Foreign investment review: Healthcare in the crosshairs

Calls to protect and bolster valued national industries, homegrown champions and strategic assets have grown louder as a result of the Covid-19 pandemic. But while foreign investment rules have long been part of many governments’ toolkits in the area of national security, the pandemic has also brought healthcare deals firmly within the purview of such reviews. Demands for self-sufficiency have become commonplace as governments seek to protect the production of essential pharmaceuticals, medical devices and supplies. Dealmakers must now consider these national security dimensions on a global basis for their transactions in the healthcare sector.

An increased zeal to protect domestic healthcare resources

Throughout the pandemic, politicians have emphasised the importance of ensuring that “the government is informed and can examine critical takeovers of companies in the health sector” (German Economy Minister Peter Altmaier). This sentiment has been echoed by the European Commission, which has urged Member States “to make full use” of their FI tools to secure the bloc’s healthcare resources. Likewise, the U.S. has stressed the need to “reduce [its] dependence on foreign manufacturers for Essential Medicines, Medical Countermeasures, and Critical Inputs”.

This political impetus has resulted in governments around the world granting themselves (increased) scope to intervene in healthcare transactions. Specific jurisdictional clauses have been introduced or adjusted to this end, including in Canada, France, Germany, Italy, the UK and the U.S.

The result has been more wide-ranging powers for governments to protect domestic healthcare resources. Agencies have been granted broad discretion and powers to impose a range of far-reaching remedies, including the outright prohibition of a transaction, divestitures and penalties (with some regimes providing for criminal sanctions). While regulatory processes vary greatly across jurisdictions, this new landscape must be factored in by sellers and buyers alike when planning transactions in the healthcare sector.

The expanding notion of national security

In reaction to technological and geopolitical developments, the notion of national security has expanded, bringing new areas within the scope of FI regimes. Recent cases illustrate a number of trends, including:

• FI review is developing an increasingly extraterritorial reach. In a recent high-profile deal, the Committee on Foreign Investment in the U.S. (CFIUS) expressed national security concerns concerning an Asian-focussed joint venture. Ekso Bionics, an industry leader in exoskeleton technology for medical and industrial use, was required to terminate its role in a 2019 joint venture with Chinese partners. This signals a potentially significant expansion in asserting jurisdiction.
• Buyer identity remains key – but the previously limited set of foreign acquirers which would typically raise red flags is expanding. Traditionally regarded as ‘friendly’, investors from the U.S. or EU Member States are increasingly finding that they, too, are coming under close scrutiny. Following press reports in 2020 that “Donald Trump grabs for German Vaccine Company”, we saw Germany investing €300 million in the Covid-19 vaccine developer CureVac, in part to mitigate the perceived risk of a ‘for the U.S.-only’ use of the vaccine.
• Foreign investment has become yet another battleground in relation to control over data. CFIUS raised concerns in relation to a Chinese entity’s investment in PatientsLikeMe, a U.S. health technology start-up offering a network where patients connect to track and share their experiences. The result: a forced divestiture by Chinese-based iCarbonX of its stake due to national security concerns related to patient data.

Cooperation and cross-fertilisation

This concerted bid to protect healthcare resources goes beyond the national realm and includes transnational efforts and increasing international cooperation. The fruit of such labours – fully operational since 11 October 2020 – is the European Union’s foreign investment screening mechanism, which introduces a framework to facilitate cooperation and information-sharing between Member States, and between the EC and Member States (see here for our earlier blog post). This international cooperation highlights the increasing importance of a globally co-ordinated approach to FI issues.

Keep your eye on the ball

A year on from the Covid-19 outbreak, agencies and governments have made it clear that healthcare deals are at the top of their enforcement agenda. This sea change imposes on parties an additional layer of regulatory complexity, with a review process that illustrates the political and social sensitivities that go hand-in-hand with activities in the healthcare sector. Indeed, as more countries move to tighten restrictions on FI in healthcare, the assessment of regulatory risk has become an essential part of deal planning that must be addressed head-on. Plotting a route to success must start early.