On December 2, 2020, the Department of Health & Human Services (HHS) published its long-awaited two final rules – one by the Office of Inspector General (OIG) and one by the Center for Medicare & Medicaid Services (CMS) – finalizing changes to regulations implementing the federal anti-kickback statute (AKS), the beneficiary inducement provisions of the civil monetary penalty law (CMPL), and the physician anti-self-referral law (Stark Law) and their safe harbors and exceptions. Among the most anticipated aspects of the final rules are the new value-based arrangement AKS safe harbors and Stark Law exceptions.

The two final rules, while complicated, are aligned in their definitions of value-based arrangements.

A value-based enterprise (VBE) is two or more participants that: (1) are collaborating to achieve at least one value-based purpose; (2) are each a party to a value-based arrangement with the other (or at least one other participant in the same VBE); (3) have an accountable body or person responsible for financial and operational oversight of the VBE; and (4) have a governing document describing the VBE and how its participants intend to achieve the VBE’s value-based purpose(s).

A value-based arrangement is an arrangement entered into between (1) a VBE and one or more of its participants, or (2) among participants in the same VBE, for the provision of one or more value-based activities for a target patient population.

A value-based purpose is (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.

While the new AKS safe harbors exclude pharmaceutical and medical device manufacturers, distributors, and wholesalers; DMEPOS suppliers; laboratories; compounding pharmacies; and pharmacy benefit managers, there is a narrow exception intended to facilitate the deployment of health technologies for care coordination. These entities are eligible for protection under the care coordination safe harbor as “limited technology participants” that exchange “digital health technology” (defined broadly) with a VBE or VBE participant.  The OIG Final Rule provided as an example “a medical technology company could partner with physician practices, to better coordinate and manage care for patients discharged from a hospital with digitally-equipped devices that collect and transmit data to the physicians to help monitor the patients’ recovery and flag the need to intervene in real time (e.g., a device that monitors range of motion that could inform what an appropriate physical therapy intervention may be). The technology company could provide the physician group with necessary digital health technology that improves the physician group’s ability to observe recovery and intervene, as necessary.” However, the OIG final rule requires that the exchange of digital health technology by a limited technology participant is not conditioned on any recipient’s exclusive use of, or minimum purchase of, any item or service manufactured, distributed, or sold by the limited technology participant.

The Stark Law final rule does not exclude such entities from qualifying as VBE participants under any exception for value-based arrangements.  However, because the Stark Law is focused on prohibiting self-referrals by physicians, the new Stark Law exceptions for value-based arrangements will be of limited value to medical device and pharmaceutical companies.

In an effort to lend further support to the expedited development of COVID-19-related vaccines and therapeutics (see Covid-19 Prioritized Examination Pilot Program), the United States Patent and Trademark Office (USPTO) has implemented a deferred-fee provisional patent application pilot program whereby applicants filing under 35 U.S.C. 111(b) can elect to defer the $300.00 USD provisional filing fee ($150 for small entities; $75 for micro-entities) until the filing of a corresponding non-provisional application.

In order to be eligible for the deferred-fee pilot program:

1. the subject matter disclosed in the provisional application must be directed to a product or process related to COVID-19;
2. the product or process must have obtained, be pending, or will seek prior to marketing, Food and Drug Administration (FDA) approval for COVID-19 use;
3. the applicant must submit a technical disclosure, a provisional application coversheet, and a completed PTO/SB/452 form (“Certification and Request for COVID-19 Provisional patent Application Program”); and
4. the applicant must agree that the technical subject matter disclosed in the provisional application will be published on the USPTO website.

While insulated from being cited against an inventor’s own later-filed corresponding non-provisional application in the United States, the USPTO warns that special consideration should be taken by applicants seeking international patent protection since “[m]any foreign jurisdictions treat an inventor’s public disclosure made within one year of filing as prior art against the inventor’s own application unless that earlier disclosure is the subject of a proper priority claim in that jurisdiction.”

The USPTO will accept certifications and requests to participate in the deferred-fee program until September 17, 2021, after which the program may be extended beyond that date and may be expanded to other technological areas beyond COVID-19 requiring rapid innovation.

…the essential criterion for being classified as a medical device is the software’s medical objective…

Background

Relying on an unregulated app or piece of standalone software to provide a diagnosis or recommend treatment could have potentially life-threatening consequences. In June 2020, the UK’s medical devices regulator, the Medicines and Healthcare Products Regulatory Agency (MHRA) updated its guidance to help software and app developers in the medical field identify whether their products should be regulated as medical devices.

In particular, the MHRA endorsed the European Court of Justice (CJEU) ruling of Snitem v Philips France C-329/16 from December 2017. This case considered whether prescription support software which used patient-specific data to detect drug interactions and excessive doses, constituted a medical device.

The CJEU’s Judgment

The CJEU held that the prescription support software was a medical device under EU law for the following reasons:

• the software cross-referenced patient-specific data with the medicines that the prescriber had contemplated prescribing;
• the software automatically provided the prescriber with an analysis intended to detect possible drug interactions and excessive dosages; and
• the manufacturer intended the software to be used for one of more medical objectives specified in Article 1(2)(a) of the Medical Devices Directive 93/42/EEC (MDD), which include the diagnosis, prevention, monitoring, treatment or alleviation of a disease.

The CJEU further held that it is irrelevant whether the software acts directly or indirectly on the human body. According to the court, the essential criterion for being classified as a medical device is the software’s medical objective, examples of which are mentioned above.

Practical Implications

The MHRA guidance provides further certainty that prescription support software and other decision support software in the medical field may be classified as medical devices and thus need to comply with the requirements under the MDD.

As a final point, the MDD is due to be replaced by the Medical Devices Regulation on 26 May 2021. A key implication is that the risk classification of a significant proportion of existing medical device software could change which would mean manufacturers will soon need to obtain regulatory approval to market such software in the EU.

Can a government authorize the production of a COVID-19 vaccine without the consent of the patent holder? The answer is likely yes, depending on which country you are in.

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides a mechanism for member states to authorize themselves or third parties to produce a patented product without the express consent of the patent holder through the grant of compulsory licenses.

In response to the COVID-19 pandemic, several countries have already taken steps to facilitate compulsory licensing.  In March, Canada^[1], Germany^[2] and France^[3] amended their laws to make it easier to issue compulsory licenses, Ecuador^[4] and Chile^[5] passed resolutions to encourage the use of compulsory licenses, and Israel issued a compulsory license to import from India a generic version of AbbVie’s patented product Kaletra for the treatment of coronavirus patients, which has since then been proven to be an ineffective treatment.^[6]

More recently, on the basis of national security, Pharmasyntez, a Russian pharmaceutical company, is seeking a compulsory license from the Russian government to manufacture a generic version of Gilead’s patented COVID-19 drug remdesivir without Gilead’s consent.^[7]

A compulsory license, however, may not always be necessary. Following Israel’s issuance of the compulsory license for Kaletra, in an official company statement, AbbVie announced its intention to dedicate to the public its intellectual property related to Kaletra^[8], and in October 2020, Moderna announced that while “the pandemic continues, Moderna will not enforce our COVID-19 related patents against those making vaccines intended to combat the pandemic”^[9].

Whether reliance on compulsory licenses will be necessary in order to ensure access to COVID-19 vaccines remains to be seen. However, the use of compulsory licenses should be carefully considered, as patent protection is one of the main economic incentives to innovate, particularly in the pharmaceutical field, where the average cost of bringing a drug to market is estimated to be close to 1.3 billion dollars.^[10]

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[1] https://laws-lois.justice.gc.ca/eng/AnnualStatutes/2020_5/

[2] https://www.gesetze-im-internet.de/ifsg/index.html?_sm_au_=iVVvns5WHQ11sMDPvMFckK0232C0F

[3] https://www.legifrance.gouv.fr/codes/id/LEGIARTI000042103698/2020-07-11/

[4] https://www.keionline.org/wp-content/uploads/ES-Ecuador-CL-resolution.pdf

[5] https://www.keionline.org/wp-content/uploads/resolucioncoronavirus.pdf

[6] https://www.reuters.com/article/us-health-coronavirus-israel-drug-idUSKBN216237

[7] https://www.reuters.com/article/us-health-coronavirus-russia-remdesivir/russian-firm-seeks-to-produce-covid-19-drug-remdesivir-without-patent-idUSKBN27I0QH

[8] https://news.bloomberglaw.com/pharma-and-life-sciences/abbvie-to-allow-use-of-intellectual-property-for-coronavirus

[9] https://investors.modernatx.com/news-releases/news-release-details/statement-moderna-intellectual-property-matters-during-covid-19

[10] https://www.biospace.com/article/median-cost-of-bringing-a-new-drug-to-market-985-million/

Life sciences companies often turn to geographical licensing to realise the maximum value from their assets, and to ensure their products reach markets worldwide, particularly where they do not have a global footprint.

In the context of a collaboration agreement, the owner of certain intellectual property rights may collaborate with a licensee to develop a product, and grant such licensee the exclusive right to further develop and commercialise the product, but only in a specific territory. The licensor may reserve for itself the right to develop and commercialise the product in another territory, usually where that licensor has a presence.  In certain cases, usually after much of the development of the product has taken place, the licensor may also grant additional licences limited to other specific territories to third parties, further dividing up the territory it had reserved for itself in the initial collaboration agreement.

The above deal structures raise many complex issues of coordination between the parties. Some of these issues in relation to geographical licensing in the context of collaboration agreements are:

1. Product development: if multiple parties are conducting activities in their own territories to develop a single product, high levels of coordination between those activities are required. No party will want the activities of another party to damage the value of the product being developed. Sharing results of development activities between the parties could avoid duplication of work, and help to ensure compliance with regulatory obligations. However, development results are costly to produce, and some parties may not be willing to disclose this information freely. The development work may also give rise to intellectual property rights, and the licensor will need to consider the degree of access it will need to those intellectual property rights.

2. Regulatory authorisation and compliance:
   1. Pre-approval submissions: the collaborating parties will also need to coordinate their submissions to regulatory authorities in relation to the product being developed. Inconsistent statements between such submissions must be avoided in order to protect the value of the product worldwide and ensure timely regulatory approvals can be granted.
   2. Post-approval submissions: once the product is on the market, each of the parties involved in its commercialisation will have reporting obligations to the regulatory authorities in their own territory. The parties will likely need to share information relating to safety and regulatory matters. If any additional licensees have been brought into the mix, the licensor will also need to consider whether all regulatory information should flow through the licensor, or whether it should flow directly between these licensees.

3. Intellectual property management:
   1. Patents: licensees who are taking an exclusive licence under certain intellectual property in a territory – particularly if they are developing improvements to such intellectual property under a collaboration agreement – are likely to want control over the prosecution, maintenance, enforcement and potentially the defence of such intellectual property in their territory. Although this may relieve the licensor of the cost of maintaining the intellectual property in such territory, prosecution of patent applications, and defence of patents, must be coordinated worldwide to avoid inconsistent statements or actions. Such inconsistencies could impede the prosecution of a corresponding patent application, or diminish the validity or enforceability of a granted patent, in another territory.
   2. Trade marks: if a licensor licenses rights in a centralised trade mark to various licensees, care also needs to be taken to ensure licensees are restricted in their use of the mark. Licensees should be prevented from acting in ways that could damage the value of such trade mark.

The above issues are tricky to navigate in a collaboration agreement, particularly where significant development of the product remains to be carried out, and the identity of any future additional licensees remains unknown.

A carefully considered term sheet at the beginning of negotiations can help to ensure that all relevant issues are raised and discussed as part of an overall package, as well as avoiding any key issue being missed which could potentially derail negotiations at a later stage.

Flexibility provides the greatest value in laboratory space design for both owners and users of life sciences real estate.  Science and technology are evolving at such a rapid pace that it is difficult to predict future needs. Bespoke spaces can become obsolete before they are even occupied.  Spaces that can easily adapt to changing needs not only support the science long-term, but they can provide the most sustainable solution as well.  Below we explore the various interests of investors, developers, owners, and users that must be considered; as well as how these concepts of flexibility and sustainability can be realized when creating a laboratory space.

What Are The Owner/Developer/Landlord Considerations When Designing and Building a Lab Space?

Owners and developers of real estate generally have to walk the fine line between seeking to attract maximum prospective tenant interest, through things like amenities and unique spaces, and creating the highest possible return on investment based on a projection of what the future holds.  Life sciences presents a unique opportunity and challenge to create a space design that can adapt to the market.

What Are The End User/Tenant Considerations When Designing and Building a Lab Space?

From a tenant or end user perspective, if a group cannot perform its science in a space, there is no point to leasing it.  It is also important to recognize that regardless of the tenant improvement allowance packages being provided by landlords, the cost to develop a lab can often dwarf the numbers being provided by the landlord and require a significant capital investment by a tenant.  Another reality for life sciences users is the necessity to lease for growth.  Given how quickly life sciences companies can increase their employee counts, having to plan for exponential growth year over year means more square footage for say, a year or two, while a company grows into a space.  If excess space can be programmed for uses from a collaboration space to a laboratory, it would provide the user with the largest amount of flexibility for a company’s long-term needs, which are often an unknown when a lease is initially signed.

How Does Technology Help in Integrating Flexibility Into Such Technical Spaces?

Flexibility and adaptability can be easily achieved in lab spaces by implementing a strategic approach to design.  Planning for the future through building systems, support spaces, and a flex zone will offer the greatest value for all project stakeholders.  Flexible lab furniture will allow the tenant to maximize a building’s potential.  Building systems are typically the largest investment on a lab project, for every stakeholder.  Mechanical Electrical and Plumbing (MEP) systems account for 30%-50% of total construction cost, and it is vastly more difficult and expensive to retrofit MEP systems than to build initially.  Thus, it is critical to design building systems that can support the long-term evolution of a facility.

In this post, we discuss FDA’s conduct of inspections of manufacturing facilities for new drugs and biologics during the COVID-19 pandemic. These inspections, known as pre-approval and pre-licensure inspections (PAIs/PLIs, respectively), are performed to give FDA assurance that a manufacturing site named in a new drug or biologics license application is capable of manufacturing the product according to current good manufacturing practices (cGMPs) and producing the product at commercial scale.

In July, FDA resumed limited domestic on-site inspections after temporarily postponing all domestic and foreign routine surveillance facility inspections in March. Since June, FDA had conducted only mission-critical domestic inspections. Currently, domestic on-site inspections are pre-announced and are prioritized on a newly developed rating scale that uses real-time data on the number of COVID-19 cases in a local area to qualitatively determine when and where it is safest to conduct inspections. Foreign PAIs/PLIs continue to be temporarily postponed unless deemed mission-critical.  FDA may deem an inspection mission-critical based on a variety of factors including, but not limited to, whether the product has received breakthrough therapy or regenerative medicine advanced therapy designation.

In response to COVID-19, FDA has used, on a limited basis, various tools to conduct alternative inspections. These tools include the use of FDA’s authority under Section 704(a)(4) of the FD&C Act, which enables the Agency to request records directly from facilities “in advance of or in lieu of” drug inspections.  In addition, FDA has indicated that it may also look to records of recent inspections and information shared by foreign regulatory partners through mutual recognition agreements. And while the concept of virtual inspections has been floated, it remains to be seen if video-based or other virtual inspection strategies can be used to fulfill PAI/PLI requirements and how long such proposals may take to implement.

Worryingly, FDA explains in its August 2020 guidance that should the Agency determine that a PAI/PLI is necessary, and such an inspection cannot be completed during the review cycle due to restrictions on travel or other COVID-19-related risks, FDA generally intends to issue a Complete Response letter or may defer action. The guidance, along with a number of concerns raised quietly by sponsors regarding delayed inspections leading or potentially leading to Complete Response letters, paints a potentially ominous picture for drug and biologic approvals and the advancement of the public health over the coming months. Sponsors submitting marketing applications in the near-term would be wise to proactively prepare for discussion of alternative inspection approaches during the review of their applications.

When submitting a new drug application (“NDA”) with the FDA, an applicant (or branded company) is required to file a list of patents that cover the drug product.  These patents will be listed in the FDA’s Orange Book upon approval of the drug for commercial sale.  Patents that are eligible to be listed in the Orange Book are patents that have claims that cover the drug substance (active ingredient), the drug product (formulation and composition), or the approved method of use.

What patents can’t be listed in the Orange Book?

Patents that have claims directed to the process or manufacture of the drug substance, to the packaging of the drug product, or to metabolites or intermediates of the drug substance are not eligible to be listed in the Orange Book.

Why pursue patents that are Orange Book listable?

Competitors seeking to market a generic version of the drug must certify for each patent claiming the drug or the approved use of the drug that (i) such patent information has not been filed; (ii) the patent has expired; (iii) the date the patent will expire; or (iv) the patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.  Filing a paragraph IV certification can constitute an act of patent infringement and the generic company can be sued before even selling the generic version of the drug.  If the branded company files the suit within 45 days of the notice of filing the certification, the FDA will postpone the generic drug approval for 30 months.  During this 30 month period, the branded company and the generic competitor can litigate the patent dispute while the generic drug is barred from entering the market.  If all patents are held invalid or not infringed, the FDA can proceed to approve the generic drug even if the 30 month period has not yet concluded.

The process of underwriting tenants can be complex at the best of times, even more so when you add the particular requirements of early stage and/or fast growing life sciences companies and a global pandemic into the equation. With that in mind, we have summarized a few of the key landlord considerations when underwriting life sciences tenants.

Understanding the science (where possible)

It is important to try both to understand the viability of a tenant’s business/financial model and, where possible, to make an assessment of the value of their science. This allows landlords to better understand the background of a life sciences tenant and to seek to weed out, on their assessment of the strength or otherwise of their science, those which they consider may not have a sustainable business plan. Knowledge obtained from this exercise can also afford landlords the opportunity to capitalize on gains to be made in early investment perspective into life sciences companies by sitting alongside venture capital investors.

Understanding the source of capital

Life sciences companies are typically only funded for the next stage or two of their development. Landlords will need to undertake careful due diligence to enable them to understand how a prospective tenant is financed: is it venture backed? Does it get its capital from a foreign parent? Does it rely entirely on the strength of its science or its reputation for its pipeline of fundraising? Or is it financed in some other way? The source of capital and the security or availability of future financial support can make a significant difference from a financial underwriting and .

Protecting landlords from future financing difficulties

Landlords should keep in mind the fact that most life sciences companies will run out of money only a few years (or even sooner) into a 7 – 10+ year lease term and so security deposits and future sources of capital are essential. Whilst parent guarantees from venture firms are pretty much unheard of, to the extent that there is another source of capital available, landlords should seek out upper tier entity guarantees wherever possible.

Design considerations

Life sciences companies can have complex requirements in terms of the fit out of their space, some will need a bespoke, fully operational, laboratory and given the innovative nature of their work they will often demand a very high specification in terms of the security of their premises.

A key landlord consideration when reviewing large tenant improvement or specification packages is to make sure that the design of the space is going to be useful for second generation tenants. As noted above, life sciences companies can run out of funding before termination of their lease and so a space which can be easily re-purposed will be leased again more quickly and will require less investment in terms of future specification. Consequently landlords are becoming much more involved in the planning, review and approval of design modifications to ensure that their property will remain attractive to a range of future tenants.

Life sciences real estate clusters

Record investment in the life sciences sector has created geographic concentrations of interconnected life sciences companies and institutions, or “clusters,” forming in key global locations, including the U.S. and the UK.  The forming of clusters has been driven by a variety of factors, including a broad recognition that proximity between market participants can drive overall productivity.  While it may seem paradoxical for a company to locate near its competitor, a deeper examination reveals that clustering creates synergies for all participants who can benefit from communal resources, regional trade, lobby and support groups, shared infrastructure and logistics channels, and a common regulatory and legal framework (and in some instances local tax incentives).   In this way, life sciences real estate, or “propsci”, is becoming more than just an operational decision for life sciences companies – it can provide a competitive advantage through strategic access to talent, funding, innovation, and shared resources.  Not surprisingly, real estate investors are looking to capitalize on this trend, and we anticipate seeing a desire by a growing number of capital allocators, investors and developers to add propsci investments to their portfolios in key geographies.

U.S. perspective

The top 3 propsci clusters in the U.S. are (1) the San Francisco Bay Area, (2) Boston and (3) San Diego.  These three markets have been the dominant clusters for life science companies and investors as well as for real estate.

Looking beyond the traditional “big-3” clusters, there are several secondary clusters that have attracted substantial capital and governmental investment and appear ripe for significant for more growth and in turn, propsci.  Among these markets are places like Chicago, Philadelphia, New Jersey, and Baltimore.  These locations share many of the same characteristics (and opportunities) as Boston, San Francisco and San Diego – well-regarded research universities, high-levels of private investment and governmental grants and a deep and growing talent pool to draw from.

UK perspective

In the UK, the “golden triangle” of London, Cambridge, Oxford, and surrounding areas is the most advanced of the life sciences clusters, where around 80% of all UK life sciences investment happens.  This cluster is home to a diverse and large population consisting of academics, clinicians, leading universities, research centres, healthcare providers, innovative SMEs and startups, and large industry corporates, as well as fit for purpose real estate and infrastructure.

The golden triangle is followed by Edinburgh, Glasgow, Manchester and Nottingham, and more recently, Birmingham, Liverpool, Leeds and Newcastle, where there are also significant amounts of concentrated activity.  These emerging destinations all have key ingredients for success – world renown universities in close proximity, great transport and infrastructure links, and a UK Government intent on investing to rebalance the UK economy in favour of regional locations.