Companies operating in the life sciences industry continue to face distinct challenges in 2022 mainly due to socio-political developments, trade restrictions, sanctions, inflation, and the lingering effects of the pandemic. However, during the unprecedented times over the last two years, many companies operating in the life sciences sector have driven through scientific breakthroughs, shifted successfully to more data-driven approaches, engaged more in hyper-collaborations, digitally transformed or committed themselves to corporate accountability with respect to SESG.
Digital Transformation
Artificial intelligence (AI) and machine learning mainly speed up the drug development and diagnosis, which benefits not only the industry players but society as a whole. However, the regulations have not caught up with the innovations resulting from the digital transformation. Currently, the applicable regulations for medical AI tools in the EU are the 2017/745 Medical Devices Regulation (MDR) and the 2017/746 In Vitro Diagnostic Medical Devices Regulation (IVDR), which were passed in 2017. However, because they were implemented at a time when AI was at an early development stage, it does not cover many aspects specific to AI. In April 2021, the European Commission presented the first-ever AI Act with the aim of filling the regulatory void. However, new EU requirements in AI might not come into force until 2024.
Digital transformation also consists of developments in telemedicine, digital health apps, remote monitoring and health wearables. Is the software within a digital health app considered a medical device? Who should be liable if the digital health app provides false results? What is the legal framework for telemedicine? These are the sorts of questions that have emerged recently. The EU Commission provides numerous non-binding guidance documents (e.g. Manual on borderline and classification in the community regulatory framework for medical devices), which are intended to assist manufacturers in determining whether their health app software falls within the definition of a medical device. However, the manufacturers should also seek to legally assess the more complex question of whether the software created falls under the EU Regulations and what are the related consequences.
Collaboration agreements
The development of the COVID-19 vaccines was a best-practice example of stepping into new types of partnerships with tech companies to successfully bring new medicines to market in the shortest time possible (e.g. Pfizer partnering with BioNTech regarding development of mRNA vaccine). Collaboration agreements in the life sciences industry continue to increase and expand. Traditional partnerships among industry players have been replaced by collaborations often with biotech startup companies with little experience in the life sciences industry. These collaborations bring legal and practical challenges but also trigger growth and efficiency. The legal challenges we lawyers need to deal with are extremely complex – starting with the structuring of the deal (research sponsorship, collaboration or joint venture), its funding and valuation. The complexity then continues with proper drafting and negotiating the key terms of pharma R&D and collaboration agreements (e.g. IP in the context of R&D, IP and data ownership, IP warranties, management of newly developed IPs, filing for patents, manufacture of product for R&D, licensing of critical pre-existing IPs, financial clauses, exit strategies, etc.).
Supply chain disruptions and resilience
Not only the pandemic, but also trade restrictions, sanctions and inflation are some of the factors disrupting the supply chain and revealing its long-standing vulnerabilities. Companies are restructuring the supply chain with new supply strategies and re-evaluating their contract considerations (e.g. using dual supply sources instead of one, transferring warehouse inventory, changing price mechanisms and service provisions, etc.).
Businesses are also actively assessing their liability for failing to fulfil contractual obligations under their supply contracts. Under Slovak law, the force majeure exclusion of liability applies if the failure has been caused by circumstances excluding liability (i.e. force majeure circumstances), unless contractually agreed otherwise. When determining whether the situation caused could be considered a force majeure event excluding the liability of obliged party, the existing force majeure clause must be analyzed. Otherwise, the assessment will have to be made on the basis of the general statutory provision. For the future, life sciences companies do need to proceed with care when seeking to rely upon such clauses. They must be drafted with due care to ensure parties fully understand the complex nuances surrounding them. This is particularly important as incorrectly declaring a force majeure event may result in a contracting party repudiating the contract, which may provide the other party with a right to damages. It is a highly complex legal area and parties should seek legal advice in this respect. Also, companies should review supply contracts that could be affected by the potential disruptions and analyze the risk allocation in those contracts.
SESG - sustainability, environmental, social and governance considerations
The market increasingly demands corporate accountability for SESG transparency. Materiality in SESG defines what is important to stakeholders as well as what is important for business success itself. Life sciences players are already making SESG materiality assessments and embedding SESG within day-to-day activity. Companies in the life sciences sector need to devise dedicated SESG strategies showing how they are addressing SESG risk while involving boards and senior management to identify the most material SESG risks for the company.
For instance, the “E” – environmental consideration, is one of the biggest focuses for life sciences investors now. Assessment of environmental materiality is likely to be of greater concern for companies with wider manufacturing, waste and global supply chain footprints, less so for smaller R&D operations. Internal company strategies should be implemented with the aim of effectively monitoring and reducing greenhouse gas production while limiting environmentally persistent pharmaceutical pollutants or controlling bio waste. Also, life sciences companies are active in energy transition while corporate power purchase agreements are now more common within the life sciences industry. Companies globally are also setting their carbon-zero targets. From an M&A perspective, ESG standards are expected to continue influencing investment decisions and thus should be taken seriously.
The cannabis business
In recent years the cannabis trade has developed into a growing business area. In the life sciences, there have been increases in the number of jurisdictions where patients have access to medicinal cannabis. In Slovakia, it is not permitted to grow, import or sell cannabis for medical use. However, it is now permitted to grow cannabis for research purposes, subject to approval by the Slovak Ministry of Health. As regards patentability, the Slovak Patent Act does not contain any specific restrictions on the patentability of cannabis-based products. Cannabis related products are thus more likely to be patentable. However, patents are generally not granted for inventions for which commercial use would be contrary to public order or good morals. Whether the commercial use of cannabis-based product would be considered as contrary to public order or good morals depends on the individual assessment of the relevant cannabis-based product. Regulation from country to country is inconsistent, but interest on the part of life sciences companies is consistent across the globe. From legal perspective, companies interested in cannabis business need to deal mainly with marketing feasibility, patentability, legal permissibility, clinical trials and export/import regulations.
Conclusion
To sum up, the COVID-19 pandemic acted as a digital accelerator for companies operating in the life sciences industry. Digitalization is the number one driving force these days throughout all areas of the life sciences industry. Now it is no longer about creating a business strategy, but rather about creating a business strategy for a digital world. Further, with a war affecting some of the key geographic regions, including Slovakia, supply chain disruption still persists. To minimize disruptions, life sciences companies should make their supply chains as resilient as possible. Collaborations of the life sciences industry with tech are on the rise, while traditional M&A activity is slowing down. Life Sciences companies are keen on making material assessments of SESG considerations. Cannabis is also considered a growing area of opportunity to many life sciences players. All these factors are bringing about huge benefits to the life sciences industry but also carry significant risks and legal challenges that should be considered carefully. Also, reform of the pharmaceutical legislation is on the European Commission's work programme for 2022. The aim is to ensure access to quality and affordable medicines in the EU, to foster digitalization, innovation and ensure security of supply.
Martina Gavalec
Author of the article:
Martina Gavalec
Senior Associate
CMS Slovakia
Martina.gavalec@cms-rrh.com
This article has been brought to you by CMS Slovakia.
