Healthcare M&A 2024

High inflation, rising interest rates, the ongoing war in Ukraine and a strong Swiss franc, combined with the turbulences in the Swiss financial sector posed challenges...
Switzerland Food, Drugs, Healthcare, Life Sciences
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1. Market Trends

High inflation, rising interest rates, the ongoing war in Ukraine and a strong Swiss franc, combined with the turbulences in the Swiss financial sector posed challenges on the deal activity in Switzerland in 2023, leading to longer deal processes and added complexity in deal structures. Nonetheless, the Swiss healthcare M&A market has shown resilience with an increased deal activity in 2023 compared to the previous years, both in terms of deal numbers and deal value. This development is particularly noteworthy given the overall depressed M&A deal activity in Switzerland in 2023; the number of deals involving Swiss businesses (outbound, inbound and domestic transactions) dropped by 25% compared to 2022.

1.2 Key Trends

Deal Activity

In general, M&A activity in Switzerland has seen an overall decrease in 2023. However, M&A activity in the Swiss healthcare sector has remained strong and increased in 2023 compared to the previous year, both in terms of number of deals and value.

Private equity and venture capital investors have been particularly active in healthcare M&A. In 2023, more than 50% of the M&A deals in the Swiss healthcare industry involved either private equity or venture capital investors. Whereas in the past, private equity investors mainly focused on healthcare service providers, their focus shifted in 2023 towards investments in pharmaceutical and medtech companies. In contrast, venture capital investors continued to focus on the Swiss biotech sector. Beside private equity and venture capital, larger pharmaceutical companies were heavily involved in the Swiss M&A market: the three Swiss pharmaceutical companies Roche, Novartis and Lonza were involved in almost half of the ten largest M&A deals by value in the Swiss healthcare industry.

Swiss Adaption to the European Regulation Governing Medical Devices

Since the Mutual Recognition Agreement between the European Union (EU) and Switzerland was not updated in 2021, Switzerland is now considered a "third country" under the EU regulations and Swiss registrations/authorisations are not recognised in the EU any more and vice versa. The Swiss Federal Council tried to mitigate the negative consequences of this non-recognition by aligning the Swiss legislation on medical devices and in vitro diagnostics with the European Union Medical Devices Regulation (MDR) and In Vitro Diagnostics Regulation (IVDR) and imposing certain additional measures. For example, medical devices with an EU conformity assessment (CE marking) are unilaterally recognised in Switzerland. These legislative developments may be relevant to M&A activity in the field of medical devices. For example, if a non-European company acquires a Swiss manufacturer of medical devices with the respective authorisation(s) under Swiss law, this does not suffice for the targets to be recognised as manufacturer or distributor in the EU. The appointment of an authorised representative or other authorisations may be necessary under EU regulation to such purpose. Generally, Swiss medtech companies have timely addressed this topic and implemented the measures required to be compliant under EU law.

Revision of the Swiss Data Protection Act

On 1 September 2023, the new Swiss Data Protection Act (revDPA) came into force. The aim of the revDPA was, on the one hand, to modernise Swiss data protection law and, on the other hand, to bring it into line with EU law, in particular with the EU General Data Protection Regulation (GDPR). Companies that were already compliant with GDPR had only minimal adaptations to implement under the revDPA. The revDPA may be relevant in the context of Swiss healthcare M&A if the business of a target company involves processing of Swiss personal data or generally processing personal data in Switzerland. It is noted that the transfer and processing of personal data in the context of a due diligence exercise may trigger obligations and restrictions under the revDPA.

Failure to comply with the revDPA may result in criminal sanctions against the individuals involved.

Foreign Direct Investment Screening

Currently, Switzerland does not have any general foreign direct investment (FDI) screening mechanisms in place. However, certain regulatory requirements apply to certain industries and sectors, for example, banking and real estate. Several additional business activities require a governmental licence, and the licensing conditions include specific requirements regarding foreign investors. Examples of such business activities are aviation, telecom, radio and television, and nuclear energy.

Mid December 2023, the Federal Council adopted the dispatch on a new Investment Screening Act. Under the new draft legislation, investment screening is intended to only apply when a foreign state-controlled investor takes over a domestic company that operates in a particularly critical area, such as health infrastructure. This means that the takeover of Swiss hospitals and companies active in the research, development, production or production or distribution of medical products, devices or other equipment by a foreign state-controlled investor would need an approval subject to reaching certain turnover thresholds. The proposal is still subject to the approval of the Swiss parliament.

EU Artificial Intelligence Act (EU AI Act)

Artificial Intelligence (AI) is making its way into the healthcare sector, in particular in the area of pharmaceuticals where AI is used in research and development, including for better processing of large amounts of data and quicker evaluation of different combinations of active ingredients. In medical treatment, AI increasingly comes into use in medical devices, either as standalone software or integrated into hardware components.

On 8 December 2023, the EU Commission published a draft of the AI Act, the first-ever legal framework on AI that aims to provide AI developers, deployers and users with clear requirements and obligations regarding specific uses of AI. Like the GDPR, the AI Act will have an extraterritorial reach and will not only be applicable to a Swiss company that makes an AI system available in the EU market but will also apply if the output generated by the AI system of a Swiss company is used in the EU. Once it is formally adopted, it is expected to be fully applicable after two years.

There is currently no specific AI systems regulation in the Swiss legal system. On 22 November 2023, the Federal Council has instructed the Federal Department of the Environment, Transport, Energy and Communications to prepare a report on the possible regulatory approaches to AI systems for Switzerland that are particularly compatible with the EU AI Act and the Council of Europe's AI Convention, which should create the basis to issue a concrete mandate for an AI regulatory proposal in 2025.

2. Establishing a New Company

2.1 Establishing a New Company

Among other features that make Switzerland one of the most innovative countries in the world, it offers a business-friendly legal framework ensuring fast and cost-effective incorporations. Therefore, it is attractive to incorporate a startup company in Switzerland. Swiss corporate law offers all relevant features required for a start-up company to operate successfully, in particular also with regard to initial seed financings and subsequent capital contributions from financial sponsors or strategic investors. Different share classes with voting/non-voting structure, dividend and/or liquidation preferences are some of these prominent features. The entire incorporation process for a new company typically requires two to four weeks, depending, among other things, on the canton of the company's intended seat, the country of residence of the investors (in particular for opening the required blocked bank account) and the efficiency of the founders in delivering the necessary documents. Unless the founders choose a partnership with full personal liability, an initial capital contribution is required to establish a new company (see 2.2 Type of Entity for required capital amounts).

2.2 Type of Entity

Entrepreneurs are typically advised to incorporate an entity in the form of a corporation ("Aktiengesellschaft") or a limited liability company ("GmbH"). Both types of entities are endowed with a separate legal personality and provide for a limited liability with its share capital. The minimum share capital to incorporate a corporation is CHF50,000 (partially paid-in) or CHF100,000 (fully paid-in), whereas investors naturally favour a fully paid-in capital to have recourse to a higher adhesion substrate. An entity may also be incorporated as limited liability company. The main difference from a corporation relates to its lower minimum share capital requirement of CHF20,000, the disclosure of the shareholders in the commercial register and somewhat limited flexibility in terms of capital-raising features.

2.3 Early-Stage Financing

As professional investors such as venture capitalists usually expect recurring annual revenues, early-stage financing is typically provided by family and friends as well as wealthy individuals ("angel investors"). They do not require an accreditation or another qualification, professional experience or net worth. In fact, these are private individuals investing their own money into a start-up and – unlike professional venture capitalist investors – do not get paid for making the investment. Ideally, angel investors provide knowledge to develop a company and promising products. In terms of investing volume, angel investors are followed by seed and series A funds, corporate ventures and family offices. Over the past years, Switzerland has seen a large increase in seed investments, both in terms of numbers (166 investments) and value (average investment amount of CHF2 million). The documentation for early-stage financing for a start-up company in Switzerland is usually rather basic, consisting of a subscription form (rather than an eloquent subscription agreement) to subscribe for newly issued shares resolved at a shareholders' meeting and a basic shareholders' agreement including some form of tag- and drag-along rights, if at all.

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Originally Published by A Chambers Global Practice Guide

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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