FTC Workshop Contemplates “New Approach” to Pharmaceutical Mergers

On June 14 and 15, 2022, the Federal Trade Commission (FTC) and Department of Justice Antitrust Division (DOJ) hosted a workshop entitled “The Future of Pharmaceuticals: Examining the Analysis of Pharmaceutical Mergers” to explore new ways of examining mergers and acquisitions in the pharmaceutical industry. The workshop was the culmination of the Multilateral Pharmaceutical Merger Task Force, launched in March 2021, by then-Acting Chairwoman Rebecca Kelly Slaughter. Over the two-day workshop, panels of lawyers, academics, economists, and enforcers expressed their concerns about antitrust enforcement in the pharmaceutical industry and opinions about how to improve it. The panelists primarily advocated for stronger and more expansive government enforcement in the pharmaceutical industry and discussed concerns over increased market concentration, elimination of innovation competition, and the insufficiency of divestiture remedies.

The workshop is one of several steps the FTC has taken in recent months to better understand and potentially alter their approach to antitrust enforcement in the industry. In January 2022, FTC and DOJ launched a public inquiry with the goal of modernizing both horizontal and vertical merger guidelines to better prevent anticompetitive deals.¹ In February 2022, the FTC used its investigative authority under Section 6(b) of the FTC Act to study the commercial practices of pharmacy benefit managers (PBMs).² In June 2022, the FTC issued a policy statement regarding its enforcement approach for allegedly anticompetitive PBM rebate practices.³ The policy statement laid out the authority that the FTC will use to investigate and prosecute this conduct.

FTC and DOJ Leaders Set the Stage

FTC Chair Lina Khan opened the workshop by highlighting the perceived need for a new enforcement paradigm in the pharmaceutical industry. Chair Khan asserted that median list prices for drugs have increased 20% per year over the past several years, large pharmaceutical companies are producing fewer blockbuster drugs, and so-called “killer acquisitions,” where FTC believes larger pharmaceutical companies have acquired smaller rivals to eliminate competition, are becoming more common.⁴ DOJ Antitrust Division Assistant Attorney General (AAG) Jonathan Kanter outlined the four broad themes of the workshop: effects of market concentration, merger remedies, effects on innovation, and consideration of prior bad acts of merging parties. Finally, FTC Commissioner Rebecca Kelly Slaughter observed that the FTC has, historically, focused on mergers involving overlapping products; she suggested that this analysis leaves out important issues the FTC should consider, including whether the merging parties’ incentives to innovate will change and whether a transaction impacts non-merging parties’ incentives as well.⁵

Panelists Suggested Shifting Burdens of Proof for Large Mergers

The FTC’s traditional approach to pharmaceutical merger review is to look at the impact on individual product markets. The panelists advocated that the agency should also consider firm size and cross market effects of mergers. Some panelists argued that the best way to address firm size in merger review is to establish a series of presumptions centered on the size of the companies (based on sales). For example, when the merger involves two large firms, panelists suggested the agencies should make a presumption of competitive harm with the burden falling on the merging companies to prove otherwise. If the merger involves a medium sized firm or if the merger involved blockbuster drugs, there should be heightened scrutiny. The standard level of scrutiny would continue to apply to transactions between small firms. These suggestions echo Senator Amy Klobuchar’s bill that would codify a burden shift requiring that large merging parties prove that their merger does not violate the law.⁶

Panelists Advocated for the FTC to Adopt a Higher Standard for Merger Remedies

Panelists suggested that divestitures may be insufficient to ameliorate anticompetitive concerns given that only 36% of divested drugs are still in production, and firms spend less on R&D following a merger. To improve outcomes, some panelists argued that agencies should err on the side of blocking mergers rather than accepting divestitures. Other panelists offered more modest recommendations, including suggestions that the agencies should (1) consider the impact of serial acquisitions on volumes across related markets, and (2) establish a post-merger review to ensure the merger had its intended results.

Panelists Emphasized the Effect of Mergers on Innovation

The panelists generally agreed that they saw a threat to innovation from market concentration. They referred to studies showing that M&A results in decreased R&D expenditures and decreased patent output, as well as a decline in human capital. All panelists rejected the notion that increasing sales is what enables innovation, and that that firm size increases R&D productivity. They claimed that evidence from pharmaceutical and agricultural sectors prove the opposite is true—most new drugs (70% of new compounds) emerge from small firms. Panelists also suggested that innovation from dominant firms is often used to protect their own market share and avoid cannibalizing their own product lines. Further, panelists characterized five to seven percent of all pharmaceutical mergers as so-called “killer acquisitions.” Because these mergers are perceived to immediately end development of competing products, panelists alleged that they directly harm innovation competition. Panelists agreed that in the future, the FTC should be factoring in any overlap with marketed products and pipeline products as well as overlaps between multiple pipeline products. They said the FTC should also consider how a merger affects incentives for both merging firms and non-merging firms.

Panelists Considered Agencies’ Capacity to Review Harmful Mergers

Panelists bemoaned that many pharmaceutical deals fall outside the FTC’s radar, given HSR thresholds and jurisdictional limitations. However, panelists noted that the FTC withdrew its 1990s guidance that disfavored requiring merging parties to get prior approval for future acquisitions. They asserted that prior notice and approval requirements in FTC settlements provide the FTC with broader visibility into acquisitions below HSR thresholds when they follow a settlement in the same geographic area or industry. Further, the panelists supported actions that show the FTC is taking seriously harms to innovation—e.g., challenging Lockheed/Aerojet and Illumina/PacBio, where innovation harms were central.

Panelists did not discuss the potential chilling effect systematic merger review could have on innovation. They pointed to studies that show that mergers can reduce innovation, but noted that there is no evidence to suggest agency investigations cause chilling effects. They agreed that risks of underenforcement were greater than the risks of overenforcement.

Panelists Considered Whether Non-merger Conduct Should be Incorporated Into Merger Reviews

Panelists observed that more than half of pharmaceutical merging parties are defendants in antitrust cases that include allegations of market allocation, pay-for-delay, and price fixing, among other conduct. Panelists agreed that prior bad acts can be useful factors for competition agencies to consider. First, they suggested it can inform the agencies as to the merging parties’ intent in merging, which can also be indicative of the merger’s effect. Second, they suggested a merger can amplify the negative effects of existing anticompetitive conduct.

The panelists also asserted that prior anticompetitive conduct is indicative of market power. Many claimed that prior coordination is a more effective way of showing that there is excessive consolidation in the market than the Herfindahl-Hirschman Index (a traditional measure of concentration). They stated that when trying to show coordinated effects, evidence of prior collusion is key. Beyond that, some panelists expressed the idea that prior use of bargaining leverage may even be helpful in assessing mergers. Some proposed having the FTC ask PBMs if they think that pharmaceutical companies’ bargaining leverage would increase substantially after a merger.

While there could be other explanations, the panel explained that a party willing to pay a premium to acquire a target could be indicative of the benefit the company sees from achieving market power. Bad conduct from one of the merging parties could be treated as a “plus factor” that implies a greater risk of anticompetitive harm.

Impact on Marginalized Communities

Some panelists argued that enforcers should think systematically about a merger’s effect on vulnerable people. Panelists explained that the people who need healthcare the most are the most vulnerable in our society and mergers that make it more expensive to receive treatment can be disastrous. Therefore, panelists argued that antitrust agencies should consider the importance of the underlying market, and prioritize investigating pharmaceutical mergers over less vital industries.

Takeaways and Recommendations

The workshop’s panelists largely agreed with each other that merger enforcement in the pharmaceutical industry needs reform Although the workshop was missing the views of stakeholders with differing views, the two days of panels were helpful to provide guidance as to where the FTC and DOJ may be headed as they revise their merger guidelines.

As a result, companies need to be aware of new and evolving antitrust considerations as they evaluate transactions in this ever changing antitrust enforcement environment. Traditional antitrust analysis, focused on horizontal and vertical competition in relevant product and geographic markets, is likely to remain the primary determinant of FTC enforcement. But, enforcers’ inquires may expand to explore a transaction’s impact on a range of innovation issues as well as topics not traditionally covered by merger review. The antitrust agencies may approach acquisitions by larger manufacturers with greater scrutiny and seek to challenge transactions outright, rather than accept limited divestitures. To the extent that they do accept divestitures, those may be more robust and challenging than in the past.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.