FTC and DOJ Workshop on Antitrust Enforcement in Pharmaceutical Industry
On June 14 and June 15, the Federal Trade Commission (FTC) and the U.S. Department of Justice’s Antitrust Division (DOJ) hosted a workshop entitled “The Future of Pharmaceuticals: Examining the Analysis of Pharmaceutical Mergers” to explore new approaches to enforcing antitrust laws in the pharmaceutical industry. The workshop was the culmination of the Multilateral Pharmaceutical Merger Task Force, formed in March 2021 by then-Acting Chairwoman Rebecca Kelly Slaughter to consider how to address the varied competitive concerns that pharmaceutical mergers and acquisitions raise. Members of the Task Force include staff from the Federal Trade Commission, Canada’s Competition Bureau, the European Commission Directorate General for Competition, the U.K.’s Competition and Markets Authority, the U.S. Department of Justice’s Antitrust Division, and Offices of State Attorneys General.
Panelists discussed market concentration in the pharmaceutical sector and merger remedies, as well as innovation aspects of pharmaceutical mergers and how conduct by pharmaceutical companies affects merger analysis.
FTC and DOJ Priorities
Introductory remarks from FTC Chair Lina Khan and FTC Commissioner Kelly Slaughter suggested that FTC is taking a new approach to merger investigations and enforcement in the pharmaceutical space. Chair Khan identified several areas of concern, including rising list prices for new drugs, the prevalence of so-called “killer acquisitions” of pipeline drugs, and reports of illegal bundling. Commissioner Slaughter, too, cited to rising costs and the need for enforcement in order to prevent diminished competition. Commissioner Slaughter also indicated merger enforcement must look beyond markets defined around existing products and pipeline products and consider merging parties’ post-transaction incentives and ability to innovate more broadly. Jonathan Kanter, AAG for DOJ’s Antitrust Division, suggested that DOJ wants to align with FTC on enforcement and perform competition analysis against the backdrop of market realities to ensure that consumers get the full benefit of competition.
Effects of Market Concentration
Panelists asserted that M&A of large pharmaceutical firms risks exacerbating their size-related advantages, such as cross-market leverage in portfolio-wide contracting with pharmacy benefit managers (PBMs) and physicians. Panelists argued for shifting burdens of proof for large mergers. Traditionally, FTC has looked at the impact on individual product markets when conducting pharmaceutical merger review, but panelists indicated the FTC should also consider firm size and cross-market effects of mergers. Some panelists argued for establishment of a series of presumptions centered on the size of the merging parties. For example, Professor Patricia Danzon of the Wharton School argued that when a merger involves two large firms, 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. For transactions between small firms, the standard level of scrutiny would continue to apply.
In terms of merger remedies, panelists argued the standard divestiture remedy is problematic because it is too theoretical and fails to capture all the dynamics of the pharmaceutical industry. Many panelists urged regulators to adopt a robust post-merger review system to ensure past remedies had their intended results and to improve future evaluations (as opposed to the current “crystal-ball” predictions-based approach). In addition, panelists argued competition measures should be adjusted to consider the power of volume across different markets as well as the impact of repeated small mergers. Panelists also suggested that agencies conduct and issue a merger remedy study. Panelists argued that current HSR thresholds and jurisdictional limits cause many pharmaceutical deals to fall outside the FTC’s radar. Panelists were in agreement that the risks posed by underenforcement were greater than the risks of overenforcement.
Effects on Innovation
The panelists were generally of the consensus that market concentration results in threats to innovation. Several referred to studies claiming M&A results in decreased R&D expenditures and decreased patient output. Panelists rejected the notion that increasing sales enables innovation or that firm size increases R&D productivity, citing to some evidence of a trend towards smaller biopharma companies originating more drugs than large companies. Panelists also stressed that “killer acquisitions” (mergers which are perceived to end development of competing products) are particularly harmful. In terms of next steps, panelists urged the FTC to look at general overlaps in R&D capabilities among merger parties in addition to traditional overlaps between parties’ marketed products and pipeline products.
Consideration of Prior Bad Acts of Merging Parties
Panelists also agreed that prior bad acts are useful factors for competition agencies to consider, suggesting such acts can inform the agencies as to the merging parties’ intent in merging, which can be indicative of the merger’s effect – in other words, bad conduct from one of the merging parties could be treated as a “plus factor” that implies a greater risk of anticompetitive harm. Panelists also asserted that prior anticompetitive conduct is indicative of market power.
Takeaways and Recommendations
FTC and DOJ, as well as the panelists the agencies hosted, agreed that merger enforcement in the pharmaceutical industry needs renewed attention and reform. Going forward, companies should be aware of new and evolving antitrust considerations as they evaluate transactions. While traditional antitrust analysis is likely to remain the primary determinant of FTC enforcement for now, the workshop indicates enforcers’ inquiries may well begin expanding to explore a proposed transaction’s impact on a range of innovation and cross-market issues. We expect to see increased scrutiny by agencies, as well as heightened enforcement, going forward.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.