Pharma and mergers – future alignment of multinational competition issues?

Co-authored by Carolin Goldbeck

Those of you who follow this blog closely will remember that we touched upon the Pharmaceutical Merger Task Force, consisting of American and European regulators, in a short paragraph a while ago (here). Back then, we did not see any dramatic changes in the approach of competition authorities to assess mergers in the pharmaceutical sector. The Task Force has now published a summary report with observations and ideas which invites to take a second look. Here is what we found most interesting.

The Covid pandemic and the work to achieve a medical breakthrough has put the global pharmaceutical industry in the public eye. But even without the pandemic, it seems like the pharma industry already has its plate full of problems to solve. It is expected that the world population will further grow, people will get older and with it the number of chronic diseases will increase dramatically. So, demand for adequate health care and innovative solutions worldwide will stay high.

Financial and strategic investors will continue to look for interesting M&A targets, not the least in the small-cap segment. Global competition authorities have also recognized these developments and identified the need to adapt merger control rules accordingly. More drastically, FTC Chair Khan emphasized in her opening remarks of the workshop that creating the right competitive conditions in the pharmaceutical sector, is a “matter of life and death”.

Unsurprisingly, the workshop of the Pharmaceutical Merger Task Force – consisting of e.g. members of FTC, DOJ, European Commission, Canada’s Competition Bureau and the UK’s Competition and Markets Authority – did not come-up with a blockbuster solution for antitrust issues but rather gathered ideas and approaches towards certain problems which may play a role in the future. Here is an overview of the topics, observations and innovative ideas to tackle antitrust concerns we found most interesting (the full summary report can be found here).

Antitrust and innovation – more than protecting prices

As a general observation, the participants of the workshop found that the R&D intensity of the pharma industry is among the highest. However, according to one of the experts speaking at the workshop, more than 70 % of “new active substances” come from small pharmaceutical companies. So, creating huge firms is not necessarily in the interest of innovation as transactions in the past have shown.

But there is more: Firms with large product portfolios could, allegedly more than in other industries, engage in a cross-market strategy of leveraging certain major products to achieve preferred status for all their products. Economies of scale could not always outweigh the risk of lower innovation and higher drug prices for patients worldwide.

Presumption of harm for blockbuster deals?

In light of these special circumstances, some participants raised that the normal tools of merger control could not be sufficient to tackle some of the concerns. As such, for some sorts of mergers a presumption of harm should apply.

For instance, it was suggested reversing the burden of proof for mergers of two large “originator firms” (i.e. in the top decile of US sales). In practice, this would mean that the parties of those mergers would need to demonstrate that their merger does not raise antitrust concerns. Similarly, mergers should also face special scrutiny if they involve blockbuster or must-have products, as the standard market review may not be sufficient in these cases.

Mergers under the radar

The participants further stressed that only a fraction of transactions is examined as many do not meet the threshold criteria that typically trigger antitrust scrutiny. Sounds familiar?

EC representatives again advocated (we previously reported on this here) for increased use of the referral mechanism under Art. 22. By way of a reminder, following Illumina/Grail, the EC now has the power to review transactions following referral by a Member State even if the transaction is not notifiable under national merger control law. With a view to the US, it was noted that the FTC recently re-implemented so-called consent decree provisions that require parties to seek prior approval or provide notice of certain transactions, including those that are not notifiable under the US merger control regime.

Crystal ball or second look?  

In hindsight, you always know better, right? So why not establishing a “second look” merger control? By this, some voices suggest establishing a system of post-merger review to ensure that past decisions had the intended results and to improve future evaluations. Rather than relying on assumptions of what will happen after a merger, the second look system could ensure that past decisions had the intended results and therefore improve future evaluations. Especially the occurrence of repeated small mergers should be considered (the German legislator is currently thinking in a similar direction).

Outlook

Going through the topics discussed during the workshop, it is striking that many of the topics currently most debated in the antitrust sphere also seem to relate to the pharma sector. From new theories of harm concerning innovation, over killer acquisitions and acquisitions not caught by merger control regimes, to post-merger-control, all of these topics seem to cumulate in pharma.

It is important to reemphasize that the ideas mentioned in the summary report should be understood as such. But in any case, it will be interesting to see in which legislative initiatives the ideas of this Pharmaceutical Merger Task Force will be taken into account, and which results they may achieve.

Co-author Carolin Goldbeck studied law in Freiburg and Linköping (and currently works at ROCAN as a trainee lawyer)