French healthcare market – opportunities for (2.0) investors

The healthcare market is one of the most dynamic in France and it has significantly evolved over the last ten years. Industrial partnerships are booming, investment in research and development is massively increasing, and so are the number of services, products and solutions that are being developed.

In particular, new technologies such as artificial intelligence and big data, among others, are becoming a primary focus and are being used by over a third of healthcare companies in France. At a time when technology and patient related data are revolutionizing the sector, investors are becoming more and more interested in the evolution of the healthcare sector and especially the e-health sub-sector, medical technologies, and projects launched by biotech and medtech companies.

The interest of investors is resulting in extended consolidation of the French market, in a wide array of healthcare services sub-sectors, such as diagnostic laboratories, private clinics, elderly care and home care. Biotech, dental, medical devices, imagery software and medtech are also sub-sectors where consolidation is growing, and which are critical in the French healthcare market and of significant interest for foreign investors.

From a legal standpoint, what are the specificities? Are there legal barriers to investment in France? The answer is: it depends… on the sub-sector concerned and on the type of deal. Whatever the issue, efficient ways around the problem are generally available.

Share deals in France: come on in!

In the EMEA region, healthcare M&A transactions have soared. In France, the overall number of deals and their value significantly increased in 2018 (+ 39% !¹), with a number of such deals involving a French company as target and a foreign company as acquiring entity.

Sub-sectors such as medtech, biotech and healthcare services (including private clinics, elderly care home care and diagnostic laboratories) are highly active.

Most of these transactions are structured as share deals.

The good news is that share deals can be completed freely and are generally not delayed by regulatory constraints (as opposed to asset deals), with an exception for diagnostic laboratories as addressed below.

The only hurdle that foreign investors and healthcare companies may have to overcome as part of healthcare related PE and M&A transactions is the prior authorization or post-completion declaration to the French Minister of Economy. Indeed, prior authorisation may be required by the French Minister of Economy at its discretion and on a deal by deal basis; if required it may take up to two months to be issued by the French Minister of Economy. However, the vast majority of transactions in the sector have not required any authorisation so far (for example, the PE and M&A deals relating to the number 1, 2 and 3 private clinics (by size) have not been considered by the French Minister of Economy as falling within the scope of their control).

Such M&A transactions, depending on their value, may also be subject to a post-completion declaration for statistical purposes only to the French central bank.

Pharma and medical devices: regulated sectors and asset deals

Transactions in France relating to medical devices and drugs have also increased. Such transactions however prove to be slightly more difficult to complete and require more formalities and regulatory checks when they are structured as asset deals (which is the most frequent structure we see).

Indeed, on the regulatory side, the most significant requirement is that the marketing authorisations (for drugs) and the CE Mark (for medical devices) need to be registered in the name of the new owner, which require certain formalities and a certain amount of time (about 3 months). The purchaser will have indeed to bring evidence that it presents sufficient guarantees in terms of manufacturing process, structure and infrastructure, etc.

The transition needs to be managed from a regulatory standpoint so that the former owner continues to comply with all regulatory constraints while the new owner carries out the formalities.

Another important aspect is that intuitu personae contracts (i.e. supply contracts (e.g. for active pharmaceutical ingredients), distribution contracts, public tenders, etc in which the identity of one of the parties is an essential term of the contract) do not transfer automatically (in particular those entered into with public entities, such as hospitals); therefore, their transfer has to be organised. It is common for parties to enter into agreements under which the former owner continues to deal with the client relationship until the transfer is finalised.

In practice, we are seeing an expansion of agreements ancillary to the transaction (e.g. supply agreements, quality agreements, transitional agreements, distribution agreements, service or commissionaire contracts, etc) as efficient ways around these problems.

Focus on medical biology laboratories – An investor’s favourite

With apparent regulatory obstacles but tried-and-tested methods to circumvent them, the medical biology laboratories market has become one of the preferred targets of French and International PE funds thanks to its interesting risk-reward ratio, illustrated by the sale in 2017 of Cerba Healthcare by PAI for a price of €1.7 billion (compared to an acquisition price of €500 million in 2010).

Still, investing in this area does not look like an easy task at first sight due to a protective regulation designed to ensure the medical independence of biologists, requiring that:

• more than half of the capital and voting rights of a company running a medical biology laboratory must be owned by the biologists who effectively work with the company;

• the company can only be run by the same working-biologist partners, and all its collective governing bodies must be formed by at least two thirds of working-biologist partners; and

• an external company can only hold 25% of the capital and voting rights, which is adequate for minority equity participation but does not fulfil all the necessary conditions for takeovers or most buy-outs.

Despite these restrictions, market players have found ingenious ways to by-pass this bar on investment, such as for example:

• decoupling capital/voting rights on the one hand and financial rights on the other hand, giving investors up to 99,9% of the financial rights while leaving them owning only 25% of the capital/voting rights; and/or

• investment through debt instruments (as opposed to equity investment). French law offers a certain variety of debt instruments. Such securities which present a wide array of reimbursement or conversion modalities may be, for instance, convertible into share bonds or stock warrant bonds instead of equity shares. Moreover, the investment, coupled with a shareholders’ agreement will allow the investors to be involved in the management, and may later be converted in equity, depending on the securities’ terms and conditions.

The main trick in all these forms of investments is to tie things up with a solid, binding and well-packaged shareholder/security holder agreement.

The above are good examples of how creative and well-advised market players can overcome regulatory hurdles in opening up attractive and profitable markets to investment.

¹ M&A in Healthcare and Pharma in France – H1 2018, PWC.