Innovation and transformation are the watchwords for life sciences in 2022. Digitization and personalization trends are set to continue (with AI, data and MedTech primed to play an increasingly prominent role), while regulators grapple to fit new modalities into existing legal frameworks. Here we preview the trends to watch in the year ahead.
What to expect in… M&A and licensing
1. Divestments of non-core businesses and a focus on key therapeutic areas
Several key players launched strategic reviews in 2021, with those strategies set to be implemented in 2022. This will drive the divestment of significant non-core businesses and continued focus on fewer key therapeutic areas. As a result, we can expect to see carve-outs, demergers and spinoffs – as well as high-profile “mega” deals (against a more certain macro and virus backdrop), with many likely to be the subject of competitive auctions.
2. Acquisition activity to be driven by patent cliffs, significant cash on balance sheets, softened valuations and SPACs
With certain exceptions, biopharma M&A activity in 2021 was largely down, driven by a number of factors: easy access to capital through venture capital funding or the public markets (including SPACs), easing the pressure to seek M&A as an exit; valuations were high (although they softened towards year-end); and a general preference in the market for licensing and collaboration deals. While this trend is continuing so far in 2022 (with few M&A deals announced around the JP Morgan Healthcare conference) we see potential for a strong M&A market across the year as a whole. Patent cliffs will continue to drive acquisition activity, as will companies having significant cash on the balance sheet (either as a result of divestments or cash accumulation through the pandemic). Additionally, a large number of SPACs have completed financings and are looking for acquisitions before they have to return their investors’ money). M&A headwinds could arise however from increased (or more unpredictable) regulatory scrutiny, especially if the capital markets continue to provide biotechs with access to free-flowing capital.
3. Interest in cell and gene therapies
As the industry continues to refocus post-pandemic, oncology, immunology and cell and gene therapies remain key areas and we expect companies that have made developments in advanced therapies to attract widespread interest – both from investors and from regulators/government agencies.
4. More MedTech and cross-sector M&A
MedTech will continue to be an attractive focal point for M&A. The combination of rapid technological innovation and disruption of traditional models of care has expedited the integration of MedTech and we expect significant activity from cross-category players. You can read our deep dive into MedTech trends for 2022 here.
5. Continued interest from financial sponsors
Financial sponsors who are sitting on record levels of dry powder (an estimated $1.4trn globally) will continue to actively seek opportunities to deploy capital in the sector, viewing it as structurally stable with good prospects for growth across the economic cycle.
6. Increased reliance on licensing and collaboration
We predict an increasing reliance on licensing and collaboration deals, as companies search for flexible and creative ways to access funding and novel technologies. Again, we can expect significant activity around MedTech, with an uptick in strategic collaborations. We also anticipate more digitization-driven collaborations between technology companies and SMEs with innovative platforms, and more data collaborations between biotechs and pharma companies.
What to expect in… antitrust, competition and trade
The life sciences industry remains high on antitrust authorities’ enforcement agendas – both in relation to M&A deals as well as investigations into commercial and behavioral practices (see our in-depth review here). More than ever, life sciences companies need a truly global and well-planned approach to their regulatory clearance strategy, even deals which on their face appear to be local or regional.
7. M&A/merger control landscape is ever more challenging
Intervention by antitrust agencies in life sciences deals is increasingly unpredictable. Authorities are actively cooperating on broader policy development (for example through the recently announced Multilateral Pharmaceutical Merger Task Force) as well as on individual cases, yet at the same time, the prospects of divergent outcomes are increasing. Companies must be ready to engage on complex theories of harm as authorities push the established bounds of substantive and jurisdictional assessments. The following issues will be particularly important in the transactional space in 2022:
- Loss of innovation competition has become a mainstream theory of harm. US, EU and UK authorities are looking not just at direct overlaps, but also at broader innovation competition concerns unrelated to specific pipeline products.
- Vertical and conglomerate aspects of mergers are subject to closer scrutiny. Antitrust authorities are increasingly focused on the potential for reduction in post-merger access to key inputs, such as APIs.
- Concerns around nascent/potential competition are a key focus of substantive analysis (especially for the UK CMA).
- National security concerns, including critical supply chains and technology leadership, are increasingly under scrutiny. Similar to the US CFIUS approach, the UK’s new National Security and Investment Act makes certain investments in targets active in areas perceived as high risk - AI, advanced robotics, synthetic biology, and supply to the emergency services - subject to mandatory review.
8. Enhanced focus required on licensing, collaboration and option agreements
Licensing and collaboration agreements need careful antitrust consideration to ensure that the parties are able to achieve their intended commercial rationale, realize their investment and are able to exit as planned. For example, appropriate safeguards may be needed if the parties are, or could become, actual or potential competitors during a collaborative venture. Option deals may, depending on their structuring, not be notifiable at the time of signing, but could become notifiable once the rights are exercised.
What to expect in… the regulatory space
The year ahead looks set to be transformative as regulators strive to keep pace with and fit market-led developments – such as AI and the personalization of medicine – within existing regulatory frameworks.
9. Accelerated pathways to market
Post-pandemic, some regulators have begun to demonstrate flexibility and the facility to bring innovative medicines to market more quickly, for example the UK MHRA’s Innovative licensing and Access Pathway (ILAP) which is showing signs of genuine take up by industry.
10. More clarity around AI
As the sector’s integration of AI and machine learning technologies grows, regulators are playing catch-up. This year, we expect more detail to emerge around their thinking. For example, the EU Commission is reviewing EU liability regimes to reflect the rise of AI and digital technologies, and the UK consulted on regulating AI as a medical device at the end of 2021 as well as initiating an extensive AI Work Programme (you can read our blog here).
11. MedTech will continue to test the boundaries
With data at its core and products that span the intersection of consumer, tech and traditional healthcare, MedTech presents unique regulatory challenges. As more diverse players with novel products and services enter the field in the year ahead, it will increasingly test the regulatory boundaries.
12. European developments
In the EU, manufacturers will need to finalize preparations for the new IVD Regulation in May. While we expect high utilization of recently amended transitional provisions, companies will be expected to comply with certain requirements immediately (as with the MDR). We also expect the Commission to revise pharma legislation in Q3 to adapt to innovative products and technologies, in line with the broader EU pharmaceutical strategy. Meanwhile, the Representative Actions Directive, part of the EU’s evolving consumer agenda, needs to be transposed into national law by the end of the year, so draft legislation is set to emerge soon. Plans may also be announced to reform EU product liability rules in ways that are unlikely to be welcomed in industry. In the UK, we anticipate the government will articulate its regulatory approach to healthcare post-Brexit. There is intense interest in how closely UK regulatory policy will align with that of the EU and the wider international community, with increasing diversity bringing further complexity and challenge (you can read our blog here). The MHRA’s consultation to overhaul medical devices legislation closed at the end of 2021, and it has just launched another consultation on new legislation for clinical trials.
What to expect in… disputes and enforcement
13. Litigation risk associated with innovation
Increased digitization, personalization and MedTech will lead to more complex data privacy issues, presenting a significant litigation risk with respect to data protection and cyber security. Increasing levels of licensing and collaboration will result in an increase in attendant litigation risk (for example around milestones and efforts to achieve them). Finally, while increased regulatory flexibility and speed to market is laudable, it remains to be seen whether this will drive future litigation, including in relation to product liability and patents.
14. ESG dispute risk
ESG and sustainability-related legal risks will continue to feature on boardroom agendas in 2022. While there are important differences in regulatory requirements, enforcement activity and litigation risk among jurisdictions, horizon-scanning and risk mapping in light of increasingly granular environmental reporting and human rights diligence obligations has never been more important. In particular, we expect the following in the year ahead.
- More climate litigation - as of September 2021 there were c.1,800 global cases reported. We do not see that slowing down in 2022.
- The growth of strategically motivated litigation and quasi-litigation (in relation to climate and other ESG issues), as NGOs use the courts and non-judicial mechanisms to seek to influence corporate behavior. Sustainability reporting will be in the spotlight, in particular in relation to climate risks, carbon transition plans and supply chain due diligence.
- Increased shareholder activism and potentially shareholder claims, particularly as institutional shareholders come under pressure to demonstrate that investments align with their own ESG commitments, and as activist groups acquire shareholdings to exert pressure.
- Increased litigation risk and challenges related to so-called “greenwashing”. Towards the end of 2021 we saw consumer protection regulators around the world gearing up to take a more proactive approach to protecting consumers from alleged unfair commercial practices related to sustainability and environmental claims.
15. Increased enforcement risk for corporate wrongdoing
In the US, we expect a ramping up of investigative and enforcement activity, following several pronouncements by US agencies last year of intentions to vigorously pursue corporate wrongdoing. In Europe, France, Germany and the UK are all expected to review their corporate crime laws, while the EU and UK in particular are considering how criminal law can be used to drive human rights compliance and the green agenda.
What to expect in… IP and patents
16. Impact of advanced therapies and focus on access to medicines
The arrival of advanced therapies such as mRNA vaccines raises questions as to the patent landscape underpinning them at a platform level. Both new product launches and acquisitions will face an increased focus on the FTO risk of such technologies, with parties having to carefully consider the associated licensing requirements. With such high stakes, patent litigation will inevitably be part of the struggle for dominance. At an international level, access to medicines will remain in the political spotlight, with IP rights (IPRs) continuing to attract attention, particularly in the context of COVID-19. With little movement on the proposal by India and South Africa to the WTO to amend TRIPS to waive IPRs on all treatments for COVID-19 (compulsory licensing), the ongoing emergence of new treatments will sustain interest in other measures, for example unilateral IPR pledges and the Medicines Patent Pool clearing-house mechanism (which may also become an enhanced area of ESG focus for investors).
What to expect in… tax
17. International tax reforms take shape
Significant OECD and G20 international tax reforms will continue to take shape through 2022, with life sciences likely to be particularly affected. Pillar Two of the reforms – which applies a minimum 15 percent tax rate to multinationals – will move closer to legal reality domestically following the publication of detailed OECD and EU proposals last year. Multinationals with complex international structures will need to closely examine their tax position, as states consider local implementation and whether to introduce domestic top-up rules. Pillar One (which will reattribute taxable profit to market jurisdictions) is still some way off, although given its potential significance, larger multinationals will want to monitor developments closely.