Iqbal Hussain at Reed Smith looks at Covid-19 and its impact on supply chains in the life sciences sector as well as private equity and venture capital investment
With the Covid-19 situation continuing to develop globally, supply chains in the life sciences sector have experienced significant disruptions and challenges which have resulted in rising concerns about the availability of medicines and medical devices that are, in the absence of a Covid-19 vaccine, critical in the fight to contain the virus and to manage patient care.
Challenges have manifested at each stage of the supply chain including sourcing of active pharmaceutical ingredients (API), disruption to manufacturing caused by factory closures and restriction on movements, transportation challenges fuelled by the extensive restrictions on movement of people and political challenges with certain nations banning exports of drugs for fear of internal supply shortages.
The restrictions and impact of Covid-19 on China and India, two of the largest global producers of APIs and generic medicines, have made many headlines in recent months, led to political tensions and have caused many governments and pharmaceutical players to question the reliance on such limited sources of supply.
This has also led to commitments and efforts on the part of governments and industry to develop local sources of supply. A great example of this is the collaboration between Accord Healthcare and Sterling Pharma Services to secure new supply of UK manufactured hydroxychloroquine (HCQ), one of the drugs under investigation for the prevention and/or treatment of Covid-19.
The supply chain challenges have led to a sharper focus on the rights and contractual terms in manufacturing, supply, logistics and distribution contracts on which businesses can rely.
Much analysis has focused on considering whether the wording of force majeure clauses covers situations arising from Covid-19 responses and, in particular, whether force majeure clauses fully or partially excuse parties from performing their obligations or from doing so on time.
IT WOULD SEEM APPROPRIATE AND ADVISABLE THAT BOTH EPIDEMICS AND PANDEMICS ARE ENUMERATED IN THE DEFINITION OF FORCE MAJEURE
A force majeure clause is a contractual provision that excuses the performing party from liability or obligation when an event beyond its control prevents it from fulfilling its contractual obligations. The underlying event must be unforeseeable and not the result of actions undertaken by the party invoking force majeure. Typically, enumerated conditions constituting force majeure include natural disasters, acts of God, contamination, labour disturbances including strikes, armed conflicts and terrorist attacks.
Whether Covid-19 constitutes a force majeure event will come down to a number of factors including the scope of the force majeure provision.
The key consideration is whether a pandemic is a situation that is contemplated within the definition of force majeure in the concerned contract, whether by express statement as one of the enumerated events or due to it being deemed covered by a general statement such as all other circumstances beyond a party’s reasonable control or due to governmental actions.
Another factor is determining the cause of the non-performance. The governing law of the applicable contract should also be analysed; this could, in the absence of an express contractual provision, be a determining factor as to whether force majeure is available and the terms therefore.
For example, in the absence of an express inclusion, force majeure is not implied into contracts under English law, and so cannot be relied on where there is no express force majeure clause included. By contrast, in France, force majeure is provided for in Article 1218 of the French Civil Code and so parties are able to rely on force majeure provisions in the absence of a contractual statement.
Going forward, it would seem appropriate and advisable that both epidemics and pandemics are enumerated in the definition of force majeure so as to avoid any debate as to whether such circumstances trigger force majeure treatment.
From a planning perspective, more thought is to be deployed at the outset of a contract to determine reasonable steps to mitigate the consequences of a force majeure including appropriate levels of stock build, alternative sources of supply and appropriate indemnification and insurance coverage.
Contractual and legal provisions when force majeure is not an option
While much attention has been focused on force majeure, it is not the only contractual provision on which businesses should be focussed.
Many jurisdictions have a concept of hardship clauses. In contrast to force majeure, a hardship clause requires contract revision when unforeseen events beyond a party’s control render performance excessively onerous.
These provisions are often invoked in long term contracts when events render performance economically irrational. Contracts governed by English law would enable parties potentially to rely on the doctrine of frustration.
Whether frustration is available will depend on the circumstances of each particular contract and is likely to be disputed. In addition, it is important to review other relevant provisions in the contract, such as those related to termination, cancellation, breach or inability to perform.
Parties should also consider the governing law of the applicable contract to determine what, if any, remedies may be available (both contractual and non-contractual by virtue of the governing law).
Covid-19’s impact on investment in the life sciences industry
The private equity and venture capital industry has had a significant focus on the life sciences sector for many years and the level of investment is increasing.
While many transactions have been put on hold as a result of the restrictions caused by Covid-19, even through these challenging times many private equity players have progressed to securing deals in the life sciences space including in supply chain. This includes the recent acquisition by York Capital Management and Elements Capital Management of the Famar business in Greece, Italy and Spain. Private equity and venture capital funds have continued to raise funds for further investment in the life sciences industry successfully with more than US$5bn of new capital raised in the first few weeks of 2020.
There is recognition that investment in life science companies are long-term investments and consequently, the Covid-19 pandemic is likely to have little impact on private equity and venture capital investment appetite for the life sciences sector.
Moreover, the Covid-19 pandemic has highlighted certain gaps in the market such as the need to develop local sources of supply. These gaps are likely to create further investment opportunities in the sector attracting more funding from private equity and venture capital.
That all said, not surprisingly, deal makers and their advisors are taking a more cautious approach to the impact of Covid-19 on business performance, through increased Covid-19 driven due diligence investigations, warranties and indemnities.
Investors on deals which are the subject of a split signing and closing are often requiring material adverse change provisions to be included as condition precedent to deal closing.
This cautious approach is likely to continue for the foreseeable future.