New EU Subsidies Rules Likely to Catch Global Life Sciences Companies

Given their extensive involvement in public procurement contracting, life sciences companies are likely to be heavily impacted by the EU’s Foreign Subsidies Regulation (the “FSR”), which has the potential to hold up tender awards over competition concerns. Michele Tagliaferri and Alessandra Moroni explain.

The FSR is expected to have a significant impact on life sciences companies that rely on public tenders to market their products in Europe. The FSR, which began to apply in July, allows the European Commission (the “Commission”) to investigate the impact of any foreign subsidies that have the potential to adversely affect competition in the EU internal market, and to take measures to remedy any resulting market distortions.

Alongside the Commission’s general investigative powers, the FSR imposes suspensory notification and approval requirements on some public tenders and M&A deals, subject to certain materiality thresholds. These requirements are intended to help the Commission collect information on public tenders and deals occurring in the EU, and assess risks they might raise with respect to foreign subsidies.

With specific regard to public tenders, the FSR requires operators intending to participate in EU public tenders to submit a notification, and seek pre-award approval when the following cumulative thresholds are met:

  1. The total value of the public tender contract is at least €250 million, and, if divided into lots, the value of the lot(s) bid for is at least €125 million.
  2. The bidding company (including its subsidiaries, its direct and indirect holding companies, its main subcontractors, and suppliers relevant to the tender at stake) was granted aggregate financial contributions of at least €4 million from non-EU countries in the previous three years.

For a notification and approval requirement to apply, it will suffice that a company receives ‘financial contributions’ from a non-EU country, be it from a government body at any level or from a public or private company whose actions can be attributed to the non-EU country. These financial contributions do not need to be specific to a company and do not need to grant a benefit. They can include any transfer of funds or liabilities, the foregoing of revenue otherwise due, or the provision and purchase of goods and services. Under the FSR, the Commission will analyse any financial contribution and make an assessment of whether it grants an unfair advantage, and therefore amounts to the actions of a distortive foreign subsidy.

If the financial contribution threshold under (b) is not met, then the FSR requires the submission of a declaration to that effect. This declaration — which does not automatically trigger pre-award approval — requires the submission of detailed evidence proving that the financial contributions received remain below threshold. The Commission also retains the power to call in for review tenders below the threshold under (a).

Notification under the FSR should be filed at the time of submission of the bid. The award of the contract to a notifying bidder will be suspended until the Commission has assessed any risks of distortive subsidies and issued approval. If concerns are raised, the Commission may impose conditions or prohibit the award of the contract to the bidder under investigation.

The Commission has 20 business days to conduct an initial assessment. When concerns are raised, an in-depth investigation commences, which may take up to 110 business days. This timeline may be extended on a case by case basis. Preparation is essential to avoid being caught by surprise, and is particularly important given that the information required for a notification is extensive and time-consuming to gather. In preparing, companies should map the financial contributions received from non-EU countries, and ensure main subcontractors and suppliers cooperate and also map financial contributions. Timely preparation is key to mitigating risks of stumbling in complex review processes or missing out on tenders.

Because public procurement is increasingly undergoing consolidation in Europe, particularly in certain EU Member States where regional hospitals are grouped for tender purposes, the new FSR rules on public tenders will have a material impact on the pharma and medical device sectors. Life sciences companies should also bear in mind that there are M&A notification requirements and general investigation risks.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.