A tougher M&A regulatory environment

June 25, 2021
What the new FTC working group could mean for pharma manufacturers

In March, the U.S. Federal Trade Commission announced an international multilateral working group — comprising antitrust enforcers from around the globe — aimed at taking “an aggressive approach to tackling anticompetitive pharmaceutical mergers.”

According to FTC Acting Chair, Rebecca Slaughter, the initiative was spurred by the “high volume of pharmaceutical mergers in recent years, amid skyrocketing drug prices and ongoing concerns about anticompetitive conduct in the industry.”

For pharma companies, this means preparing for the FTC — and other competition agencies — to take a more aggressive and searching approach when it comes to pharma mergers and acquisitions.

A shift in the FTC’s approach

Let’s briefly cover the merger review process before taking on how the new working group could affect future pharma mergers.

Under U.S. law, many pharma M&A deals must observe a mandatory 30-day waiting period before closing, which allows the FTC to investigate. Before the 30 days are up, the FTC can request additional information from the companies. Until they’ve provided the additional information and observed a second waiting period, they can’t close their deal. This gives the FTC time to decide what it will do: clear the deal unconditionally, attempt to block it through litigation in federal court, or negotiate a settlement with the companies, which usually involves “divesting” specific products to another company.

But pharma deals have rarely ended up in court, including the last two decades of multibillion dollar deals the FTC has investigated. For example, the FTC accepted settlements in the merger of Glaxo Wellcome and SmithKline Beecham, Pfizer’s buyout of Warner-Lambert, Bristol-Myers Squibb’s acquisition of Celgene, and numerous others.

Foreshadowing a change in approach, during the Trump administration, Commissioners Slaughter and Rohit Chopra criticized the FTC for allowing the Pfizer/Mylan, Allergan/AbbVie, and Bristol-Myers Squibb/Celgene deals to go through with what they considered inadequate settlements. They claimed that the FTC’s assessment focused too much on discrete competition between individual products. The commissioners advocated for a more thorough investigation of broader competitive harms, such as innovation and product portfolios, potentially seeking to block deals on those bases.

Going forward, instead of primarily focusing on competition in product-by-product overlap areas, we’ll likely see the FTC spend more energy investigating competition in broader therapeutic areas, including innovation competition.

Possible challenges

If the FTC finds that a deal would likely harm competition in an entire therapeutic area instead of a specific product, it would likely take a very large divestiture to resolve its concerns. Larger divestitures could include the transfer of more products, personnel, R&D capabilities, and/or manufacturing facilities to an independent third-party buyer in order to maintain the level of competition that existed pre-merger.

But more expansive divestiture settlements are more complicated and difficult to execute, especially if challenging technology transfers of manufacturing facilities are required. In a 2017 report, the FTC found that in 42 divestiture settlements between 2006 and 2012 involving a transfer of manufacturing capabilities, the buyer of the divested assets failed to replace lost competition in 35% of the cases. Based on this experience, the FTC may not accept a divestiture of an entire therapeutic area, even if a pharma company was prepared to offer it up.

Where there is no settlement offer the FTC finds acceptable, the agency does not have the final word — to stop a deal, it needs to challenge a merger in court. There haven’t been many court challenges of pharma deals, so it is uncertain how a more aggressive approach based on broader competition concerns would be received by a federal judge, or the extent to which pharma companies would ultimately be prevented from merging. All told, pharma companies looking to make acquisitions should gear up for tougher reviews ahead.

About the Author

Lisl Dunlop - Partner | Antitrust Practice Group