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June 6 — Pharmaceuticals deals were challenged at a much higher rate than other mergers reported to the Federal Trade Commission, but have ultimately been approved with a consent order—rather than blocked by regulators—in challenged cases, according to an analysis of data from the FTC and Bloomberg BNA's Deal Analytics.
Most pharmaceuticals deals ultimately win approval because the agency can address any concerns with targeted divestitures. As long as those divestitures do not destroy the economics of the deal, parties will accede to the FTC’s demands, said Steven A. Newborn, head of the global antitrust and competition practice at Weil, Gotshal & Manges LLP in New York.
Newborn told Bloomberg BNA that the reason is relatively simple. “The FTC typically postulates narrow markets in these cases, so the required overlaps between two merging parties are correspondingly narrow,” said Newborn, who previously served as director of litigation for the FTC's Bureau of Competition. That means that it often makes economic sense to divest in order to get the deal through, he said.
The past 20 years have witnessed waves of consolidation in the pharmaceuticals industry.
Today's ten largest pharmaceuticals companies swallowed up more than 50 others over the course of the past two decades. Pfizer Inc. is emblematic of the trend of growing through mega-mergers, having acquired Warner-Lambert in 2000 for $90 billion, Pharmacia — itself the product of mergers between Upjohn and Monsanto, among others — for $60 billion in 2003, Wyeth for $68 billion in 2009, and Hospira for $16 billion in 2015. Most recently, Pfizer agreed in May to buy Anacor Pharmaceuticals Inc. for $5.2 billion.
The Anacor deal, of course, comes after Pfizer's proposed merger with Allergan plc, the largest pharma merger ever announced, came apart in the face of increased U.S. regulation of tax inversions (67 ATD, 4/7/16).
The Department of Justice and FTC use the Herfindahl–Hirschman Index (HHI) to measure both existing concentration in markets and how much a specific merger will add to that concentration. Their merger guidelines instruct that an HHI between 1,500 and 2,500 indicates a market is “moderately concentrated,” and those with an HHI over 2,500 are “highly concentrated.”
Between 1999 and 2003, the agencies challenged 52 mergers in the chemical and pharmaceutical industries. Of those, almost all were in markets considered to be at least “moderately concentrated,” and all would yield an HHI after the merger of at least 2,000. Eighteen of them occurred in markets where the market after the merger would score 7,000 HHI or higher, indicating that many mergers—around a third of those challenged—happened in already concentrated markets.
Pharmaceuticals consolidation has not slowed since. Bloomberg News reported $40 billion in new health care deals were announced on April 28 alone (83 ATD, 4/29/16).
High concentration means close scrutiny for these deals from a specialized unit within the FTC that considers the number of players in each market to be an important factor for effective competition.
Health care mergers reportable for antitrust analysis under the Hart-Scott-Rodino Act (HSR) go to a specific group in the health care division within the Bureau of Competition. Formed in the 1970s, the division includes around 35 lawyers and investigators who work exclusively on health care antitrust matters, including non-merger investigations into potential anticompetitive conduct in the pharmaceutical industry. Mergers are reviewed by the “Mergers I” team.
According to data from the FTC and Bloomberg BNA's Deal Analytics tool on the Corporate Transactions platform, pharma deals see more frequent challenges than other kinds of deals, from a “second request” for information from the merging parties, which indicates an investigation of the deal, through an administrative complaint or even a court case.
Although pharmaceuticals mergers were a steady proportion of all HSR-reported transactions in 2013 and 2014, they were challenged at double the rate as other mergers in 2013, and about four times that rate in 2014. Preliminary data show that they were challenged at roughly three times the rate of other mergers in 2015.
The added scrutiny is a function of the market itself. Pharma mergers are challenged more frequently because any two companies, each with hundreds of products, are likely to have at least some overlap in an area that requires a more careful look than the boilerplate reporting information provides – including information about drugs in the pipeline that might compete in the near future. That need to assess drugs in development at the parties and at competitors means that the FTC staff will often need to issue a second request to fully understand the markets in which the parties compete.
Despite scrutiny, and necessary divestitures when a market will become unacceptably concentrated, most of these mergers over the past two decades ultimately closed.
The FTC resolves many merger challenges in the pharmaceutical industry with a consent order, and 2015 was no exception. Between April 2015 and April 2016, the FTC issued 16 consent orders requiring divestitures: six of those involved pharmaceutical company mergers.
The dedicated FTC group that reviews pharmaceutical mergers is very experienced, Newborn said, often knowing far more than the parties’ own lawyers and they are “very transparent in their analysis.” He said that this leads to far better analyses by both the agency and by the external antitrust lawyers allowing results that protect consumers and allowing benign deals—or parts of deals— to be consummated.
The overlay of FDA approval for pharmaceuticals it is easier to see where merging companies have competing products for a specific therapeutic application, added Phillip A. Proger, of counsel in Jones Day's Washington D.C. office.
Proger agreed with Newborn on both the expertise of the FTC team and on the transparency of their analysis. He added that the FDA process makes it easier to analyze drug markets around specific products for specific health problems. There can be some ambiguity about drugs being used for specific therapeutic applications, he said, but there is greater clarity about what products constitute a particular market than in other industries.
Richard A. Feinstein, a partner at Boies Schiller & Flexner LLP and past chief of the FTC's competition bureau, added that experienced lawyers who understand the process know that one way to move it along is to be “clear and up front” with the FTC staff about where products overlap and issues may reside. Because the staff is expert, companies can't expect them to miss any potential competitive problems with a deal. Being as transparent with the staff as they are with parties is often the best policy, he said.
The antitrust agencies face increased political pressure to curb what some contend is market power in the pharmaceutical industry. Given the steady drumbeat of announced deals and that added pressure, scrutiny of pharma mergers is unlikely to ease.
For example, Sen. Amy Klobuchar of Minnesota, the top Democrat on the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, called on the FTC to investigate pharmaceutical companies for possible antitrust violations in light of what she called “alarming drug price increases.”
In an October 2015 letter to FTC Chairwoman Edith Ramirez, Klobuchar highlighted closed distribution systems that could hamper new generic market entry to respond to substantial price increases in particular drug markets. She asked Ramirez “to thoroughly investigate whether Turing Pharmaceuticals or any other pharmaceutical company has used restricted distribution practices to insulate a price increase from competition.”
The FTC and DOJ were also called to a Senate oversight hearing for the first time in three years in March 2016 and quizzed about mergers and market concentration (47 ATD, 3/10/16).
“Whether the issue is predatory drug pricing, collusive behavior in industries with few competing companies, or practices by dominant players to foreclose entry by smaller businesses, Americans want their government to act,” Sen. Patrick Leahy (D-Vt.) said in a prepared statement.
Newborn said he does not foresee changes in enforcement, however. Enforcement is already aggressive, he said, and he “expects that aggressiveness to continue, at least until the next administration.”
At the March Senate hearing, Ramirez said the pharmaceutical industry has “experienced significant merger activity in recent years” and that the FTC “continues to carefully review mergers between pharmaceutical manufacturers and require divestitures where necessary to maintain competition.”
“The Commission is committed to enforcing the antitrust laws in pharmaceutical markets to promote competition and prevent conduct that is likely to harm consumer welfare,” Ramirez said.
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