Thinking | 28 May 2020
Investment in health, life sciences and COVID-19
The Australian and international economy is a rapidly changing landscape with COVID-19. In these times of uncertainty, there are strategic investment opportunities in the health and life sciences sectors.
The Australian health and life sciences sector is performing strongly, and many of our health and community clients are currently capital raising and seeking opportunities. Global hospital operator Ramsay Health Care has pressed go on a capital raising to snare $1.2 billion. The fully underwritten institutional placement launched on 22 April and was priced at $56 a share, which represented a 12.9% discount to Ramsay's $64.29 last close. Australian Unity has recently raised $39 million for its Specialist Disability Accommodation Fund, $9 million more than its initial target.
Investing in health and life sciences involves unique regulatory due diligence and it is important for both vendors and purchasers to understand those requirements. It is not only in relation to the licensing and registration of services (such as hospitals, medical, aged care and disability services) and products (such as medicines and medical devices). Vendors and purchasers should also understand how those services and goods are funded through Medicare, private health insurance and the Pharmaceutical Benefits Scheme.
Regulation of ‘therapeutic goods’
If a business makes claims about its products having any ‘therapeutic use’ (such as alleviating diseases, influencing physiological processes or modifying parts of the anatomy), they may be regulated as ‘therapeutic goods’ under the Therapeutic Goods Administration (TGA).
Common tag lines, such as ‘genetically improved’ or references to medical diseases or treatments may be sufficient claims to attract the TGA therapeutic goods provisions, depending on the specific wording of each claim being made.
Subject to limited exemptions, the TGA requires therapeutic goods to have a ‘sponsor’ and be listed on the Australian Register of Therapeutic Goods (ARTG). The TGA also imposes special advertising, product labelling and warning requirements. These go beyond what is required for general consumer goods, although specific requirements will vary based on the type of ARTG entry.
Consequences of breach are very serious, including reputational damage and significant financial penalties. In July 2019, the Federal Court ordered Peptide Clinics Australia to pay $10 million to the Commonwealth for breaches of mandatory advertising rules, following a TGA investigation: Secretary, Department of Health v Peptide Clinics Australia Pty Ltd  FCA 1107. Investigations are commonly triggered by consumer complaints, and in 2019, the TGA Advertising Compliance Report revealed that the highest number of consumer complaints by a significant margin were made in relation to cosmetic products.
Case study: regulation of general cosmetics
The Australian Consumer Law (ACL) also regulates general skincare and cosmetic products, including ‘therapeutic goods’ (which are therefore subject to dual regulation under both the TGA and ACL). There are specific regulations that apply to cosmetic product labelling: Refer to the Therapeutic Goods (Excluded Goods) Determination 2018 (Cth).
In addition, ACL misleading and deceptive conduct provisions and consumer guarantees will apply. The beauty industry is particularly susceptible to breach given the tendency to advertise and promote their products as having anti-aging or other miraculous effects, without any evidentiary support. The recent trend towards online sales means that websites may contain misleading statements or make therapeutic claims, and should also be carefully reviewed as part of the due diligence process.
In a COVID-19 affected world, health and life sciences have emerged as a strong and growing industry sector and the area is ripe for M&A transactions and capital raising. However, sellers should be aware of their regulatory obligations, and buyers should conduct careful due diligence. It is also important to ensure that the sale agreement contains a carefully negotiated set of warranties, and if necessary, specific indemnities, to adequately address regulatory and compliance issues. Otherwise, if you are on the Sell-side, you may become embroiled in a warranty claim, or if you’re on the Buy-side, you may be find that your recent acquisition has bestowed unexpected exposure and hefty liability.
The Hall & Wilcox Health and Community team recently acted on various M&A transactions in the health and life sciences sector including hospitals, medical centres, aged care, disability, medical devices, medicinal cannabis, Australian Unity’s SDA fund and the acquisition by Amorepacific, the world’s 12th largest cosmetics company (which owns Sulwhasoo and other brands) of a significant minority interest in Rationale, a leading Australian luxury skincare brand.
Foreign Investment Review Board approval for investment in Australian health and life sciences
Health and life sciences businesses are not defined as sensitive businesses under the Foreign Acquisitions and Takeovers Act (Cth) 1975. Historically, economically significant transactions in the health and life sciences sector such as Swisse Wellness, Healthe Care, PRP Diagnostic Imaging have not invited significant scrutiny from the Foreign Investments and Review Board (FIRB).
However, the recent proposed acquisition of ASX listed medical services provider Healius by Shanghai listed, Jangho Group did raise significant concern from regulators, management and market commentators. In particular, it was suggested that such an acquisition exposed Australian patient data to a Chinese listed entity and should be closely scrutinised by the FIRB.
While the deal eventually floundered when rejected by Healius board and was never formally considered by the FIRB, the changing public and regulatory attitudes towards Chinese investment in this sector is instructive for future deals.
Moreover, the FIRB’s temporary COVID-19 response measures which have set the monetary thresholds for FIRB notification to zero means that:
- transactions which previously did not require FIRB notification will now need to be assessed by the FIRB. Prior to the COVID-19 temporary measures, acquisitions of non-sensitive Australian businesses by foreign persons from free trade agreement countries only required notification were acquisition values exceeded $1,192 million;
- FIRB approval timeframes are stretched out from 30 days to up to six months with priority given to applications which are intended to protect Australia businesses and employment; and
- it is likely that the ‘national interest test’ will be used more broadly to target investors who are government backed or investing into areas where sensitive technology such as vaccines or genetics or personal data could be compromised as a result of the transaction.
Please see our ‘Guide to regulation of inbound investment in Australia’ for detailed discussions of the FIRB COVID-19 temporary measures.
In conclusion, there are significant opportunities for foreign investment in Australian life science and health businesses and also opportunities for foreign investment into China. To take advantage of these opportunities, both investors and operators need to carefully plan and strategize to overcome possible regulatory and legal hurdles. This is particularly important in the present COVID-19 environment.
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