U.S.-based life sciences companies considering transactions in Europe may easily become overwhelmed with the complexity of Europe’s various jurisdictions. In this series, members of our European Life Sciences Transactions Team provide country-specific perspective and guidance to help you navigate the jurisdictional challenges and differences that you may run into when acquiring a European life sciences company.
In this edition, Madrid-based Alex Dolmans and Adrián Fernández discuss life sciences transactions in Spain.
Life sciences transactions in Spain
What if the value of the acquired business is embedded in its public sector contracts?
Spain is one of Europe's key markets for pharmaceutical and medical devices companies, and is experiencing significant M&A activity in the life sciences industry.
The deals are driven by both international and domestic players; are either purely local or part of a larger global deal; and involve strategic buyers, financial investors and private equity firms. A handful of Spanish companies such as Grifols, Almirall, ISDIN and Chemo are notably active in outbound M&A transactions, particularly in the U.S. and Asia.
Looking at the legal aspects of M&A transactions in this sector, most of the transactional issues which exist in other European countries also apply to Spanish life sciences transactions. However, one of the more complex issues usually faced in Spain is the regulatory component.
On the one hand, the market authorisations, manufacturing permits, and even storage and distribution requirements are particularly sector-specific and can influence how the deal should be structured. For instance, if the target company has market authorisations or other regulatory permits, a share deal (as opposed to an asset transfer) would usually be the preferred option since the transfer of permits in an asset deal is subject to authorisation by governmental bodies such as the Spanish agency AEMPS (similar observations were raised in this series' editions for Italy and Russia). These regulatory requirements can be cumbersome and may affect the timing of the transaction.
On the other hand, however, the fact that the value of the acquired business depends on public sector contracts must not be overlooked. For instance, a manufacturer of devices for renal failure treatments may be largely dependent on the sale of haemodialysis systems to public hospitals or, alternatively, a pharmaceutical company's vaccines may be administered predominantly in public health centres rather than private clinics. These transactions would normally be governed by public tender rules, requiring contracts with the health authorities of the Spanish region in which the public hospital or healthcare centre is located.
How does this affect your M&A transaction?
First, a due diligence on any relevant public sector contracts is essential. It is important to establish whether these public sector contracts, and any underlying tender terms, contain any restrictions that could affect the feasibility of transferring the contract and, as a result, have a consequent influence on the structuring of the transaction. Secondly, the information gathered as a result of the due diligence on these public sector contracts should enable you to determine the structure of the transaction with regard to:
• the acquisition itself;
• any required carve-out or unbundling/restructuring in the pre-closing stage; and
• the integration and reorganisation necessary in the post-closing stage.
Thirdly, the due diligence outcome may determine the timing of the transaction, particularly with regard to pre-closing consents and any potential notifications or filings. Fourthly, it will also provide insight into what third party notifications or formalities, if any, are required once the acquired business is integrated into the buyer's group structure (particularly if contracts need to be transferred in an asset deal, with a new entity acting as supplier to the public hospital or healthcare centre, as this can have a practical impact on invoicing, VAT, data, etc.). Finally, the information may also reveal a need for a purchase price adjustment mechanism, for instance, if it is expected that some of the public sector contracts may be at risk as a result of the proposed transaction.
More often than not, these elements point towards a share deal rather than an asset deal structure to specifically secure the continuance of the public sector contracts, since the share transfer removes much of the regulatory obstacles which would otherwise result from the transfer of assets and liabilities.
However, even in a share acquisition, buyers must be wary of any hidden obstacles in relation to public sector contracts. Not infrequently, public sector contracts are awarded on the basis of the specific attributes of the supplier or the corporate group to which it belongs – legally referred to as the "intuitu personae" or "personal" character of the contract. This may mean that – even in a share acquisition, and even if the public sector contract does not contain any change of control provisions – the change of the target company's ownership may adversely effect the contract, causing early termination or a request by the public health authorities for a change of its terms. For instance, if a target company was awarded a supplier contract because it belongs to a group with significant R&D or technical capacity at parent company level and this was a key factor in the public authority's evaluation of the company as a suitable bidder, then the fact that this company ceases to belong to that group as a result of an M&A transaction may cause the authority to have doubts about the capacity or suitability of the company which now becomes party to the public sector contract. This will necessitate engaging with the relevant authorities in order to convince them that the R&D or technical attributes are safeguarded (e.g. through post-closing transitional support or licensing agreements with the selling parent company), so that this supplier contract is kept intact following the acquisition.
In summary, buyers need to be particularly mindful of the regulatory issues in any life sciences sector transaction. However, you should not limit your "regulatory radar" to market authorisations or other obvious regulatory permits in Spain. We advise you, instead, to expand your analysis to include the target company's portfolio of contracts with the public sector in order to ensure that the value of the acquired business is properly secured.