-term protection of their intellectual property rights, which are essentially the lifeblood of these companies. While regulatory exclusivity does play a role in encouraging innovation and protecting intellectual property, unlike patent protection it does not provide for a direct means to enforce such rights against a third-party infringer

Andrew Shaughnessy: In the small molecule pharmaceutical field, litigation of major products is multi-jurisdictional. I have only one case in Canada right now which is not being litigated in at least one other jurisdiction around the world. The international nature of litigation, and the fact that information is so readily accessed and easily accessible, means that local litigation matters have to be carefully conducted with an eye to the worldwide strategy.  This puts tremendous pressure on Canadian counsel to coordinate with others around the world. This is not only to ensure that the Canadian song sheet is in harmony with other productions; it is equally the task of local counsel to ensure that everything that can and should be done in Canada gets equal treatment. If a document or a witness emerges somewhere else, there may be some explaining to do in Canada. 

A trend we have been seeing is the need of generic companies to try to get to market either exclusively or at least with a bit of a lead over the rest of the pack. In the past, there was a bit of a “wait and see” approach taken, where the second and third comers would sit back to allow a lead litigant to test the patent first. That trend has seemingly taken a back seat. Now, it is all about winning the race to the first judgment. With a Canadian Federal Court willing to embrace a “rocket docket” mentality, pharma litigation has increased in intensity (if one can imagine such a thing). 

On the bio front, we are waiting for the other shoe to drop on subsequent entry biologic (or follow-on biologic) litigation. Many clients are anticipating that marketing approval in 2010 will issue on a subsequent entry biologic. Many are preparing their strategy and I dare say that many litigators are poised to react immediately when the first marketing approval emerges.

Marcos Levy: In Brazil manufacturers of generics and copies have gone to the judiciary to discuss disputes related to second-use patents (Swiss formula) and also to discuss the validity in Brazil of a certain number of extension terms of patents granted by the USPTO or by the European Patent Office. This affects, especially, patents that were granted in Brazil under the pipeline provisions of the legislation that sets forth that the term of validity of these types of patent in Brazil is equal to the remaining term of the patent in the country of origin.

Yuval Horn: One recent interesting example of litigation highlights an area that I foresee becoming more important as price and technology become key. H Lundbeck appealed to the District Court, with respect to the decision by the Israeli registrar of patents not to extend the appellants’ basic patent on an anti-depressant active ingredient in Cipralex. This decision allowed Unipharm to develop and commercialise a generic form of the drug. The District Court rejected the appeal, ruled that the appellant is not entitled to an extension of its registered basic patent, and therefore Unipharm is not in violation of the said patent for marketing its generic drug. A request for appeal has been filed with the Supreme Court.

Masaru Kitamura: Japanese pharmaceutical companies are becoming far more aggressive in seeking judicial remedies than in the past, be it inside Japan or globally. A recent case I worked on involved a client developing products worldwide through licensing arrangements. These disputes are fairly common.

These clients have sufficient resources to pursue international litigation, and I believe the trend will continue. For corporate and licensing counsel, it is imperative to envisage potential conflicts arising over IP ownership and from future M&A.

Emerging Markets

Who’s Who Legal: Which jurisdictions are emerging as places to watch for life sciences work?

Yuval Horn: Israel has been a fertile landscape for the funding of drug development technologies. Investors no longer focus on Israel companies per se (although OCS funding requires the technology to remain in Israel). The standards are internationally oriented, and many companies have entered into international licensing, material transfer and joint development agreements.

In addition, a relatively large number of opportunities exist with technology transfer companies of academic institutions, which have enabled several drug development successes per capita. For example, the Weizmann Institute of Science has licensed out Copaxone, Rebif and Erbitux; Ramot (Tel-Aviv University) has licensed Lipimix, Circadin, Dentyl pH; and Yissum (The Hebrew University in Jerusalem) has licensed Exelon and Doxil (Caelyx).

Grace Chen: China, with its rapid economic development and the increased buying power of its consumers, is certainly one of those jurisdictions where we would expect life sciences work to increase at a significant rate. As stated above, globalization is the goal of many multinational companies, and China is one of the world’s most important markets today. Many non-Chinese companies in the life sciences industry, particularly in the pharmaceutical sector, have already set up R&D facilities in China or are planning to do so, some have elected to outsource certain functions to China or other parts of Asia, and there are others that have elected to enter into cooperative R&D or commercial arrangements with domestic Chinese companies. On the other hand, Chinese companies, as they become more sophisticated and cash-rich than they have been in the past, are also recognising a need to expand their own operations on a global scale and with that in mind, they are considering their options with respect to offshore investments with the objectives of expanding their operations, obtaining new technologies, and strengthening their R&D capabilities.

Andrew Shaughnessy: We are seeing a lot more activity out of China, India and Israel.

Regulatory Changes

Who’s Who Legal: What regulatory changes have been imposed in your jurisdiction since the last edition of this guide in 2008? What trends do you envision going forward?

Masaru Kitamura: There are many factors in Japan which are fundamentally changing the regulatory landscape. First, the election last year and the new government altered the policymaking process drastically. It is no longer determined behind closed doors by the bureaucracy, a few politicians, and the institutional stakeholders. One most notable development in this regard is the reshuffle of advisory board memberships, purging Japan Medical Association’s representatives.

Secondly, the government is seeking to reallocate budget resources in health care. This will provide a strong downward pressure on the drug reimbursement rates and promotion of generic products. Notably, the government introduced guidelines for approval of biosimilar products last year.

Third, the efforts to expedite Japanese clinical trials and drug approval are continuing, with a variety of consequences. One such consequence is a more frequent post-marketing surveillance requirement on new drug products, and higher distribution costs. 

Marcos Levy: The main issue in the regulatory area in Brazil is the regulation of clinical studies. Since 1996, the regulations for the carrying out of clinical studies in Brazil had been issued by the National Health Council (NHC), through Resolutions 196/96; 251/97, 292/99 and 340/04. In September 2009, the Ministry of Health enacted Ordinance 2048/09,which set forth the new regulations for the National Health Programme (SUS). However, the ordinance, more than just regulating the SUS, also expressly revoked all the resolutions regulating clinical studies and set forth new regulations.

The text of the new Ordinance specified that it would come into force on the date it was published. As the NHC complained that it had not been consulted on the matter, the Ministry of Health published a second ordinance (2230/09), not only staying, for one year, the enforcement of Ordinance 2048/09 but also saying that the ordinance will stay in a state of “public consultation” so that “other departments of the Ministry of Health can verify any inconsistency between the new ordinance and existing rules and legislation. Finally, the Ordinance reinstated the NHC resolutions that Ordinance 2048/09 had revoked.

When Ordinance 2048/09 comes into force in December 2010, we will be faced with a very peculiar problem. The resolutions of the NHC will, in theory, continue to be in force. However, the carrying out of clinical studies will also be, entirely regulated by Ordinance 2048/09. As per the terms of the Introductory Law to the Brazilian Civil Code, rules and legislations are revoked tacitly when a new rule entirely regulates the same subject. Looking into the confusion that lay ahead, some lawyers also contend that the decree establishing the competencies of the NHC did not include powers for regulating clinical studies. This means that, in principle, all of the resolutions of the NHC on clinical trials can be questioned. So, either the Ministry of Health must change the competencies of the NHC and republish the ordinance without the regulations related to clinical studies, or there may be a great problem for any company doing clinical research in Brazil, as it is almost certain that staff from the regulatory agency will have different interpretations on the rules and regulation that apply to clinical studies in Brazil. We shall have to wait and see.

Grace Chen: The promulgation of a series of management standards for the manufacturing quality of medical devices signals the government’s intention to impose strict regulatory control on this sub-sector. The issuance of discharge standards of water pollutants in the pharmaceutical industry in various categories in 2008 obligates pharmaceutical manufacturers to comply, which means it will no longer be possible to achieve profitability at the expense of the environment.

We expect the imposition of these or other, stricter government controls on this industry to force non-compliant companies to either undergo changes to achieve compliance or to shut down altogether, which will improve the overall quality of Chinese companies in this industry sector.

With the 2009 promulgation of food safety regulations, after news of the food contamination scandals broke in late 2008, it appears that the government intends to impose strict regulatory controls on the food industry, which will bring it close to the pharmaceutical industry in respect of quality control and regulatory compliance. We expect to see a greater overlap between the two industry sectors.

We are also seeing a cross-over effect from the pharmaceutical sector as they invest in the foods sector; part of the reason may be a growing interest on the part of pharmaceutical companies to expand into the health foods arena. We would expect the R&D strengths of the pharmaceutical companies to bolster the weaker R&D capabilities of companies in the food sector, and the strong distribution channels of the food companies to provide significant support to the pharmaceutical companies’ efforts to break into the health foods market. All of the above are positive developments that would be mutually beneficial to both sectors.

Andrew Shaughnessy: The regulatory landscape currently has many moving parts. On the controversial issue of subsequent entry biologics or biosimilars, Health Canada, the federal health department, is preparing to finalise its guideline on the regulation of SEBs. Many industry players in Canada have expressed their concerns to Health Canada regarding the proposed guidelines.

Regarding data protection, Health Canada published a guidance document on how data protection is to work, from the minister’s perspective, in practice. Data protection has also been introduced with respect to pest-control products. Proposed amendments affecting data protection have been published for comment.

In 2009, there appeared to be a greater amount of attention paid by US companies to ensuring that their Canadian operating divisions or subsidiaries are complying with all applicable regulatory laws, guidelines, codes of conduct. Health Canada has also amended its Adverse Drug Reaction Reporting requirements to reflect a heightened sense of rigour and vigilance by the regulator.