“If you define life sciences narrowly as biotech and therapeutic developments or if you focus just on the private sector or the public sector, then the market would be subject to certain cyclical aspects,” says Joseph Garcia of Blake, Cassels & Graydon LLP’s Vancouver office. “But if you look at it from a wider perspective – one that has four legs to the stool – then as a law firm we’re almost always busy.”
As Garcia sees it, the four legs are made up of large or multinational pharmaceuticals and biotech concerns that develop therapeutics; the medical device sector; the healthcare sector; and the public and private research and non-profit institutions that include universities, foundations and supporting bodies like Cancer Care, Genome Canada and the Rick Hansen Institute.
A surge of optimism has imbued the industry recently. “I’m very excited in a way I haven’t been for a while,” says Vanessa Grant of Gowling Lafleur Henderson LLP’s Toronto office.
Indeed, an analysis of the industry from the ground up to venture capital stage suggests the optimism is well-founded.
According to the MoneyTree Report, released in July by PricewaterhouseCoopers LLP and the National Venture Capital Association, and based on data from Thomson Reuters (publisher of Lexpert), the US$13 billion invested in VC in Q2 2014 in the US represents the largest quarterly investment total since US$13.1 billion was invested in Q1 2001. VC investment for the first half of 2014 reached US$22.7 billion, the highest first half total since 2001. “In other words, the prior quarter was exceptional and the second quarter was fantastic,” Garcia says.
Biotechnology was the second-largest industry sector affected, with US$1.8 billion going into 122 deals, up 69 per cent in deal value and 7 per cent in deal volume over the first quarter. Medical devices and equipment also rose by 8 per cent in value (US$649 million) and 12 per cent in deals (73). “These developments are important because venture capital had been moving away from the life sciences for the last seven or eight years,” Grant says.
The US numbers portend well for Canada, where the timing of early-stage investment is accelerating. “What’s driving the market as well is that venture capitalists and big pharma money is coming in earlier in the development cycle and the angel network in Canada is building nicely because they’re seeing good results,” says Cheryl Reicin of Torys LLP’s Toronto office.
By way of example, TVM Capital, a German private-equity fund, recently expanded into Canada by investing $150 million in a life science VC fund. Big pharma is also having an impact in the VC market.
“Big pharma is looking for additional ways to enhance its pipeline,” Grant says. “They have gone and are still going the acquisition route, but now they are also establishing their own venture funds or partnering with experienced private-equity and venture-capital investors who can assist them in evaluating potential investments.”
Merck, for example, joined with Lumira Capital, a healthcare VC firm, and invested $35 million in the Merck Lumira Biosciences Fund to support early-stage life science innovation in Quebec. “These types of deals provide cash injections into Canadian funds, and also provide nascent companies and their investors with the superior expertise that big pharma can provide,” Grant says.
There is a fundamental change, however, in the way that the resurgence of investment in Canadian companies is being deployed. “What’s changed from the last time we had this kind of excitement, before the financial crisis, is that investors are being very careful to invest in companies that have shorter terms to commercialization,” Grant says.
Consequently, investors are focusing more on diagnostics and therapeutics than on medical devices because the former have a faster path to commercialization. “People are investing more strategically, ensuring not only that the technology is interesting and novel and will address medical needs but that governments and private insurers will pay for it,” Grant says.
The Toronto-based MaRS EXCITE program, for example, assists companies whose technologies will help reduce healthcare costs. Once the selected products have been evaluated, reviewed and subjected to an economic analysis, MaRS provides an “EXCITE core evidentiary bundle” that companies can use for both Health Canada licensing and reimbursement and purchasing reviews.
BUSINESS IS ALSO good further along the life cycle. “If you look at stock prices and offerings in the US, you can see that life sciences is a big growth area with lots of money for transactions,” Reicin says.
Optimism seems pervasive throughout the sector. “There has been a massive increase in deal activity in all sectors, including biologics, biotech, medical devices, large M&A and big pharma consolidations,” says Jason Markwell of Norton Rose Fulbright Canada LLP’s Toronto office.
According to Grant, public markets, perhaps because of the move away from resources, are starting to focus on life sciences. “Gilead’s US$510-million acquisition of YM BioSciences in February 2013 started a trend,” she says.
As evidence of that trend, Grant cites Mitsubishi Tanabe Pharma Corporation’s acquisition of Quebec-based Medicago Inc. for $357 million and the sale of Canadian medical isotope-maker Nordion Inc. to US firm Sterigenics International Inc., with both transactions occurring earlier this year. “Foreign companies have started to realize that there is excellent research and value to be had in Canada,” Grant says.
Although many transactions involve only US-listed or other foreign companies, they nonetheless provide plenty of work for Canadian firms. “Due diligence from an IP and regulatory perspective are a big component of Canadian life sciences practice,” Markwell says.
Another driver in the life sciences market is the emerging convergence between high-tech companies and life sciences companies. Technology aimed at monitoring body function is high on this list: Novartis and Google have partnered to develop a smart contact lens that will monitor blood-sugar level in diabetics and correct vision in a new way. Google has also recently debuted its Google Fit platform to track health metrics like sleep and exercise on Android devices. In September, Apple, never one to ignore a trend, unveiled the all-new Apple Watch, which will be able to monitor heart rate and movement data to feed health apps.
Late in 2013, Vancouver-based PHEMI Health Systems announced it was partnering with SAP AG to develop technology that would bring big data analysis to healthcare and medical research. The announcement was made at the Data Effect conference in Vancouver, which focused on using big data and other technology to transform healthcare and medical research, including genomic analysis for personalized medicine.
Digital and wireless companies are also hopping on the life sciences bandwagon. TELUS Health, for example, has become a Gold Sponsor of LifeSciences BC. “TELUS Health’s Gold Sponsorship underscores the convergence of wireless and information communication technology that’s taking place in the life sciences space,” according to Paul Drohan, President and CEO of LifeSciences BC, in a January 2014 press release. “An increasing number of digital and wireless companies view life sciences and healthcare as critical elements of their operations.”
In the same press release, Dr. Brendan Byrne, Vice President, TELUS Physician Solutions at TELUS Health, opined that the potential convergence of life sciences with traditional clinical informatics was “potentially transformative” for healthcare in Canada.
“As different technologies become more sophisticated, they can often work together, and that can blur the lines between tech companies and life sciences companies,” Garcia says. “But that kind of convergence also generates significant opportunities for the formation of new businesses.”
What has received the most attention lately, however, are the tax inversion deals that allow US and non-US companies to combine in transactions that move the US corporation to a non-US jurisdiction where tax rates are lower. Until the recent combination of Tim Hortons and Burger King, inversion transactions occurred almost exclusively in the life sciences sector.
But it’s not necessarily the inversion phenomenon that’s created the M&A boom in life sciences. Among other things, there’s a fundamental change in the pharmaceutical industry. “We’re reading about inversion but the real story is that M&A is the new R&D,” says Hillel Rosen of Davies Ward Phillips & Vineberg LLP’s Montreal office. “It incorporates the notion that you can be a pharma company without spending a dollar in research.”
Rosen points to his client Paladin Labs Inc., recently acquired by Endo International plc, as an example. “Paladin sought out companies that had approved products or mature products or products that were on the cusp of being approved but didn’t attract a large enough market to interest big pharma, and acquired hundreds of products either by licensing them or acquiring the companies that owned the rights,” he says.
Laval, Quebec-based Valeant Pharmaceuticals International, Inc. is another instance of a company that entered the big pharma market through acquisitions. “Valeant did it on a very large scale, but smaller deals that give rise to plenty of work for lawyers are around all over the place,” Rosen says. “To do these deals, however, you have to be both a life sciences lawyer and an M&A lawyer.”
In an inversion transaction, the US company and the non-US company typically form a holding corporation in a low tax jurisdiction. The merging companies then become subsidiaries of the newly created holding company. “The inversion deal trend has generated a significant volume of work for us,” says Emmanuel Pressman, a partner in the Toronto office of Osler, Hoskin & Harcourt LLP. “I would not necessarily rank Canada as a predominant inversion target jurisdiction relative to others, but it is definitely on the radar.”
Canadian lawyers say they benefit from the transaction model — even if the target is not Canadian or if Canada is not chosen as the domicile for the new holding company. “So long as there are assets located in Canada, meaningful Canadian legal work flow will follow,” Pressman says.
Mylan Inc.’s purchase of Abbott Laboratories’ special brands and generic business for US$5.3 billion, for example, has the Netherlands as the new holding company’s domicile. “But there are Canadian assets that need to be identified, carved out of the enterprise and assigned or dealt with otherwise,” Pressman says. “This raises significant legal, commercial, structuring and tax issues.”
Other deals include Endo Health Solutions Inc.’s acquisition of Canadian-based Paladin Labs Inc. and Perrigo Company’s acquisition of Ireland-based Elan Corporation plc. The US Internal Revenue Service, however, is starting to question these transactions. Valeant’s latest quarterly filing reveals the IRS has been investigating the company for the last two years, although the IRS only notified Valeant of the audit in the second quarter. Valeant was originally a US company that merged in 2010 with Biovail Corp., a Canadian company, by way of an inversion transaction. The IRS inquiry extends to the 2010 deal.
Pressure is also mounting on Congress to stem the tide of tax inversions. For the time being, however, that pressure may be having the opposite effect. “The perception that the anti-inversion rules may be amended has created a sense of urgency on the part of US companies,” says Paul Seraganian in Osler’s New York office.
Conversely, changes in US tax law won’t necessarily spell doom for the life sciences deal flow. “The tax considerations are significant and can be a factor in bridging the valuation gap between the buyer and the seller,” Rosen says. “But inversion transactions in the life sciences sector all have a strategic rationale and inversion is just a new twist on getting these deals done.”
There’s no doubt, however, that inversions have impacted the Canadian market in several ways. For example, although inversions work best for companies with large market caps, their high profile has prompted a greater sensitivity to tax planning in the life sciences sector generally. “While early-stage companies may in the past not have focused on tax planning, there’s a lot of focus on that right now,” Reicin says.
The inversion phenomenon has also raised Canada’s global profile in the life sciences industry. “The spotlight on inversion has caused some companies to learn more about Canada, particularly about the availability of the SR&ED [Scientific Research and Experimental Development tax credit, often called ‘shred’] incentive,” Reicin says. “Companies that would otherwise just be in the US are incorporating here and doing business here, and it’s not just one or two: it’s a bunch and it makes for very good times that we hope will continue.”
Life science practice, of course, is about a great deal more than getting deals done. The work frequently engages a deep cross-disciplinary approach involving regulation, litigation, tax and transfer pricing, competition law, corporate law, commercial law, IPOs and M&A. As in many areas of practice, there’s a transactional side and a dispute resolution side to all of these specialties and both play an important role in keeping life sciences lawyers busy.
The story on the litigation side these days, however, is markedly different from the story on the transactional side. While the transactional side is booming, the litigation side is best described as steady.
Historically, a mainstay of life sciences litigation has been prohibition proceedings between innovators and generics under the Patented Medicines (Notice of Compliance)
Regulations (PMNOC). Health Canada statistics, however, cast doubt on PMNOC litigation as a growth area. “NOC litigation has declined steadily over the past five years,” Markwell says. “That’s probably a result of the patent cliff that emerged leading up to that period.”
Also impinging on NOC growth is the strengthened data protection scheme for certain innovative drugs that came into effect in 2006 when the federal government amended the Food and Drug Regulations to implement Canada’s obligations under NAFTA and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
The provisions protect undisclosed test or other data necessary to determine the safety and effectiveness of a pharmaceutical product that utilizes a new chemical entity. Under the scheme, innovative drugs get market exclusivity for eight years.
“There’s about 150 of these drugs with respect to which the generics can only engage the NOC process after six years,” Markwell says. “That’s part of the reason for the decline in applications.”
To some extent, the gap has been filled by non-PMNOC IP litigation, mostly patent infringement cases, that pit innovators against innovators. “The drugs involved here are often blockbusters and involve companies who want to access the market for new therapeutic uses for existing drugs before the generics come in,” Markwell points out.
This type of litigation has also emerged as a result of big pharma’s restructuring by way of offering fewer product lines with deeper market penetration that companies are anxious to protect.
Legal opinion work is also filling the gap. With a number of blockbuster drugs, like Viagra, having lost patent protection as a result of decisions by Canadian courts, innovators are questioning the business case for taking some drugs to market. “The law has shifted to favour the generics on core issues like utility, sound prediction, disclosure and obviousness,” says Bill Mayo of Toronto IP boutique Aitken Klee LLP.
But the pendulum is to some degree always swinging.
“The courts are starting to recognize that they have gone too far to the generic side on some issues, especially those involving sound prediction, and that in some of these cases, the logic is bizarre,” says Donald Cameron, a partner at Bereskin & Parr LLP in Toronto. “So now they’re grasping at things to soften the threshold for innovators.”
At press time, the Supreme Court of Canada had scheduled a November hearing in the Plavix case. The hearing will afford the court a chance to determine whether Canadian standards for obtaining patents, particularly the utility standard, have gone too far and made it too difficult to get a valid and enforceable patent.
“Innovators are hoping for some relief because patents on drugs that are really useful and inventive have been found to be invalid,” says Gunars Gaikis in Smart & Biggar/Fetherstonhaugh’s Toronto office. “Innovators are hoping the SCC will afford them some relief.”
What is predictable is that the jurisprudence in this area will likely remain in flux indefinitely. “As soon as we think we have principles that are set, they continue to evolve,” says Jonathan Stainsby of Aitken Klee in Toronto. “There’s constant pressure because the courts will say something and then there’s constant lobbying by interest groups to get what they want.”
No surprise, then, that innovators are being somewhat cautious these days. “More frequently than ever, innovators are taking a hard look to determine whether it’s worth going to market with certain drugs that may not attract long-term protection,” says Jay Zakaib in Gowlings’ Ottawa office.
While generics and innovators will continue to differ on whether Canada is a brand-friendly or generic-friendly jurisdiction, the market suggests that over the long run, Canada and Canadian courts have leaned toward the generics.
“Generics, like Apotex, having been doing very, very well, and innovators are buying up generic companies or creating their own generic divisions,” says Jamie Mills in Borden Ladner Gervais LLP’s Ottawa office. “The generics’ message, which focuses on cheap drugs, is easy for the government to listen to. The innovators’ message, which promotes investing in IP to get newer and better medicines, is a more difficult message to sell.”
Meanwhile, damage claims arising under s. 8 of the PMNOC Regulations are to some extent compensating for the downturn in prohibition applications. These claims, which allow generics that have succeeded in prohibition applications to sue innovators for keeping a drug off the market while a prohibition proceeding was pending, follow on completed prohibition applications and therefore have not been affected so far by the recent downturn in these proceedings.
“Section 8 claims came out of nowhere, but now there’s a ton of them,” says Andrew Skodyn of Toronto’s Lenczner Slaght Royce Smith Griffin LLP. “Overall, there’s as much pharma patent litigation as there ever was, although it may be distributed a little differently.”
So, although life sciences litigation may not be growing a lot, there’s plenty of it to go around.
“Overall, it’s a great time for the life sciences practice, which is unique and complex and features sophisticated clients who need sophisticated advice,” Garcia says. “In the aggregate, it’s a growing and stable practice. I have nothing but optimism for the future.”
Julius Melnitzer is a freelance legal-affairs writer in Toronto.