May 10, 2019

Business and Legal Considerations for Life Sciences and Healthcare/Technology Convergence Transactions

Johnson & Johnson announced in January it entered into a research study in collaboration with Apple to investigate the new electrocardiogram feature on the latest Apple Watch to identify and potentially optimize diagnosis and treatment options for patients with atrial fibrillation. A month later, J&J announced it was acquiring Auris Health’s robotic surgical platform for $3.4 billion, one of the largest acquisitions of a private life sciences company of all time. These transactions are some of the latest in a growing number of high profile so-called convergence deals that are quickly transforming the life sciences and healthcare industries. They also are further evidence that life sciences / healthcare and technology centric business and legal issues are rapidly converging, creating opportunities and challenges for the business and legal professionals involved in implementing such complex arrangements. 

Like Flatiron Health’s stunning $1.9 billion sale to Swiss pharmaceutical giant Roche, these developments demonstrate that convergence is now at the forefront of deal activity in the life sciences and healthcare sector. By partnering with the National Institutes of Health, the National Cancer Institute and hundreds of community oncology practices, Flatiron quickly elevated a traditional electronic records platform into a healthcare technology behemoth that now successfully provides actionable data to optimize and improve oncology-focused clinical trials.

For Johnson & Johnson, the Apple and Auris deals supplement the earlier Verb Surgical joint venture between J&J subsidiary Ethicon Endo-Surgery and Alphabet’s Verily Life Sciences, as well as J&J’s collaboration with IBM to transform healthcare delivery. Verb employs robotics, visualization, advanced surgical instrumentation, data analytics and connectivity to build a next generation open surgical platform. IBM is working with J&J to build advanced intelligence coaching solutions and applications designed to transform patient experiences and deliver improved health outcomes.

The multi-billion dollar venture rounds for early cancer detection start up Grail, a company originally spun-out of Illumina, the leader in gene-sequencing technologies, earned Grail the rare status of a “unicorn” in the healthcare sector, quite an accomplishment for a company focusing on the overlap of life sciences, cloud computing, big data and artificial intelligence.

With the continuing convergence of the life sciences and technology industries, investors and lawyers involved with such deals are increasingly spending time on complex issues ranging from navigating an evolving regulatory environment to ownership of shared data to how to protect patient privacy and the security of applications. Below is a quick guide to key considerations surrounding the convergence of these industries:

FDA Regulatory Considerations: As convergence technologies, such as those powering developments in point-of-care diagnostics, robotics, bioinformatics, genomics, and more, continue to rapidly evolve, so too is the U.S. Food and Drug Administration, or FDA, modernizing its approach to regulating such convergence product offerings. Today, understanding whether, for example, a digital health product is actively regulated by the FDA and how a product is regulated involves a nuanced understanding of statutes, regulations, a web of guidance documents, and precedential decisions. Equally important is an understanding of how FDA’s regulatory framework may continue to shift over time. A thorough understanding of not only the regulatory implications of a convergence product offering, but also a developer’s business objectives can help inform efficient developmental and marketing strategies that can in turn help to ensure an expeditious path to market. 

Healthcare Regulatory Considerations: Convergence transactions often implicate a number of complex healthcare regulatory considerations. For example, as in a number of the transactions discussed above, the transfer or leveraging of health information is often an important aspect of such transactions. Consequently, the parties must consider whether any information that will be used or disclosed in connection with the arrangement is protected by The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and, if so, whether the contemplated use or disclosure requires patient authorization or is allowed without patient authorization as in the case of uses and disclosures for treatment, payment, and, in certain cases, for healthcare operations. While pharmaceutical companies are typically not subject to HIPAA, their use and disclosure of patient information may be limited by other laws such as the General Data Protection Regulation (GDPR) in Europe, the terms of a patient’s consent to participate in research, the parties’ privacy policies, or other contracts. The parties to convergence transactions also should consider what obligations, if any, they have with respect to securing any data used or disclosed in connection with an arrangement and what obligations to include in the contract with respect to data security. Finally, parties to convergence transactions must consider whether the economic terms of their arrangement implicate health care fraud and abuse laws such as the federal Anti-Kickback Statute which makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce the referral of business for which payment may be made by a federal health care program such as Medicare or Medicaid.

Intellectual Property (IP) Considerations:  Recently, federal courts and the U.S. Patent Trial and Appeal Board (PTAB) have struck down more and more software- and diagnostic-related patents for reciting ineligible subject matter. Lawyers seeking to procure patent protection for such technologies must thoroughly understand the jurisprudence that has developed in federal courts and PTAB over the last decade. Copyright protection should also be considered as an option for protecting software, whether in place of, or in addition to, patent protection. Furthermore, companies should also take steps necessary to maintain trade secrets as part of their IP portfolios. Assets that may be eligible for protection as trade secrets include, for example, patient data, proprietary databases, details regarding innovations that need not be patented, software source code, and any other discoveries that may be difficult to patent or copyright (or to enforce as patents or copyrights in court). Finally, collaboration agreements should include clear provisions concerning ownership and licensing of IP rights, including those that arise out of the collaboration itself.

With the spate of recent high profile and high dollar convergence deals, it is clear that the marriage of life sciences, healthcare and technology is here to stay, and is creating regulatory and transactional legal complexity. Investors and their advisors involved in such convergence transactions that are able to navigate this complex hybrid of business and legal issues will have a competitive advantage over those who ignore the trend, and continue to focus on life sciences, healthcare and technology as distinct fields.


*  Kris, Steve, Stephanie and Roger advised J&J on the recent Apple transaction