US FTC pharma merger workshop

On June 14 and 15, the US Federal Trade Commission (FTC) hosted a virtual workshop focused on the future of antitrust enforcement of pharmaceutical mergers. While the workshop was attributed to the FTC's Multilateral Pharmaceutical Merger Task Force, the FTC did not commit to any formal positions. Instead, the input of several FTC personnel, other federal, state and foreign enforcers and a variety of antitrust academics suggested that the Task Force likely will consider new ways to evaluate pharmaceutical mergers that (1) involve further in-depth consideration of transactions with nascent competitors, (2) more actively consider potential harm to innovation competition and (3) treat firms with a "history of bad conduct" with more scrutiny.

Industry concentration and transaction sizes

The FTC's first panel addressed consolidation in the pharmaceutical industry, but worry about the implications of high concentration was a theme throughout the workshop. Panelists expressed concerns that large companies were able to increase prices by leveraging their wide product portfolios in negotiations with Pharmacy Benefit Managers (PBMs) and tie access and rebates on their major products to having preferred status on all of their products. Patricia Danzon, a professor at The Wharton School, University of Pennsylvania, advocated for establishing a presumption of harm when two large originator firms merged and treating mergers between midsize firms with heightened scrutiny. Senator Amy Klobuchar's bill S.225, Competition and Antitrust Law Enforcement reform Act of 2021 proposes using a similar burden-shifting methodology. But panelists were not only concerned with mergers between large firms. Some panelists argued that large firms were keeping the industry concentrated by acquiring smaller firms before those firms could grow into capable competitors. Some panelists expressed concerns that current HSR reporting thresholds allow many of these transactions with smaller firms to close without the FTC being notified and that the government may need to implement different reporting rules in order to ensure that it is reviewing these acquisitions.

Innovation competition

Commissioner Rebecca Kelly Slaughter's keynote address repeated her longstanding advocacy that the FTC should broaden the scope of its enforcement to ensure that mergers do not harm innovation competition. Every panel discussed mergers' effects on innovation and the FTC's third panel focused entirely on innovation competition. Some panelists, including attorney advisor to Commissioner Slaughter, Caroline Holland, expressed concerns that the current merger guidelines do not lay out a proper framework for addressing potential harms to innovation and that the guidelines may need to be updated. Panelists argued against the idea that scale drives innovation. Some pointed out that new drugs are increasingly being researched by small firms rather than large firms and others argued that some of the efficiencies touted by merging firms during the merger review process are actually restrictions on innovation. For example, merging firms tend to eliminate parallel research pipelines, but some panelists argued that parallel development was an important component of the innovation competition.

Remedies

The workshop spent a significant amount of time discussing the FTC's remedies in merger settlements. Some panelists, like the president of the American Antitrust Institute Diana Moss, thought that seeking settlements and divestitures was not enough on its own and that the FTC needed to block some pharmaceutical transactions outright. But one panelist suggested that current divestitures could be improved by supplementing the structural remedies with specific conduct requirements. For example, the FTC could seek to preserve innovation by ensuring that some research within the merged company was able to be conducted autonomously.

Prior bad conduct

Some panelists like Gwendolyn Cooley, Wisconsin Assistant Attorney General for Antitrust and the current chair of the National Association of Attorneys General Multistate Antitrust Task Force, argued that the FTC should be more wary of firms that have a history of bad conduct in the pharmaceutical industry. For example, panelists urged that if a firm had lost litigation accusing it of engaging in pay-for-delay, sham litigation, or price-fixing, the FTC should consider those losses and be less likely to allow a merger involving that firm to go forward. Additionally, panelists argued that the FTC should be skeptical of allowing these companies to act as divestiture buyers.

Going forward

The FTC has already taken action in the pharmaceutical sector following the workshop. On June 16, the Commission announced its intent to increase enforcement against rebates and fees paid by drug manufacturers to PBMs and other intermediaries that may incentivize those customers to steer patients to higher-cost drugs over less expensive alternatives. Rebate structures and their potential to exclude smaller pharmaceutical companies was one of the topics discussed on the first day of the FTC's workshop. Going forward, the FTC may consider taking action in the following areas:

• Increasing the scope of Second Requests to spend more time analyzing merging firms' bargaining power with PBMs and other customers
• Updating merger and acquisition notice requirements to include smaller products and nascent competitors
• Increasing the scope of Second Request reviews and remedies to include more developing products and research pipelines instead of existing competitive products
• Treating acquisitions to a higher standard of scrutiny when one or both companies have been successfully sued for anticompetitive behavior in the pharmaceutical industry and
• Treating potential divestiture asset buyers with greater scrutiny when those buyers have been successfully sued for anticompetitive behavior in the pharmaceutical industry

If you have any questions about the FTC's review of pharmaceutical mergers or its enforcement policy statement, Norton Rose Fulbright's antitrust team stands at the ready to assist you.