Strong Medicine: Using Investment Treaties to Mitigate Foreign Regulatory Risk in the Life Sciences
10 min read
The COVID-19 pandemic has accelerated the globalization of the life sciences industry, driving cross-border collaborations to develop urgently needed treatments, scale up manufacturing and distribution, and fill raw material shortages worldwide. Although the early months of the pandemic saw countries erect export restrictions and impose local production quotas to protect the supply of vital products – prompting concerns about rising "health nationalism" worldwide – cross-border investment continues to flourish over the longer term, as companies seek to capture growing opportunities in emerging markets and leverage lower development and manufacturing costs overseas. While the United States remains the leading market for pharmaceuticals, with estimated revenues of over US$ 500 billion, emerging markets such as Brazil, India, Russia, Colombia and Egypt account for a significant and growing share of the remaining US$ 900 billion in global life sciences revenues.1
As one of the most heavily regulated sectors, life science companies face acute political and regulatory risk when investing in foreign countries. Bringing a new product to market involves years of costly research and development (R&D), lengthy bench and clinical trials, and stringent regulatory approvals. Clearances must be obtained from regulators for manufacturing at each production location. Import permits and approvals for the marketing and advertising of life science products in each target market are frequently required. Collaborations, which are the lifeblood of innovation in the life sciences, as well as the pricing of essential drugs face constant scrutiny by antitrust regulators worldwide. In a sector where disproportionate value is concentrated in intellectual property (IP), companies rely on States for the protections needed to recoup their high upfront R&D investment through certain future revenues. Governments also have an outsized influence over pricing and procurement as large buyers of life science products. Each of these interactions exposes life science companies to the risk of political and regulatory interference that can impair or destroy the value of their investment.
These risks have manifested in various ways, including the physical seizure of manufacturing assets, the invalidation of patents, denial of marketing authorizations, premature licensing of generic drugs, and the sudden termination of supply agreements by a government purchaser. Recent years have seen life science companies, large and small, take action under international investment treaties in the face of such actions.
Investment Treaties Mitigate Regulatory Risk in the Life Sciences
Investment treaties are among the few tools to effectively mitigate the political and regulatory risks faced by life sciences companies operating overseas. There are currently more than 2,500 such treaties in force worldwide. Through these treaties, governments have pledged to extend certain protections to covered investments within their territories. Typical protections include obligations by the State to refrain from expropriating investments without fair and adequate compensation, to treat foreign investors and their investments "fairly and equitably" and to treat foreign investors no worse than domestic investors (non-discrimination) and investors from third States (known as "most favored nation treatment").
Many investment treaties allow covered foreign investors to enforce these standards of treatment by initiating an international arbitration proceeding directly against the State. Claims are heard by an international tribunal of arbitrators with the authority to issue a final and binding award. Worldwide enforcement of the resulting decisions is facilitated by international conventions such as the International Convention on the Settlement of Investment Disputes (ICSID) and the New York Convention.
Investment treaties often protect broad categories of assets, including those typically owned and deployed by life science companies. These include not only physical assets, such as manufacturing facilities, but also shares in locally incorporated companies, intellectual property rights such as patents and trademarks, marketing authorizations, import permits, and claims to money.
Life Science Companies Have Challenged a Variety of State Actions Under Investment Treaties
Life sciences companies around the world, including major pharmaceutical companies headquartered in the US, Canada and Europe, are increasingly utilizing investment treaties to challenge State measures that affect their investments.
Regulatory Enforcement Actions
A number of claims brought by life science companies have focused on the actions of regulatory agencies. For example, French pharmaceutical company Servier Laboratories successfully brought a claim against Poland under the France-Poland BIT when Poland declined to renew marketing authorization for two drugs produced by Servier while allowing local competitors to market generic alternatives.2 The tribunal found that this amounted to indirect expropriation of Servier's investment in Poland and awarded the company monetary damages.3 In another case, Ontario-based pharmaceutical manufacturer, Apotex, brought a claim against the US after the US courts nullified the Food and Drug Administration's decision that Apotex could begin marketing one of its generics following the expiration of a competitor's exclusivity period.4 Although Apotex's case involved rulings by the US courts, the FDA's underlying regulatory decisions were central to the dispute.5
Enforcement action by antitrust regulators have also come under challenge. In December 2021, a subsidiary of GlaxoSmithKline Pharmaceuticals Ukraine LLC ("GSK Ukraine") submitted notice of a dispute with Ukraine, alleging that the country's antitrust regulator violated its rights as a foreign investor under the Ukraine-UK bilateral investment treaty6 when it found GSK Ukraine and its distributors in violation of Ukrainian antitrust law and imposed fines on the company.7 Over the last ten years, the Ukrainian antitrust regulator has conducted multiple investigations into vertical integration between pharmaceutical companies and their distributors, and the rate of enforcement of Ukrainian competition law has remained high, especially against foreign companies.8
Enforcing Drug Price Reductions
Some disputes have arisen from State measures ostensibly directed at controlling drug prices, including by allowing competition from producers of lower-priced generic alternatives to patented drugs. In 2016, American pharmaceutical company, Gilead Sciences Inc., notified Ukraine of a claim under the Ukraine-US BIT arising from Ukraine's registration of a generic version of its patented hepatitis C drug before its exclusivity period had lapsed.9 The dispute settled, and the generic version of the medicine was removed from the State register.10 . In the same year, Swiss-based Novartis lodged a notice of a dispute under the Switzerland-Colombia BIT after Colombia pressed Novartis to agree to a 50% price cut for its high-earning cancer chemotherapy drug, Glivec.11 Colombia alluded to the possibility of compulsory licensing of the drug if a price reduction agreement was not reached.12 This case also settled before arbitration.
Asset Seizures and Abusive Regulatory Investigations
Classic expropriations of foreign-owned assets, relatively common during times of resource nationalism in the extractive industries, have also plagued the life sciences sector. In a pending case, the owner of a large Spanish pharmaceutical business recently brought an expropriation claim against Venezuela related to the physical seizure of his company's manufacturing plant by the Venezuelan armed forces.13 . The claimant contends that his pharmaceutical business, SM Pharma, was targeted by a series of unlawful measures, including arbitrary regulatory investigations that forced the company to sell 50% of its output to distribution companies owned by or linked to the State government, forced participation in a program to increase the production of affordable medicines, and the confiscation of imported goods belonging to SM Pharma's customers.14
Physical seizure of life sciences assets has also been at issue where the State itself is the purchaser of the pharmaceutical products. In a pending case, Qatar Pharma, a Qatar-based pharmaceutical company, alleges that Saudi Arabia violated its obligations under the OIC Investment Agreement when it suspended trade relations with Qatar and seized US$ 24 million in pharmaceutical products delivered to the State without compensating Qatar Pharma.15 Qatar Pharma contends that the trade blockade led to the closure of its three manufacturing plants in Saudi Arabia, actions allegedly amounting to expropriation, a failure to provide full protection and security, and a failure to afford Qatar Pharma most-favored-nation treatment.16
Revocation of Patents and Mishandling of Litigation
Life sciences investors have brought claims under investment treaties challenging allegedly unfair or arbitrary rulings of domestic courts. For example, US pharmaceutical company Eli Lilly brought a claim against Canada after the Canadian courts revoked its patents concerning two compounds for treating attention-deficit/hyperactivity, on the basis of the "promise utility doctrine" under Canadian patent law.17 Eli Lilly alleged that the revocation of its patents amounted to expropriation and also unfair und inequitable treatment contrary to the North American Free Trade Agreement (NAFTA) between Canada, the United States, and Mexico, and argued that the ‘promise utility doctrine' was a radical departure from Canada's traditional utility standard and the utility standards applied by Canada's NAFTA partners, the US and Mexico. The tribunal dismissed the claim, finding that application of the doctrine did not involve a fundamental change in the country's patent law.17 The case nonetheless highlights that there are circumstances in which investment treaties may present a viable option for a patentee to defend its patent.
Eli Lilly is not the only pharmaceutical company to challenge the decisions of domestic courts under investment treaties. Pfizer brought a claim against Ecuador under the US-Ecuador BIT after an Ecuadorian court allowed Pfizer's local competitor to market Pfizer's patented pharmaceuticals without authorization and awarded damages against Pfizer.18 Pfizer reportedly withdrew their claim before a tribunal was constituted.19 Merck similarly brought a claim against Ecuador based on the Ecuadorian courts' handling of a private litigation between Merck and one of its domestic competitors after the court awarded a disproportionate amount of damages against Merck based on allegedly fraudulent expert testimony.20 21
Structuring Life Science Investments to Benefit From Treaty Protections
These emerging disputes illustrate that life sciences companies are increasingly using investment arbitration to address adverse governmental and regulatory actions affecting their investments. Companies that currently cannot benefit from any applicable investment treaty should give serious consideration to restructuring their investments to secure an appropriate level of investment treaty protection. This often can be achieved by introducing a holding company incorporated in a State that has concluded a BIT with the host State in which the investment is made, in a manner similar to tax planning of an investment. When engaging in nationality planning, timing matters. Tribunals may deny treaty protections to investors that restructure their investment solely to obtain the benefits of an investment treaty after the State has taken the adverse governmental measures that give rise to a dispute. Life science companies with cross-border operations would be well advised to structure their investments to secure access to international investment treaty protections long before any dispute arises.
1 Matej Mikulic, World pharmaceutical sales, 2017-2021, Statista, 27 July 2022.
2 Les Laboratoires Servier, S.A.A., Biofarma, S.A.S., Arts et Techniques du Progres S.A.S. v. Republic of Poland, UNCITRAL, Award, 12 February 2012.
3 Jarrod Hepburn, Poland Discriminated By Not Renewing Foreigners’ Pharma Marketing Authorizations; BIT Tribunal Asserts Power to Impose ‘Punitive’ Damages Beyond Market Value, Investment Arbitration Reporter, 24 October 2013.
4 Apotex Inc. v. The Government of the United States of America, ICSID Case No. UNCT/10/2, Award On Jurisdiction and Admissibility, 14 June 2013, ¶¶ 118-119, 124.
5 Id. ¶ 132.
6 Agreement Between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland for the Promotion and Reciprocal Protection of Investments (1993).
7 Vladislav Djanic, Pharmaceutical Company Puts Ukraine on Notice of a Treaty-based Dispute, Investment Arbitration Reporter, 21 December 2021.
8 Borys Danevych, Olga Belyakova, Competition Law Enforcement in the Pharmaceuticals Sector in Ukraine, CMS Expert Guides, 5 May 2021.
9 Luke Eric Peterson and Zoe Williams, Pharma Corp Withdraws Investment Arbitration After Ukraine Government Agrees to Settlement of Dispute Over Monopoly Rights to Market Anti-Viral Drug, Investment Arbitration Reporter, 16 March 2017.
10 Id.
11 Zoe Williams, Investigation: As Colombia Pushes For Cancer Drug Price-Cut and Considers Compulsory Licensing, Novartis Responds With Quiet Filing of an Investment Treaty Notice, Investment Arbitration Reporter, 30 November 2016.
12 Id.
13 Tom Jones, Venezuela will face claim from pharma investor, Global Arbitration Review, 29 January 2020. See also Raimundo J. Santamarta Devis v. República Bolivariana de Venezuela, PCA Case No. 2020-56.
14 Id.
15 Cosmo Sanderson, Tribunal hears claim against Saudi Arabia over Qatar blockade, Global Arbitration Review, 20 October 2020.
16 Id.
17 Eli Lilly and Company v. The Government of Canada, UNCITRAL, ICSID Case No. UNCT/14/2, Final Award, 16 March 2017.
18 Gabriel Lentner, Another IP-Related International Investment Arbitration Looming, Stanford-Vienna Transatlantic Technology Law Forum Newsletter on Transatlantic Antitrust and IPR Developments, 19 December 2017; Zoe Williams, Another Big Pharma Company (Pfizer) Invokes Investment Treaty Protections, Complaining that Local Courts are Wrongly Infringing on Patents, Investment Arbitration Reporter, 12 October 2017.
19 Justin Ho, Andrew Tepperman, and Gregory Bell, Investment Treaty Disputes in the Life Sciences Industry, Lexology, 15 June 2022 (noting that the case was withdrawn with no public reports of settlement).
20 Merck Sharpe & Dohme (I.A.) Corporation v. The Republic of Ecuador, PCA Case No. 2012-10, Partial Final Award, 25 January 2018.
21 Damien Charlotin, Dutch Court Upholds 44 Million USD Merck v. Ecuador Award, Investment Arbitration Reporter, 23 June 2021
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