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Life Sciences Update: Outlook for 2019 and Post-Brexit Implications

AUTHORs: Emma Doherty, Catherine O'Meara, Brian Doohan Services: Brexit, Tax DATE: 19/02/2019

Matheson partners Michael Finn, Emma Doherty and Catherine O'Meara, together with newly appointed partners Brian Doohan and Padraic Roche, provide an update on the life sciences sector, across the key areas of corporate M&A, tax, and regulation, incorporating their outlook for 2019 and the post-Brexit implications for businesses operating in this sector.

Corporate M&A

2019 has started with a flurry of large M&A deals in the Life Sciences sector.  In early days of January global pharmaceutical giant Bristol-Myers Squibb announced that it had agreed to acquire leading biotech Celgene in a $90bn transaction, making it the largest Life Sciences M&A deal in history.  This deal was preceded in late December 2018 by the announcement that Glaxo-SmithKline, the UK based pharmaceutical company, is to acquire oncology focused biotech Tesaro for $5.1bn and was followed in the second week in January by the announcement that another large global pharmaceutical company, Eli Lilly, is acquiring Loxo Oncology for $8bn.  All three of these transactions involve large established pharmaceutical companies acquiring biotech companies with a view to replenishing their R&D pipelines and securing the rights to the next generation of drugs.

While the trend of pharmaceutical companies looking to biotechs to help replenish their R&D pipeline is not a new phenomenon, the size of these transactions has led to predications that 2019 will be a strong year for Life Sciences M&A activity, particularly with other large pharmaceutical companies seeking to acquire smaller biotechs with strong drug pipelines.  Two of the key reasons for these predictions is the excess cash now sitting on the balance sheets of large US pharmaceutical companies as a result of recent US tax reform, and the relative attractiveness of the value of biotech shares due to the overall decline of the US stock market in the second half of 2019.  Acquisitions by large pharmaceutical companies are generally welcomed by the biotechs, as it presents investors with an exit opportunity, typically at a strong premium to the recent share price, and it ensures that the drugs they have in development will have access to large and well established sales and marketing teams within the pharmaceutical organisations once they have been approved.

With a large number of the world’s leading pharmaceutical and biotech companies having operations in Ireland, this is an area to watch in 2019 as further transactions appear inevitable.

Tax Developments

A number of significant Irish tax developments are coming down the line which will impact the intellectual property holding structures of multinational Life Science companies that have operations in Ireland.   One such development is the amendment of Ireland’s current transfer pricing regime to incorporate the 2017 OECD Pricing Guidelines which, in broad terms, seek to align corporate profits with substantive economic activity.  This amendment is due to take effect from 1 January 2020.  Another Irish tax development that will impact many multinational Life Science companies with Irish structures is the sunset of the Irish incorporated non-resident company which will occur on 31 December 2020.   The combined effect of these developments is that multinational Life Science companies with Irish operations will need to restructure their intellectual property holding structures.  We have already seen a number of multinational companies in this sector implement “on-shoring” transactions where they move their IP from “off-shore” jurisdictions such as Bermuda and the Cayman Islands to Ireland and, given the imminent nature of these developments, we anticipate that many more multinational companies in the Life Sciences sector will implement similar restructuring transactions in 2019.

Beneficial Ownership Register

The ongoing process of anti-money laundering regulation in the EU contemplates the creation of a publicly available central beneficial ownership register (the “Central Register”) in each Member State.

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 was commenced in November 2018, transposing the Fourth Anti-Money Laundering Directive into Irish law.   While the 2018 Act transposes the bulk of the Directive, some aspects remain to be finalised including the establishment of the Irish Central Register.  The Department of Finance is close to finalising implementing legislation which will formally establish the Central Register.  Companies will be required to include details of the individual who ultimately owns or controls the Irish entity.  Where there is no such individual, details of “senior managing officials” (for example, the directors) will be included instead.

The Central Register will be operated by the Companies Registration Office, which has already indicated what the prescribed filing form will look like.  Once available, the legislation will give clarity on the timeframe for first filings to be made and the date from which public access will be granted.  However, it is expected that the Companies Registration Office will have three months to formally set the Central Register up and that companies will have a further six month period to file their beneficial ownership information. Accordingly, it will be some time before the Central Register directly impacts entities.  However, it is important that multinational Life Sciences companies keep this under review to ensure adequate compliance by Irish group companies.

Life Sciences regulation post-Brexit

Although the eventual outcome of the withdrawal negotiations is still unknown, there is at least some certainty for Life Sciences companies in the guidance notes published by the European Medicines Agency, the Health Products Regulatory Authority in Ireland and the Medicines and Healthcare Products Regulatory Authority in the UK. The Health Products Regulatory Authority in Ireland, for example, has held Brexit Stakeholder events to proactively inform industry about its initiatives to work with companies who need to transfer some or all of their operations to Ireland to access the EU market, and to promote dual labelling initiatives with other markets.

The requirement for permits, authorisations, systems and certain operations to be carried out in the EEA in order to continue to access the EU market has led to significant investment by industry to assess the impact of Brexit and make related changes.  There has been a noticeable increase in the registration of new Irish entities by life sciences companies who previously did not have one and internal restructurings by large multinationals with Irish subsidiaries.  These changes and registrations facilitate the transfer of marketing authorisations, orphan designations and other responsibilities and functions in time for 29 March 2019.  Companies are also assessing whether any supply chain changes are required.  The familiarity of the regulatory laws, as well as the shared common law system and language are often cited as the reasons why UK-based companies are choosing Ireland as the fulcrum Member State for their Brexit strategies.  It has also led to an increase in outsourcing, as companies look for partners to provide certain regulatory functions in the EEA.

Some companies are also using the Brexit-planning opportunity to assess whether other changes to their operations or structures should be implemented.  In addition, companies are also re-assessing the appropriate location for future investment decisions and R&D activity.

Reimbursement and market access in Ireland

As with many other markets, reimbursement continues to be a hot topic in Ireland. The current industry agreement (IPHA Agreement) is due to expire in 2020 and all eyes will be focused on the complex and lengthy negotiations to renew it.  However, some significant trends that are emerging in the reimbursement landscape include the use of public procurement for certain medicines programmes, and the publication of Prescribing and Cost Guidance by the Medicines Management Programme (established in 2013) to encourage clinicians to prescribe less expensive, equally effective therapies for patients.  In addition, the Department of Health has commissioned a review of the governance arrangements, and resources in place in the Irish Health Service Executive, supporting decisions on applications from companies for a medicine to be reimbursed.  The outcome of this review will be eagerly awaited in 2019.