M&A: US Gov’t Proposes New Rules on Regulating Mergers and Acquisitions
In what could have a chilling effect on deal-making in the bio/pharma industry, the US Federal Trade Commission and the US Department of Justice issued draft guidelines outlining their review of mergers and acquisitions to determine compliance with federal antitrust laws. Will the mega-deal become a deal of the past?
Proposed guidelines in line with recent scrutiny of pending bio/pharma M&A
This week (July 19, 2023), the US Federal Trade Commission (FTC) and the US Department of Justice (DOJ) released a draft update of their Merger Guidelines, which describe and guide the agencies’ review of mergers and acquisitions (M&A) to determine compliance with federal antitrust laws. The goal of this update is to better reflect how the agencies determine a merger’s effect on competition and evaluate proposed mergers under the law. The agencies are seeking input through a public comment period that will last 60 days and end on September 18, 2023.
The draft rules are now in the proposal stage, but the increased scrutiny by the FTC of proposed M&A can already be seen in the bio/pharmaceutical industry with the industry’s two largest recent deals, Amgen’s pending $27.8-billion acquisition of Horizon Therapeutics, a Dublin, Ireland-headquartered bio/pharmaceutical company specializing in rare diseases, and Pfizer’s pending $43-billion acquisition of Seagen a Bothell, Washington-based bio/pharmaceutical company specializing in antibody-drug conjugates (ADCs) and drugs for oncology.
In May (May 2023), the FTC announced it was suing Amgen to block its acquisition of Horizon Therapeutics on the grounds that the acquisition would create a concentrated position in two disease areas: thyroid eye disease and chronic refractory gout. The companies had announced the acquisition in December 2022. The FTC filed the lawsuit in federal court to block the transaction, saying it would enable Amgen to use rebates on its existing blockbuster drugs to pressure insurance companies and pharmacy benefit managers (PBMs) into favoring two Horizon products: Tepezza (teprotumumab-trbw) for treating thyroid eye disease and Krystexxa (pegloticase) for treating chronic refractory gout. Tepezza is Horizon’s best-selling drug with 2022 sales of $1.965 billion, and Krystexxa (pegloticase) is the company’s second best-selling drug with 2022 sales of $716 million. The FTC raised concerns that the acquisition of those products would enable cross-market bundling, which involves conditioning rebates (or offering incremental rebates) on products in exchange for giving drugs preferred placement on insurers’ and PBMs’ lists of covered medications in different product markets. The FTC said that such cross-market bundles may make it difficult, if not impossible, for smaller rivals who are developing drugs to compete against Tepezza and Krystexxa to match the level of rebates that Amgen would be able to offer. Amgen disputes the FTC’s concerns over potential cross-market bundling.
For Pfizer and Seagen, the companies first announced the $43-billion acquisition of Seagen by Pfizer in March 2023. They later received a second request for additional information from the FTC in mid July (July 2023). Seagen reported in its most filing (July 14, 2023) with the US Securities and Exchange Commission that it still expects the merger to be completed in late 2023 or early 2024, subject to the fulfillment of customary closing conditions, including receipt of required regulatory approvals,
FTC’s proposed merger guidelines
The draft proposal by the FTC and DOJ includes 13 guidelines with a principal theme on how M&A should not increase market concentration. The draft guidelines are outlined below.
Guideline 1: Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets. Concentration refers to the number and relative size of rivals competing to offer a product or service to a group of customers. The agencies examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. If so, the agencies presume that a merger may substantially lessen competition based on market structure alone.
Guideline 2: Mergers Should Not Eliminate Substantial Competition between Firms. The agencies examine whether competition between the merging parties is substantial since their merger will necessarily eliminate competition between them.
Guideline 3: Mergers Should Not Increase the Risk of Coordination. The agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable, and the agencies will presume that the merger may substantially lessen competition. In a market that is not yet highly concentrated, the agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest.
Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market. The agencies examine whether, in a concentrated market, a merger would (1) eliminate a potential entrant or (2) eliminate current competitive pressure from a perceived potential entrant.
Guideline 5: Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete. When a merger involves products or services rivals use to compete, the agencies examine whether the merged firm can control access to those products or services to substantially lessen competition and whether they have the incentive to do so.
Guideline 6: Vertical Mergers Should Not Create Market Structures That Foreclose Competition. The agencies examine how a merger would restructure a vertical supply or distribution chain. At or near a 50% share, market structure alone indicates the merger may substantially lessen competition. Below that level, the agencies examine whether the merger would create a “clog on competition…which deprives rivals of a fair opportunity to compete.”
Guideline 7: Mergers Should Not Entrench or Extend a Dominant Position. The agencies examine whether one of the merging firms already has a dominant position that the merger may reinforce. They also examine whether a merger may extend that dominant position into new markets, thereby substantially lessening competition in those markets.
Guideline 8: Mergers Should Not Further a Trend Toward Concentration. If a merger occurs during a trend toward concentration, the agencies examine whether further consolidation may substantially lessen competition or tend to create a monopoly.
Guideline 9: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the agencies consider the cumulative effect of the pattern or strategy.
Guideline 10: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The agencies consider the distinctive characteristics of multi-sided platforms carefully when applying the other guidelines.
Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers. The guidelines protect competition among buyers and prohibits mergers that may substantially lessen competition in any relevant market. The agencies, therefore, apply these guidelines to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 12: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. Acquisitions of partial control or common ownership may in some situations substantially lessen competition.
Guideline 13: Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly. The guidelines are not exhaustive of the ways that a merger may substantially lessen competition or tend to create a monopoly in another market.