As macroeconomic forces and geopolitical dynamics continue to shape the M&A and investment climate globally, health and life sciences transactions continue to remain high priority sectors presenting both high growth and defensive asset strategies.
As the market has tightened, understanding the regulatory environment for investments has become even more important.
Now, more than ever, investors want to pick sectors and companies well placed to take advantage of changes in regulation, pricing and government policies.
A deep understanding of the regulatory environment and front loading of diligence to spot changes around the corner, vulnerabilities in portfolios and opportunities to deliver scale across multiple jurisdictions is essential.
Within this dynamic environment, McDermott’s international health and life sciences team wield a deep knowledge of how healthcare services, medical technologies, biopharma and life sciences tools and services are delivered across the world, and how the laws that affect these industries will drive changes for the markets of tomorrow.
We have developed this Guide as a step to understanding the policies and regulatory issues that are shaping global healthcare and life sciences M&A and collaborations.
Our approach is to work in partnership with our clients to give practical and thoughtful advice to help guide and structure their investments.
Together, we can transform healthcare.
- Forthcoming and anticipated Changes in Healthcare and Life Sciences Law
The impact of Brexit has led to several changes in law for the United Kingdom.
While the United Kingdom has retained EU regulatory regimes that were applicable to the United Kingdom to a large extent, it has also introduced certain modifications to those regimes in the form of standalone UK legislation, which may result in a degree of divergence from EU law in the future.
Changes in UK law, including the law relating to the procurement, export and import arrangements for goods and supplies, have and will continue to arise as a consequence of the United Kingdom formally leaving the European Union following the end of the Brexit transition period.
The new NHS Health and Care Act 2022, in force on July 1, 2022, introduced a raft of changes to the commissioning and delivery of public healthcare in England.
The act mandated the integration of local NHS bodies in order to promote a greater degree of joined-up care by healthcare commissioners and providers, through the adoption of 42 regional “integrated care systems.”
The act placed these systems, which had previously only existed in shadow form, onto a statutory footing.
It also introduced changes to the NHS marketplace (which will take place alongside new and separate service provider and supplier procurement regimes that are still subject to the legislative process and parliamentary approval) and replacement of the NHS tariff with a new NHS payment scheme.
The act also gives the Secretary of State for Health new powers, including the power for the first time to introduce regulations that would require manufacturers and commercial suppliers of healthcare products to report payments or benefits that they provide to healthcare providers and others that provide healthcare or connected services in order to promote transparency.
We still await draft regulations, and the timing for the new disclosure requirements is unclear, but any new regime could reflect the approach used in the US Physician Payments Sunshine Act to promote transparency on payments to healthcare professionals and institutions.
The UK government, through the Medicines and Healthcare Products Regulatory Agency (MHRA), has consulted on changes to the UK clinical trial regulations with a view to creating an attractive regulatory environment for the conduct of clinical trials in the United Kingdom.
New legislation is currently being prepared that is expected to accelerate the clinical trial process and deliver an overhaul of trial regulation.
This approach is consistent with the wider life sciences ambitions that the government set out in its Life Sciences Vision (published in July 2021), which is intended to enhance the United Kingdom’s status as a go-to destination for the development of new healthcare products and innovation.
On the medical devices landscape, there were further delays to the introduction of a revised medical device regulatory framework.
As a consequence of Brexit, the UK did not adopt the EU Medical Device Regulations 2017 and the current law remains that based on a 1993 directive.
The UK has proposed a new framework which is very similar to the EU regime but there have been delays in that introduction.
In the meanwhile, there have also been extensions to the use of EU CE marks in the UK.
- Ownership or Equivalent Restrictions in Relation to the Provision of Healthcare Services
There are limited barriers to the ownership and operation of private healthcare facilities in England.
Any provider may operate healthcare facilities if the provider is registered with the Care Quality Commission (CQC) and holds relevant registrations.
Most NHS contracts may be awarded to or held by any provider, and current rules prevent discrimination on the basis of ownership.
There are, however, some restrictions on the entities and persons that may hold NHS primary care contracts.
Under legislation, only certain types of contracts may be held by general practitioners or other healthcare professionals (or companies wholly owned by these individuals).
In addition, for certain elective and other services, patients are entitled to choose providers who meet commissioner criteria for consultant led services (a policy also known as “patient choice.”)
- Award of Public Contracts and Reimbursement
The United Kingdom’s national healthcare system is the NHS.
The NHS is funded through general taxation, and healthcare is provided free at the point of use and without co-payment.
Privately purchased healthcare (through insurance or self-paying patients) has, in recent years, accounted for about 11% of the market.
The NHS marketplace is underpinned by legislation, with national and regional integrated care system payor bodies (NHS England and Integrated Care Boards) that commission and contract for healthcare services.
All NHS contracts are currently subject to EU, UK and NHS procurement rules, which require that contracts are subject to a tendering regime.
Changes to procurement rules following Brexit have been proposed, and the UK government is in the final stages of setting the overarching new procurement legislation and, in tandem, a “provider service regime” that will have particular application to NHS healthcare services. These changes are anticipated to take effect at the end of 2023.
In practice, many contracts held by NHS hospitals are not tendered.
Private providers commonly provide non-urgent and non-emergency care, including elective, mental health, dental, primary care, diagnostics, pharmacy and community services contracts.
In general, NHS services are reimbursed at rates set out in the new statutory NHS payment scheme, which allows for local modifications and variations.
Under the NHS Constitution, patients may exercise “patient choice” when choosing a provider for elective services provided that the chosen provider meets commissioner criteria for those services.
- Drug Approvals and Reimbursement
Marketing authorization for drugs is heavily regulated in UK law.
Prior to Brexit, the procedure for marketing authorizations was regulated by both EU and UK law.
As a consequence of Brexit, a separate marketing authorization is required in the United Kingdom.
As part of the United Kingdom’s post-Brexit regulatory system, community marketing authorizations will be converted to UK marketing authorizations.
Transitional provisions allow the United Kingdom to authorize medicines on a fast-track process in reliance upon decisions of the European Medicines Agency (EMA).
The EU-UK Trade and Co-operation Agreement includes certain cooperation and facilitation arrangements with respect to medicinal products.
The NHS is the largest purchaser of drugs in the United Kingdom.
A range of policies and statutory mechanisms regulate the prices payable by the NHS for drugs. There is no statutory regime for the drug prices payable by private providers.
For branded medicines, the main mechanism for pricing drugs and controlling spending on medicines is the Voluntary Scheme for Branded Medicines Pricing and Access (VPAS), which took effect on January 1, 2019 (replacing the previous comparable PPRS Scheme) and will be in place until December 31, 2023.
The VPAS sets out permitted growth of the NHS-branded medicines spend (set at 2 per cent per year for the period 2019 to 2023).
The scheme requires the industry to make rebate payments if NHS expenditure exceeds the permitted growth.
Any company that is not a member of the VPAS is automatically subject to statutory regulations under which the Department of Health and Social Care (DHSC) may limit prices and profits of NHS medicines.
In practice, most large companies participate in the VPAS.
As the current VPAS is due to expire at the end of 2023, some pharmaceutical industry associations are calling for a different approach that would emphasize investment and growth in addition to pricing and access.
The critical voices in the industry argue that the unforeseen increased post-pandemic NHS demand has resulted in dramatic rises in rebate payments, posing major challenges for the UK life science sector.
Negotiations between the government and the pharmaceutical industry regarding a mutually beneficial scheme are expected to conclude this fall.
The new scheme is expected to come into force when the current scheme expires at the end of 2023.
Generic (unbranded, out-of-patent medicines) are covered by the Drug Tariff (produced by an executive arm of the DHSC).
New medicines and technologies are assessed by the National Institute for Health and Care Excellence (NICE) on the basis of clinical and economic evidence.
While NICE’s role is to make availability decisions, in practice it also influences product prices through cost-effectiveness thresholds.
The NHS is legally obliged to fund and resource medicines and treatments recommended by NICE.
If NICE is unlikely to recommend a drug for use, then drug prices and access to the market may be agreed with NHS England (as part of a patient-access scheme or commercial agreement).
- Devices Certification and Reimbursement
Since January 1, 2021, following Brexit, the MHRA has been the regulator of medical devices in the United Kingdom.
The MHRA undertakes responsibilities historically managed through the EU system, including vigilance reporting.
Because of the timing of Brexit, the United Kingdom did not adopt the EU Medical Device Regulation 2017/345 (EU MDR), which applied in the European Union from May 2021.
Instead, the United Kingdom continues to follow the earlier EU Medical Device Directive regulatory regime that was implemented in the United Kingdom by the Medical Devices Regulations 2002 (MDR 2002), with certain modifications that the United Kingdom introduced as standalone UK legislation to reflect the United Kingdom’s post-Brexit regulatory regime.
Under this new standalone UK legislation, the Medicines and Medical Devices Act 2021 (MMDA 2021), the United Kingdom may adopt new regulations that diverge from the EU legislative regime for medical devices in the future.
Towards the end of 2021, the MHRA conducted a consultation on the future development of medical devices in the United Kingdom, with the intention of developing a regulatory framework for all aspects of medical devices, including to promote access and support innovation, to reform and develop the law, and to promote sustainability.
The aim is to amend the MDR 2002 with a new regime that would take effect in summer 2025.
Medical device manufacturers based outside the United Kingdom seeking access to the UK market need to assign a UK responsible person to register and act on their behalf.
A new UK certification route known as UK Conformity Assessed marking has been in place since January 1, 2021.
In 2023, the UK announced an extension to the period during which CE marking will continue to be recognized in the United Kingdom.
This means that certificates issued by EU notified bodies will continue to be valid for a transitional period (currently until June 30, 2028, or June 30, 2030, depending on the classification of the device).
There is no statutory reimbursement scheme for medical devices in the United Kingdom.
Medical devices purchased by NHS providers are subject to procurement law. The NHS currently operates a centralized procurement and purchasing system for medical devices and other supplies to NHS providers.
NHS providers are reimbursed through the NHS payment scheme for health services they provide.
The NHS payment scheme includes the cost of most medical devices, but in certain cases, high-cost devices are excluded from the NHS payment scheme and reimbursed separately.
As with medicines (see section 4 above), NICE appraises certain devices that meet its criteria and evaluates clinical effectiveness and budget impact. NHS commissioners are legally obliged to fund treatments that are recommended by NICE.
Separately, the CQC regulates all healthcare services, including online healthcare and telemedicine (to the extent they are not software as a medical device).
- Regulation of AI and Software as a Medical Device
The MHRA regulates medical technology software and artificial intelligence (AI) tools as medical devices under medical device legislation.
Online software tools, such as symptom checkers, are typically regulated as Class I medical devices. However, if the device allows for diagnosis, it may be a Class II medical device or higher.
If the software is only a reference or decision-support tool, and healthcare professionals are required to use their own knowledge for the care, the tool may not be a device.
In the European Union, the EU MDR, which came into force on May 26, 2021, has changed certain classifications for medical devices.
As noted above, the United Kingdom’s regime for medical devices will continue to be based on the EU Medical Device Directive implemented in the United Kingdom by the MDR 2002, which has been amended to reflect the United Kingdom’s post-Brexit regulatory regime under the MMDA 2021.
This includes clarification on how devices in Northern Ireland will continue to be required to comply with EU medical devices regulation under the Northern Ireland Protocol that was introduced as part of the Brexit arrangements.
In addition, software provided to NHS organizations must also meet certain mandatory standards published by NHS Digital.
The United Kingdom currently lacks specific legislation for governing AI use and relies on existing laws (such us the UK Data Protection Act 2018 or MDR 2002).
However, the government aims to foster AI development by creating a “proportionate, light-touch and forward-looking” regulatory framework.
On March 29, 2023, the UK government introduced a white paper outlining its “pro-innovation” approach to AI regulation.
The framework is based on five core principles, emphasizing safety, transparency, fairness, accountability and redress.
Instead of enacting new legislation, existing sector-specific regulators will develop guidelines for implementing these principles within their domains.
Additionally, voluntary “AI assurance” standards and toolkits will aid in responsible AI adoption.
This approach contrasts with the EU AI Act and will potentially allow for adaptability as technology and risks evolve.
The UK government aims to swiftly implement this framework across relevant sectors, with sector-specific regulators building upon it.
In recent years, the DHSC has published various guidance and codes of practice in relation to AI and digital health services, setting out principles and expectations for the use and purchase of AI in healthcare in the United Kingdom.
It also sets out principles in relation to the use of and access to data.
In 2021, in parallel with its consultation on medical devices, the MHRA consulted on the use of software and AI medical devices, with a view to incrementally introducing an applicable regulatory framework through separate work packages.
On October 17, 2022, the MHRA published the Software and AI as a Medical Device Change Programme Roadmap that sets out information on each work package and a timetable for implementation.
In March 2023, the UK government published a white paper detailing plans for implementing a “pro-innovation” approach to AI regulation.
This approach contrasts with a separate standalone regulatory regime proposed in Europe.
Instead, the UK proposes to publish cross-sectoral principles that would be required to be implemented and taken into account by existing regulators in different sectors.
In other words, no new general AI legislation would be introduced but regulators may change their existing regulation of technologies in different sectors.
- Telemedicine and Teleconsultation
Telemedicine and teleconsultation, including remote, online and digital health services (which are not medical devices) located in England, are regulated by the CQC, and providers of these services must register with the CQC.
Services are assessed through investigations and other regulatory interventions to check that they are safe, effective, caring, responsive and well-led.
The CQC has stated that it is assessing how it can regulate services currently outside its remit, such as digital health services based overseas that provide services to UK patients.
To date, however, it is unclear how such regulation would work in practice, and no guidance or changes to the CQC’s regulatory remit have been formally proposed.
In 2022, the CQC announced major changes to the framework it uses to regulate providers.
By the end of 2023, the CQC will move from an inspection-based framework to a broader continual assessment that collects evidence on an ongoing basis.
- Anti-Kickback Rules and Incentives to Doctors
In the United Kingdom, financial relationships between pharmaceutical companies and healthcare professionals are governed by the Human Medicines Regulations 2012 and related guidance, which prohibit the use of inducements in connection with the promotion of medicinal products to healthcare professionals.
The legislation is supplemented by the UK regulatory guidance published by the MHRA and industry codes that set out detailed guidance about payments to healthcare professionals.
Professional rules (for example, those issued by the General Medical Council) also prohibit doctors from accepting any inducement or gift that may affect or be seen to affect the way the doctor treats patients.
Bribery legislation also applies to payments to doctors and other healthcare professionals.
There are currently no legislative requirements to disclose financial relationships with healthcare professionals.
As mentioned above, however, the Health and Care Act 2022 gives the Secretary of State for Health the power to introduce regulations that would require manufacturers and commercial suppliers of healthcare products to report payments or benefits that they provide to healthcare providers and others that provide healthcare or connected services.
We still await draft regulations, and the timing for the new disclosure requirements are unclear, but any new regime could reflect the approach used in the US Physician Payments Sunshine Act to promote transparency on payments to healthcare professionals and institutions.
There also are disclosure obligations in medicine and medical device codes of practice.
NHS contracts and guidance include an obligation to disclose and publish all financial interests, including gifts and hospitality received by staff.
A Competition and Markets Authority Order also sets out rules about certain payments and share-ownership by doctors in relation to private patient services where such payments and interests may operate as incentive arrangements to influence referrals and care.
- Merger and Foreign Investment Control
The Competition and Markets Authority (CMA) oversees merger control in the United Kingdom.
From January 1, 2021, the CMA has had jurisdiction to review the effects of certain mergers previously reviewed by the European Commission and, accordingly, is taking a more prominent role in reviewing global transaction activity.
The Health and Care Act 2022 removed some powers of the CMA in the context of health and social care, including, notably, CMA’s historic powers with respect to mergers between two NHS provider bodies.
The United Kingdom has historically operated with a liberal approach to foreign investment.
The UK government has some powers to intervene under merger controls in relation to mergers that are against the public interest for national security reasons.
This power has been exercised on rare occasions and never in relation to healthcare.
There is, however, evidence of increasing intervention from government.
In response to COVID-19 and effective from June 23, 2023, the government introduced a new public-interest ground on which it can intervene in mergers in order to maintain the United Kingdom’s capability to combat and mitigate public-health emergencies.
The National Security and Investment Act 2021 has also established a mandatory foreign direct investment regime for the United Kingdom.
The act focuses on particular industry sectors, including advanced robotics, AI, critical suppliers to government, critical suppliers to emergency services and engineering biology.
The act requires companies to notify the UK government of any relevant mergers and acquisitions and a wider range of transactions (that may include minority investments, acquisitions of voting rights, and acquisitions of land or intellectual property assets) that fall within the regime.
The act gives the UK government the power to review (and call in) relevant transactions.
Failure to comply may result in heavy turnover-based fines, criminal liability and the transaction being voided.
This new regime is already having a sizeable impact on certain life sciences investments in the United Kingdom, particularly those that involve manufacturing of certain biologics and vaccine related drugs.
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