Navigating the Complex Landscape of Merger Control and Foreign Direct Investment in Life Sciences in the EU and UK

Regulators are concerned that established market players may stifle competition by acquiring emerging competitors at the product development stage, before their products are approved and commercialised, and consequently before these innovative companies cross the turnover, asset, or market share thresholds that have traditionally triggered competition reviews. There are also significant concerns that certain mergers and acquisitions could lead to one player gaining too much dominance in a particular therapeutic area, or the cessation of the development and innovation of valuable treatments. Similarly, FDI regimes are also a key consideration for competition authorities to properly screen foreign direct investment in certain circumstances to safeguard national security and public order.

When should dealmakers consider merger control and FDI issues?

Dealmakers should consider merger control and FDI issues at the earliest stages of a transaction, as these regulatory frameworks can significantly impact the structure, cost, and timeline of a deal. Merger control regulations prevent anti-competitive market practices and may require clearance from competition authorities before a transaction can proceed, which can be time-consuming. FDI regimes protect national security interests and may impose restrictions or conditions on investment in certain sectors. Early consideration of these issues allows dealmakers to anticipate potential hurdles, plan accordingly, and ensure a smoother transaction process. Engaging with relevant authorities proactively fosters a more cooperative and efficient review process.

However, the consideration of merger control and FDI regime issues is not a one-time event. It’s a continuous process that should start upon commencement of a deal but also be integrated throughout the entire deal lifecycle to ensure timelines are met and delays are avoided as far as possible. As the deal progresses, the regulatory landscape may also shift, necessitating ongoing reassessment of these issues. Regularly monitoring changes in laws, regulations, and political climate, alongside maintaining open lines of communication with relevant authorities can help dealmakers respond proactively to new developments, manage risks effectively, and conclude the deal successfully. In some regimes, mandatory merger control/FDI notification can affect the entire deal if not done correctly, and even cause the deal to be void. A dynamic and vigilant approach to merger control and FDI issues is therefore a key component of effective dealmaking.

What are the key FDI considerations for acquirors and investors in life sciences transactions?

The European Union’s Foreign Direct Investment Regulation, implemented in March 2019, and the United Kingdom’s National Security and Investment Act 2021 (“NSIA”), implemented in 2022, have had significant implications for the Healthcare and Life Sciences (“HLS”) sector. They primarily aim to safeguard national security and public order across sectors like critical infrastructure, critical technologies, supply of critical inputs, and sensitive data.

Since adopting the Regulation, most Member States in the EU have implemented a system for screening FDIs, and the UK has separately implemented a system under the NSIA. Both regimes include their own list of sectors and/or activities which may be subject to notification for FDI screening, and timelines for drawing up timescales for merger completions. The HLS sector is of particular focus for FDI screening due to its involvement in research and development for medicinal and public healthcare purposes. For example:

• United Kingdom: Since 4 January 2022, it’s mandatory to notify certain acquisitions and investments under the UK’s National Security and Investment Act 2021. Companies that carry out activities in 17 key sectors of the UK economy, including the HLS sector under the remit of “Synthetic Biology”, “Suppliers to the Emergency Services” and potentially even “Defence” (e.g. nerve agent antidotes or gas-powered ventilators), will need to consider whether their transaction qualifies for notification.
  
  With the rise of artificial intelligence (“AI”) research, development and utilisation, industries and businesses that may not identify as ‘AI companies’ but utilise AI may also qualify. Generally, a mandatory notification is required in an acquisition or investment in a company operating in a sensitive sector which results in an acquiror or investor holding a stake above 25%, 50% or 75%.
  
  Failure to comply with this regime can lead to significant criminal and civil sanctions, including fines up to 5% of global turnover or £10 million (whichever is greater), and up to five years’ imprisonment. The standard review assessment, which applies to all notified transactions, can last up to 30 working days. Deals that trigger security issues may have an additional assessment period of 30 working days, and if necessary, another 45 working days. Voluntary notifications can be made for transactions not subject to the mandatory regime, and there is also scope for informal engagement.

• France: M&A transactions in the HLS sector are particularly susceptible to FDI control due to their involvement in research and public health, which are considered sensitive sectors. Even activities that are not sensitive by nature are likely to be considered as such by the French Ministry of Economy when the activities are implemented for clients considered sensitive, such as in the healthcare industry. If the transaction falls within scope, it must be notified, and the entire process can take up to 75 working days.
  
  
• Germany: Notifications are required for activities including developing, manufacturing or distributing:
  
  (i) medicinal products which are essential for ensuring public healthcare;
  
  (ii) medical devices intended for diagnosis, prevention, monitoring, prediction, prognosis, treatment or alleviation of life-threatening and highly contagious diseases; and
  
  (iii) in vitro diagnostic medical devices which are used to provide information on physiological or pathological processes or conditions, or to determine or monitor therapeutic measures in connection with life-threatening and highly contagious infectious diseases.
  
  The entire review process, which can be subject to various extensions and ‘stop the clock’ provisions, can easily exceed the six months’ initial review period for Phase 1 and Phase 2. Therefore, meticulous planning of the transaction timeline is essential to accommodate this.
  
  
• Spain: Sectors which are subject to authorisation are broad, and include, amongst others, programmes and projects of particular interest to Spain, supply of critical inputs, and other sectors that may affect public security, order or health. The maximum legal deadline for deciding on the application for authorisation is three months, although this can be extended if additional information is required. No decision made is considered a rejection.

For cross-border transactions, it is therefore crucial to carefully co-ordinate foreign investment approval procedures globally to ensure consistency and aligned timetables. Under the Enterprise Act 2002, there is also a “public interest interventions” provision which allows the government to intervene in mergers and acquisitions on public interest grounds, including mitigating the effects of public health emergencies.

It is evident that the EU’s FDI Regulation and the UK’s National Security & Investment Act have introduced a new layer of consideration for life sciences businesses. These businesses should therefore be prepared for rigorous scrutiny of their transactions and ensure they adhere to the regulatory requirements of the respective jurisdictions in which they operate.

Competitive potential: What is the role of Article 22 EU’s Merger Regulation (“EUMR”) in life sciences mergers?

When assessing pharmaceutical mergers and acquisitions, not only does the European Commission (“Commission”) take into account actual overlaps and competition between parties’ existing and pipeline products, but also overlaps in parties’ innovative capabilities. This can be clearly seen in the Commission’s application of Article 22 EUMR. In 2021, the Commission issued guidance on the application of Article 22 of the EUMR. This provision allows the Commission to review transactions referred to it by a Member State, where the transaction does not have an EU dimension but affects trade between Member States, and which risks significantly affecting competition within that Member State’s territory.

This mechanism can be used where the competitive potential of the target company is not adequately reflected in its turnover and so the referring Member State does not have jurisdiction itself to review the transaction. It ensures effective review of all concentrations that could significantly affect competition in the EU.

• Factors life sciences businesses should consider: The guidance explicitly mentions the digital and pharmaceutical sectors, where innovation is an important parameter of competition, as areas where targets are often acquired before they start to be commercially exploited. This does not mean these firms lack market significance. The potential for Article 22 to be applied to transactions is particularly relevant when the target is a recent market entrant with significant competitive potential or a key innovator or a supplier of key inputs for other industries. This includes companies conducting promising research & development projects, or those with access to or impact on competitively valuable assets like raw materials, intellectual property rights, data or infrastructure.
  
  
• Application of Article 22 in the Grail/Illumina merger: Article 22 EUMR was a crucial factor in the review of the acquisition of GRAIL by Illumina. Despite GRAIL not generating significant revenues from the sale of products, the Commission accepted the referral from France and other countries to assess the acquisition. The Commission found that the case met the criteria of Article 22(1) of EUMR, emphasising that the concentration threatened to significantly affect competition in markets beyond national borders. It also noted that one of the products in development was expected to capture a significant share of the addressable market, and that a coordination of investigative efforts at EU level was desirable, as the concentration concerned the detection of cancer (a major health priority for the Commission). The decision is currently under appeal, with the Attorney General having expressed disagreement with the Commission’s interpretation of Article 22, stating that it could result in a lack of legal certainty and less efficient merger control system for merging parties.

The outcome of the Grail/Illumina appeal could provide more legal certainty for businesses involved in transactions that do not meet the notification thresholds at either EU or national level, but which are considered to have competitive potential to come within scope of review under Article 22 EUMR.

However, until then, market players must carefully navigate any agreement involving the purchase or sale of an innovative business. Currently, parties involved in ongoing transactions that have not been finalised are subject to a stand-still obligation (as per Article 7 of the EUMR), once the Commission notifies them of a Member State's referral request. This imposes a mandatory halt on the deal and prohibits the completion of the transaction without clearance. Parties must factor this into their transaction timeline and should include clauses in their agreements making Commission clearance a prerequisite for the transaction in case an Article 22 referral is made.

UK merger control: an interventionist approach

The Competition and Markets Authority (“CMA”) has arguably become more interventionist in merger control enforcement, with the share of Phase 2 referrals of total decisions increasing significantly in recent years. The CMA has been known to apply the Share of Supply Test (“SOST”) quite expansively to catch any transactions which may be expected to raise UK competition concerns. The SOST is one of two jurisdictional tests that apply in UK merger control. It generally allows the CMA to intervene in a transaction where the merger would result in the creation or enhancement of at least a 25% share of the supply of particular goods or services in the UK, or a substantial part of it. The CMA has even applied the SOST to review transactions where one party has no UK revenues. The CMA can now also review transactions where there is no overlap in share of supply in certain circumstances, by virtue of its new powers under the Digital Markets, Competition and Consumers Act 2024 (“DMCCA”).

• Broad application of SOST: The investigation into Roche's acquisition of Spark Therapeutics is a clear example of the CMA taking a broad approach in its application of the SOST. Although Spark Therapeutics had no UK revenues, as its gene therapy was still in the clinical development stage, the CMA considered the company active in supplying treatments for haemophilia A. This was due to its R&D activities, UK-based research employees, and patent procurement for haemophilia A treatment in the UK. The CMA argued that the acquisition would increase the supply of such treatments beyond its 25% jurisdictional threshold. Despite the eventual approval of the deal, the CMA’s approach in this case implies that companies operating in innovative sectors should view the UK as a potential jurisdiction for notification (whether formally or informally) of the transaction, even if one party has not yet commercialised a product that is still in the development stage.
  
  
• New jurisdictional powers under the DMCCA: Companies should consider the new threshold introduced under the DMCCA, where jurisdiction for the CMA to review transactions can also now be established when at least one merging business has an existing 33% share of supply in the UK and a UK turnover exceeding £350m, and where the target has a UK nexus. The new threshold can capture life sciences acquisitions (including of small companies) where there is no overlap in share of supply. However, small life sciences companies and venture capital backed companies focused exclusively on R&D with less than £10 million in turnover may be protected by the new small mergers safe harbour.

What remedies might be required to ensure a deal is approved?

For an acquisition or merger to be approved, sometimes the relevant competition authority will require one or both merging parties to give undertakings to remedy its concerns. In some cases, this can include divestment of certain assets to reduce the risk of one party becoming too dominant in a particular therapeutic area. Some recent examples of this include:

1. GSK/Pfizer merger: As discussed previously in Trends in Life Sciences Deals, divestment was required as a result of the European Commission’s investigation of GlaxoSmithKline's (“GSK”) acquisition of Pfizer's Consumer Health Business. The Commission was concerned that the acquisition might diminish competition for topical pain management products, potentially leading to price hikes in several EEA countries, including Austria, Germany, Ireland, Italy, and the Netherlands. In response to these concerns, the companies proposed to divest Pfizer's topical pain global management business under the ThermaCare brand, including all relevant assets essential for maintaining its operation and competitiveness. This move nearly eliminated the overlap between GSK and Pfizer's respective consumer health businesses in the EEA's topical pain management category. The Commission approved these commitments and made its approval of the merger conditional upon complete adherence to them.
   
   
2. Abbvie/Allergan merger: Divestment has also been required where a merger is likely to lead to a loss of innovation, such as where a merging party is developing a competing product which it would cease developing because of the merger. This happened during the European Commission’s investigation of the acquisition of Allergan by AbbVie, where the Commission concluded that, since AbbVie would discontinue development of a particular treatment for inflammatory bowel disease (“IBD”), the acquisition would lead to loss of innovation for IBD treatments. Therefore, it impeded a promising medication from entering the market, possibly resulting in fewer treatment options and increased costs for patients and healthcare systems. The remedy proposed by Abbvie and accepted by the Commission was to divest the IBD treatment in question, including the manufacturing, marketing, and development rights worldwide, to a purchaser that would continue its development.
   
   
3. Cochlear/Oticon merger: A recent example of where the CMA has required undertakings was its investigation of the proposed merger between Cochlear Limited (“Cochlear”) and Oticon Medical (the hearing implants division of Demant A/S (“Demant”)). Post-merger, the companies were estimated to control 90% of the bone conductive solution (“BCS”) products supply in the UK. This lack of competition raised concerns about reduced consumer choice, increased prices, and potential decrease in quality and innovation. Having conducted a Phase 2 investigation, the CMA cleared the merger on 17 May 2024 after accepting final undertakings from Cochlear and Demant. The undertakings prevent Cochlear from acquiring interests in Demant's BCS or cochlear implants businesses for ten years, unless approved by the CMA. The case was officially closed on 29 May 2024.

Understanding where competition authorities require remedies before approving a merger is crucial for businesses in the life sciences sector. It is vital to anticipate that an increase in market dominance, potential price hikes, or a decrease in product innovation, amongst other things, could draw the attention of competition authorities. Adequate preparation, including thorough due diligence and even considering potential remedies in advance of notification, may be necessary to secure approval for a merger or acquisition.

What are the key takeaways?

In recent years, life sciences transactions have been subject to greater regulatory scrutiny. No where is this perhaps more evident than in merger control and FDI. Acquirors and investors must navigate an increasingly complex regulatory landscape and ensure compliance with a range of jurisdictional requirements, especially in complex cross-border transactions. It is critical that dealmakers in the sector stay abreast of competition law and FDI requirements and their potential implications on future transactions.