In the global pharmaceutical industry, there were 479 M&A deals announced in Q2 2023, worth a total value of $51bn, according to GlobalData’s Deals Database. In value terms, M&A activity decreased by 30% in Q2 2023 compared with the previous quarter’s total of $72.5bn and rose by 77% as compared to Q2 2022. Related deal volume increased by 18% in Q2 2023 versus the previous quarter and was 151% higher than in Q2 2022.
Pharmaceutical companies such as Pfizer, Merck, BMS and Sanofi have led the M&A revival this year by announcing multibillion-dollar acquisitions, even as dealmaking across other market sectors has fallen sharply due to rising interest rates and tighter bank lending.
In contrast, in the first half of 2023, just 42 medtech acquisitions were closed, for a total spend of $13.1bn. Unless the second half picks up the pace, 2023 will see the lowest spend for a decade, and the fewest deals since Evaluate Medtech began tracking the sector.
In this article, we consider the latest regulatory trends in the review of pharmaceutical and life sciences M&A and how, if at all, they are impacting deal making in the sector. Merger review timelines remain lengthy for substantive cases and regulators are increasingly seeking to intervene in both below-threshold and non-overlap deals. Meanwhile, foreign investment regimes continue to expand in the face of a more complex geopolitical landscape, and the EU Foreign Subsidies Regulation in now in force and capturing most of the largest M&A transactions.
Merger control – widening the net and increased scrutiny
The continued use of below-threshold mechanisms by merger regulators to catch and call in mergers for review requires a level of self-assessment by parties regarding the risk of future enforcement. New rules in China urge informants to report smaller, potentially anticompetitive mergers (with regulation on “killer” acquisitions to follow). And in the EU, screening non-notifiable transactions to assess whether the EU should encourage Member States to request an Article 22 referral is now routine, particularly in the pharmaceutical and tech sectors, while national competition authorities are also using abuse of dominance rules and receiving more call-in powers below filing thresholds.
Several EU Member States have or are about to introduce mechanisms enabling them to review “killer acquisitions”. Germany and Austria have already established value-based transaction thresholds; Sweden, Slovenia, Latvia and Lithuania have or will obtain the power to review below threshold acquisitions if they meet certain criteria; and Italy and Ireland have already established this power.
A March 2021 initiative to establish a cross Atlantic working group aiming to “bring enhanced scrutiny and more detailed analysis” to pharmaceutical mergers promised a more harmonised and more aggressive enforcement approach between the US and EU authorities.
But while there have been 20 non-simplified cases notified to the European Commission in the healthcare sector since 1 January 2020, only one of those deals (Illumina/Grail) has been prohibited and two deals (Mylan/Upjohn and Elanco Animal Health/Bayer Animal Health Division) have required remedies for clearance. The ongoing Illumina/Grail saga is noteworthy for several reasons, including because Grail is a US-based company with no presence in Europe (that develops blood tests for cancer detection using an innovative technology based on genomic sequencing and data science), which was spun out of Illumina four years earlier. That didn’t stop the Commission from calling the deal in for review some 7 months after it announcement, and ultimately prohibiting it due to vertical foreclosure concerns which it alleged would interfere with the “innovation race” between Grail and rivals to develop and commercialise early detection cancer tests. While the EU’s General Court delivered a ringing endorsement of the Commission’s revised approach to asserting jurisdiction in its judgment in the Illumina/Grail case last year, that judgment (as well as appeals against the substantive decision) and gun jumping fine is now under appeal to the Court of Justice, and we await the results.
In the UK, the CMA which has become one of the most feared authorities for global M&A in recent years and has always had the power to ‘call-in’ deals with its flexible jurisdictional tests, has had a less interventionist year, unconditionally clearing several deals that were referred to an in-depth investigation in Europe. The CMA has had a dearth of investigations in the healthcare sector in recent years but has turned its attention to roll-up transactions in veterinary services (investigating, amongst others, several acquisitions by Medivet Group Limited) and the supply of healthcare software, IT solutions, and health data analytics (UnitedHealth Group / EMIS – unconditionally cleared after a Phase II investigation in September 2023).
In the US, the FTC’s challenge of a non-overlaps deal in Horizon/Amgen marked its first attempt to block a pharma deal in more than a decade, invoking conglomerate effects based on concerns around the bundling of blockbuster products. Under the settlement reached with the FTC in September 2023, which included no financial settlement, Amgen promised not to bundle two of Horizon’s drugs.
Foreign investment control – new regimes and geopolitical shifts
The growth in foreign investment screening regimes shows no signs of abating. It is expected that 23 of 27 EU Member States will have national FI regimes in place by the end of this year – with Sweden having come into force on 1 December 2023, Ireland also expected soon, and a further four Member States (Croatia, Cyprus, Greece, and Bulgaria) working on legislation.
In parallel, the more established regimes are maturing, as screening authorities show signs of pragmatism in some areas (e.g., proposals to exclude internal reorganisations from the scope of the UK NSIA), while flexing their powers in others – with a number of high-profile prohibitions across Europe this year, including in Italy, France the UK and Denmark.
The sectoral coverage of foreign investment regimes often includes healthcare, particularly since the Covid pandemic and resultant sensitivities, pursuant to which demands for self-sufficiency became commonplace as governments sought to protect the production of essential pharmaceuticals, medical devices and supplies. However, intervention by foreign investment authorities in the healthcare sector has been rare in more recent years.
However, broadly drafted legislation (which gives regulators discretion to ‘cherry-pick’ transactions of interest) means that the number of foreign investment notifications continues to increase. And outbound foreign investment control is also on the agenda in numerous jurisdictions, including the US, EU and UK.
Another regulatory hurdle for big M&A – the EU Foreign Subsidies Regulation
Finally, in (yet) another regulatory hurdle for M&A, the EU’s Foreign Subsidies regime took effect from 12 July. It introduces ex-ante notification obligations for certain M&A and EU public procurement as well as giving the European Commission powers to investigate any market situation where it suspects that the EU’s internal market has been distorted by foreign subsidies. The notification obligations kicked in from 12 October 2023. Its broad “net” will capture most of the largest M&A transactions and public tenders, imposing a considerable administrative burden on both EU and third country companies and investors.
Tying it all together – a complex formula
The widening regulatory net means that there are new and potentially significant hurdles to in-organically scale for pharma and life sciences M&A. The size of those hurdles will depend on a complex formula for dealmakers to assess comprising at least the parties’ product portfolios, the geopolitical landscape and their connections to and support from any state actors.