Review of mergersThresholds and triggers
What are the relevant thresholds for the review of mergers in the pharmaceutical sector?
The acquisition of a patent or exclusive licence may be subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act) reporting requirements if the value of the patent or exclusive licence meets the threshold requirements for pre-merger notification, and the transaction is not otherwise exempt.
The HSR thresholds include both a size-of-transaction and size-of-persons test. Under the size-of-transaction test, the threshold is met when a buyer acquires, or will hold as a result of an acquisition, voting securities, assets or non- corporate interests valued in excess of US$92 million. If the value of the transaction is greater than US$368 million, the transaction is reportable even where the size-of-persons test is not satisfied. Under the size-of-persons test, the threshold is met if one party to the transaction has at least US$184 million in annual sales or total assets and the other has at least US$18.4 million in annual sales or total assets. (These dollar values are for 2021; the dollar value of these thresholds is revised annually based on changes in the US gross national product.)
Is the acquisition of one or more patents or licences subject to merger notification? If so, when would that be the case?
In 2013, the Federal Trade Commission (FTC) implemented a new HSR rule that clarifies when the transfer of rights to a patent in the pharmaceutical sector is reportable under the HSR Act as an asset transfer and expands the application of the HSR Act to certain exclusive licences in the pharmaceutical sector. Specifically, the rule targets licensing agreements that transfer the exclusive use and sale of a patent but allow the licensor to retain manufacturing rights for that patent. Under the new rule, a transfer of ‘all commercially significant rights’ to a pharmaceutical patent is reportable if it otherwise meets the HSR Act’s size-of-transaction and size-of-person thresholds. ‘All commercially significant rights’ is defined as ‘the exclusive rights to a patent that allow only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area (or specific indication within a therapeutic area)’. Such a transfer now occurs even if the patent holder retains the right to manufacture solely for the recipient (licensee) or retains the right to assist the recipient in developing and commercialising products covered by the patent.
This patent transfer reporting rule applies only to the pharmaceutical sector, distinguishing it from other industries in the treatment of the transfer of exclusive licences where the transferor retains a right to manufacture. The new rule was upheld by the United States Court of Appeals for the District of Columbia in 2015 (Pharmaceutical Research and Manufacturers of America v FTC, No. 1:13-cv-01974 (DC Circuit 9 June 2015)).Market definition
How are the product and geographic markets typically defined in the pharmaceutical sector?
When defining a relevant pharmaceutical market, the Department of Justice (DOJ) and FTC (the Antitrust Agencies) focus on the nature of the transaction and specific products at issue. The ultimate question with respect to market definition is to what alternatives customers could turn to in the face of an attempted price increase by the merged firm. In the pharmaceutical sector, the relevant product market is sometimes defined by the illness or condition that the drug is approved to treat (eg, In re Pfizer and Pharmacia, FTC File No. 021-0192; one relevant market defined as drugs for treatment of erectile dysfunction). In other instances, the agency will define a market based on the particular mechanism by which the pharmaceutical works or the manner in which it is administered (eg, In the Matter of Novartis AG, FTC File No. 141-0141; two separate relevant markets defined for BRAF and MEK inhibitors, cancer treatment drugs that inhibit molecules associated with the development of cancer). Product markets in some cases have been limited to a specific drug and its generic substitutes, but even more commonly, solely to the generic form of a particular drug (eg, In the Matter of Teva Pharmaceutical Industries and Barr Pharmaceuticals, FTC File No. 081-0224).
The FTC has said that where a ‘branded drug manufacturer may choose to lower its price and compete against generic versions of the drug’, the brand ‘is a participant in the generic drug market’ (In the matter of Mylan Inc, Agila Specialties Global Pte Limited, Analysis of Agreement Containing Consent Orders to Aid Public Comment, FTC File No. 131-0112).
The Antitrust Agencies generally define the relevant geographic market in a pharmaceutical merger to be the United States as a whole because of the country’s regulatory scheme for drug approvals and sales.Sector-specific considerations
Are the sector-specific features of the pharmaceutical industry taken into account when mergers between two pharmaceutical companies are being reviewed?
The Antitrust Agencies apply the same substantive test to the analysis of a proposed merger, regardless of industry, with the Horizontal Merger Guidelines and the Vertical Merger Guidelines (the Merger Guidelines) providing the framework for the agencies’ review. As their names suggest, the Horizontal Merger Guidelines assist the Antitrust Agencies in evaluating mergers between companies at the same level of the market (eg, two manufacturers of a drug to treat the same condition), while the Vertical Merger Guidelines help the Antitrust Agencies review mergers between companies at different levels of the supply chain (such as between a producer of stem cells and a manufacturer of stem cell therapies). The agencies do, however, take the specific features of a market into account when analysing the competitive effects of a transaction, and the highly regulated nature of the pharmaceutical market is an important part of the analysis in a pharmaceutical transaction.
Entry that is timely, likely and sufficient to counteract anticompetitive effects can be a defence to the assertion that a merger will substantially reduce competition. Entry into the pharmaceutical industry can be time-consuming and expensive, however, because of the regulatory approval process for new drugs. Thus, the FTC generally has taken the position that de novo entry into a pharmaceutical product market will not be timely because of a combination of drug development times and Food and Drug Administration (FDA) approval requirements (eg, In the Matter of Hikma Pharmaceuticals plc, FTC File No. 1510198).
In reviewing mergers of generic pharmaceutical manufacturers, the FTC has taken into account the merging firms and their competitors’ ability to compete for new generics during the initial 180-day marketing exclusivity period. For example, in connection with Teva’s acquisition of Cephalon, the FTC required Teva to extend its supply agreement with Par, enabling Par to continue to compete during the initial 180 days, and to enter into a licensing agreement with Mylan to establish an independent competitor to Teva after the exclusivity period had ended (In the Matter of Teva Pharmaceuticals Industries Ltd and Cephalon Inc, FTC File No.111 0166).Addressing competition concerns
Can merging parties put forward arguments based on the strengthening of the local or regional research and development activities or efficiency-based arguments to address antitrust concerns?
US courts and the Antitrust Agencies generally do not take into account industrial policy arguments when considering whether a merger or conduct violates the antitrust laws. Evidence that a merger or other challenged conduct will create efficiencies that result in lower costs, improved quality or increased innovation, however, is typically relevant to the antitrust inquiry. Evidence of the pro-competitive benefits of the challenged conduct will weigh in favour of a finding of lawfulness.Horizontal mergers
Under which circumstances will a horizontal merger of companies currently active in the same product and geographical markets be considered problematic?
Under the agencies’ 2010 Horizontal Merger Review Guidelines, the focus of a merger analysis is whether the merger will ‘encourage one or more firms to raise prices, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives’. In reviewing a merger, the US Antitrust Agencies generally follow the 2010 Horizontal Merger Review Guidelines, which identify two types of potential anticompetitive effects: unilateral and coordinated.
Unilateral effects result from the elimination of competition between the two merging firms that allows the merged firm to unilaterally raise prices. The analysis hinges on the degree to which the products of the merging firms are reasonable substitutes for each other, and the agencies use a variety of indicia to assess their substitutability. Views of physicians, evidence of switching by physicians or patients in response to price or other factors and other evidence of head-to-head competition, such as competition for favourable placement on a payer’s formulary, may be relevant to the analysis. The more closely the products of the merging companies compete, the more likely it is that the merged firm will be able to profitably raise prices above competitive levels because sales lost because of a price increase will more likely flow to the merger partner. The agencies also rely heavily on the merging parties’ ordinary course documents for evidence of an anticompetitive rationale for a transaction.
Under a coordinated effects analysis, a merger may be anticompetitive if it facilitates coordination among competitors. A market is susceptible to coordinated conduct when a number of characteristics are present, including a small number of firms, observable actions of competitor firms, the possibility of quick responses by rivals to a firm’s competitive actions, a history of collusion, small and frequent sales in the market, and inelastic demand.
In Grifils/Talecris, the FTC alleged both unilateral and coordinated effects, stating that the combined company would be able to unilaterally increase prices without experiencing a reduction in demand. The FTC also alleged that the transaction would facilitate coordinated interaction between the combined company and other market participants because of the characteristics of the industry and the fact that there had been prior allegations of collusion in the industry (In the Matter of Grifils SA and Talecris Biotherapeutics Holdings Corp, FTC File No. 101-0153).
When reviewing a merger of two firms, the Antitrust Agencies will evaluate all the products marketed by both firms to determine whether there is an overlap, as well as the pipeline portfolio of each firm to determine whether the firms are developing any potentially competitive products. The agencies will consider problematic any merger that is likely to enable the merged firm to raise prices unilaterally in one or more relevant market or to facilitate coordination among the merged firm and remaining competitors in one or more relevant market.Product overlap
When is an overlap with respect to products that are being developed likely to be problematic? How is potential competition assessed?
An overlap between a currently marketed product and one in development can raise concerns where there are few substitute products either on the market or being developed by other firms, the product in development appears likely to receive FDA approval and the products are close substitutes for one another. For example, the FTC has challenged mergers where neither firm currently competes in a market, but both firms are viewed as future entrants (eg, In the Matter of Lupin Ltd, Gavis Pharmaceuticals Inc and Novel Laboratories Inc, FTC File No. 151-0202) (acquisition alleged to eliminate future competition in the market for a generic extended release capsule used to treat colitis where Gavis and Lupin were two of a limited number of suppliers capable of entering the market)). Both actual and potential competition are analysed using the framework of the Merger Guidelines.Remedies
Which remedies will typically be required to resolve any issues that have been identified?
The Antitrust Agencies have stated a strong preference for structural remedies (ie, divestitures) over conduct remedies that require monitoring. If a divestiture is required, the agencies will seek to ensure that the purchaser of the divested asset has everything needed to become an effective competitor. As a result, the divestiture of a complete business unit is generally preferred, and the agencies may require that the merging parties divest both tangible assets, such as manufacturing facilities, and intangible assets, such as research and development or intellectual property. The agencies have also mandated licensing arrangements in connection with a divestiture. For example, when resolving a monopoly maintenance case in a Stipulated Injunction, the FTC ordered Questcor to grant a divestiture buyer a royalty-free licence to develop the drug Synacthen. (See FTC Press Release, Mallinckrodt Will Pay $100 Million to Settle FTC, State Charges It Illegally Maintained its Monopoly of Specialty Drug Used to Treat Infants (18 January 2017).)
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12 May 2020.