Lead partner: The year the United Kingdom becomes a globally leading life sciences hub?

As part of its ambition for the United Kingdom to become a tech and science superpower by 2030, in 2023, the government announced a range of initiatives aimed at boosting investment and innovation in the life sciences sector. Innovators will have welcomed the R&D tax relief reforms whilst the Mansion House Compact (the largest UK pension providers committing 5% of their assets to unlisted equities by 2030) announced in July has provided some hope of alternative pools of capital to unlisted UK life sciences companies.

Whilst the impact of those initiatives remains to be seen (and of course with a general election looming) the UK life sciences industry is being positioned to play an integral part in the growth of the country’s economy with many recent legal and regulatory developments also seeking to enhance the attractiveness of the UK as a leading life sciences hub. The UK’s offer to prospective investors will be centred around access to innovation, the financial firepower of the City, the introduction of progressive and pragmatic regulation and a robust advisory ecosystem, which it hopes will allow it to differentiate itself from the EU.

Added to this, the Medicines and Healthcare Regulatory Agency (MHRA) has committed to eliminate backlogs that emerged following Brexit and through the pandemic and to improve levels of service and performance timelines. Its new proposed measures to increase efficiency for marketing authorisations and clinical trials are a positive sign of this intent. These promising UK developments need also to be viewed against a backdrop of significant (and for some, challenging) global regulatory changes for pharma and biotech companies, including the EU Pharma regulation reforms and the potential pricing implications coming out of the US Inflation Reduction Act.

From an investment perspective, global macro-economic factors led to a very slow start to 2023 for pharma and biotech investment and M&A. However, VC and M&A activity showed signs of recovery in the latter half of the year, providing a more promising outlook for 2024. Whilst investor confidence in private markets appears to be on the up, public market activity in the life sciences sector remained challenging throughout the year.

New international compliance route for UK marketing authorisation applications

In May 2023, the UK medicines regulator, the MHRA, announced a new route for the approval of medicines in the UK, which relies on technical assessments made by various key regulators across the globe beyond the EU, such as those of Australia, Canada, Japan, the US, Switzerland, and Singapore. The MHRA states that it is ‘focused on providing UK patients faster access to the absolute best, most cutting-edge, and safest medical treatments’ by allowing fast-track reliance on authorisations from various trusted jurisdictions, not just the EU. Post Brexit, this is a further effort by the MHRA to introduce flexibility in the approval system, and position itself as a cutting edge, innovative regulator, and speed up access to medicines in the UK. The route is live as of 1 January 2024 and over the year we should see more uptake, which is aimed at facilitating faster, smoother approvals for medicinal products.

Clinical trials overhaul

Following a public consultation in 2021, the MHRA will introduce a series of new measures to make it faster and easier to gain approval and run clinical trials in the UK. The timing for publication of the draft reforms is unclear, but they are expected to be adopted by 2026. These represent the biggest changes in the UK clinical trials regime in over 20 years and the aim is to help make the UK one of the most attractive countries in the world to conduct clinical research for patients and researchers. Under the new framework, clinical trials application processes in the UK will be more proportionate, streamlined and flexible without compromising on safety, helping to cement the UK as an attractive destination for trials.

UK patent litigation

The UK patent litigation market remained active in 2023 with a number of trials taking place and several judgments being delivered, spanning subject matter including nucleoside analogues, wound dressings, endoscopic devices, glucose monitoring and drug formulations. These judgments have traversed diverse legal issues that are prominent across the continent including ‘plausibility’, which was also subject of the much-discussed decision of the EPO’s Enlarged Board of Appeal in G2/21. There have also been some notable settlements, including of a damages inquiry concerning Warner-Lambert’s (Pfizer’s) blockbuster medicine Lyrica (pregabalin) and Pfizer’s liability to generics and the NHS due to a wrongly granted interim injunction. This was set to be the largest and most complicated follow-on damages inquiry ever heard before the Patents Court and was being closely watched for its potential to influence damages considerations in pharmaceutical cases in the UK.

‘The aim is to help make the UK one of the most attractive countries in the world to conduct clinical research for patients and researchers.’
Herbert Smith Freehills

For 2024, there is a significant pipeline of patent trials set to keep the court and legal community busy. In particular, we expect to see an increase in litigation surrounding biologics, sales of which are forecast to overtake innovative small molecules in the coming years for both large-cap and mega-cap bio/pharma companies. We may also see early skirmishes in the field of mRNA-based vaccines and treatments (with Moderna, Pfizer and CureVac all in the Patents Court lists) and other similar next-generation technologies. Something else to watch out for is the impact of the Supreme Court’s decision in Thaler v Comptroller-General of Patents, Designs and Trademarks, published on 20 December 2023. This considered whether an AI machine can be named as the inventor of a patent. By ruling that an inventor must be a natural person, it echoed the majority of decisions reached in test cases filed around the world.

A key development in 2023 was the launch of the UPC and, although the UK is not participating, we expect the UK courts to keep a close eye on developments with a view to positioning the UK as an influential jurisdiction in patent litigation. The UK has long been regarded as a source of relatively fast well-reasoned decisions on complex and technical IP issues and so has been valued for its strategic role in multinational disputes. Therefore, it will be particularly important for the UK courts to maintain their focus on bringing patents cases to trial within 12 months of a claim being issued and delivering judgments efficiently thereafter.

Upcoming changes to the medical device regulations

The UK government intends to introduce regulations that will implement a substantial reform of the current regulatory framework for medical devices in the UK. A 2021 consultation proposed various changes including reclassification of medical devices, changes to the process of conformity assessments, and post-market surveillance requirements. The government has committed to ensuring that there is a proportionate, phased approach to the implementation of the future regulatory framework, which supports system readiness and minimises the risk of supply disruption for UK patients. The government is now aiming for core aspects of the future regime for medical devices to apply from 1 July 2025.

Agreement reached on new voluntary pricing scheme

In November 2023, the government, NHS and the Association of the British Pharmaceutical Industry reached agreement on a new voluntary scheme for branded medicines pricing, access and growth. This followed mounting criticism of the existing scheme due to large rebate rates, with the new scheme including an increase of annual allowed sales growth from 2% in 2024 to 4% by 2027. With the alternative statutory scheme currently under review, it will be interesting to see the levels of uptake to the new voluntary scheme.

EU pharma regulatory changes – will the UK take the opportunity to differentiate?

In April 2023, the EU published proposals to introduce significant change to medicinal product approval and the placing of medicinal products on the market. Controversially, the regulatory rewards regime (commonly referred to as the 8+2+1 regime) is set to be shortened and the rewards set to become more flexible than under the current system. The regime for supplementary protection certificates (SPCs) is also set to change as part of the same overhaul with a centralised assessment system for SPCs and ‘unitary SPCs’ to go along with a ‘unitary patent’ being introduced. These are important changes to the EU pharmaceutical regime, and it will be interesting to see how the UK adapts to them in the future, including whether it will use this as an opportunity to differentiate itself and to highlight the benefits derived from its separation from the EU by promoting itself as a more commercially pragmatic market.

AI regulation: pro-innovation, pro-investment

Artificial intelligence (AI) may not be new to the life sciences industry, but in the year since OpenAI launched ChatGPT the landscape has changed beyond recognition. As the EU finalises the AI Act and the US tackles President Biden’s AI Executive Order, the UK has continued to take a commercially pragmatic approach to regulating AI technology by adopting a pro-innovation, sectoral approach. With the Autumn statement increasing investment in compute by another £500m in the next two years, complimenting the government’s £100m AI Life Sciences Accelerator Mission and totalling £1.5bn in funding, 2024 is set to be a good year for tech-minded organisations in the UK innovating in the sector.

M&A and investment activity – can we be cautiously optimistic?

Global geopolitical tensions and economic pressure led to a very slow start for M&A and investment activity in the UK in early 2023, with investor confidence seeming to return in the second half of the year. VC in Q3 was at its best since its peak in 2021, with Ascend Cell & Gene Therapies and Beacon Therapeutic’s being amongst the most significant transactions of the year. Similarly, UK M&A activity in Q3 increased by value from activity in the previous quarter, with Danaher’s £5.7bn acquisition of Cambridge headquartered Abcam plc and EQT’s £4.5bn offer for Dechra being two of the most significant highlights of the year. Whilst investor confidence in private markets appears to be on the up, public markets and IPO activity in the sector remained challenging throughout the year.

‘The UK remains attractive to investors as a hub for differentiated science and this will be supported by the positive steps the government is starting to take with regards to policy development.’
Herbert Smith Freehills

Various factors support the odds that the upward trend in private markets will continue during 2024. The UK remains attractive to investors as a hub for differentiated science and this will be supported by the positive steps the government is starting to take with regards to policy development, including the aforementioned R&D tax relief reforms and the Mansion House Compact. Lower biotech valuations – which were impacted by the slowdown – and the fact that big pharma and biotech, VCs and financial sponsors continue to sit on significant amounts of dry powder are also factors which will continue to drive activity. We expect that the areas of interest for strategic investors and VCs in the UK to be cell and gene therapies, oncology, immunotherapies, obesity, rare diseases, neurology, mRNA and AI enabled technologies, whilst financial sponsors will continue to show interest in pharma services assets (CROs, CMOs, CDMOs), specialties and other differentiated generics.

Whilst there are definitely reasons to be positive, the headwinds which originally disrupted the market are still swirling. Be optimistic, yes, but exercise that optimism with a good dose of caution.

Merger control and FDI

Against a global environment of increasing scrutiny of M&A and investment transactions in the sector, there are changes to the UK merger control regime are expected to take effect in 2024. It is proposed that the turnover-based threshold relating to the target of a merger will be raised from the current £70m to £100m. An additional merger control threshold will also be introduced, intended to capture deals that may not have previously been notifiable where one party has a significant UK presence even if the other party is not so significant (this will be a turnover-based (currently proposed at £350m of UK turnover) and share of supply-based (currently proposed at 33%) threshold). This is intended to make it easier for the CMA to review so-called ‘killer acquisitions’ – where the acquirer is a significant company but the target company has minimal or even no turnover.

On UK FDI, the UK’s National Security and Investment regime requires UK government scrutiny of transactions in certain sectors including ‘synthetic biology’. The government continued to seek feedback on the regime, including on the definition of synthetic biology (which is thought to be too complex) and has raised the possibility of introducing mandatory notification for transactions involving generative AI. Although this would appear at odds with the government’s stated aim of maintaining a pragmatic, pro-innovation approach to AI regulation more broadly, businesses and investors will hope that similarly pragmatic sentiments ultimately prevail.

Increased use of arbitration to resolve disputes in the life sciences sector, with London a popular seat

Building on a recent trend, 2023 continued to see an increase in the use of arbitration to resolve disputes in the life sciences sector. The London Court of International Arbitration saw its caseload in ‘healthcare and pharmaceuticals’ double between 2020 and 2022, and the WIPO Arbitration and Mediation Center saw its caseload treble in the same timeframe, reporting that 15% of its arbitration and mediation cases are in the life sciences sector.

The types of disputes vary. Though many are patent-related (29% according to the WIPO), a significant proportion of those relate to the amount of royalties due (or other financial disputes), whilst others seek declarations of infringement or as to co-ownership of patents. There are also increasing disputes arising from collaboration agreements (for example, relating to R&D or co-promotion), often reflecting a divergence in the parties’ commercial imperatives over time or differing views of the prospects of a product. Distribution arrangements are another fertile source of disputes.

London is a common choice as seat of arbitration in the sector, including in high value disputes with limited – or no – UK nexus (for example, Novartis’ USD$900m royalty dispute with Mitsubishi Tanabe Pharma). This reflects both London’s prominence as an international arbitration hub generally and factors specific to life sciences. English law recognises an implied duty of confidentiality in arbitration, which is often of key importance in life sciences disputes. Further, English law has recognised the arbitrability of IP disputes, including as to patent validity (at least as between the parties to the arbitration). As such, arbitration, and arbitration in London, looks set to continue growing as a forum for resolving life sciences disputes.