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US antitrust review of pharma M&A shifts to address drug pricing

With some of the largest acquisitions in pharmaceutical industry history in 2019 and a focus on anti-competitive behavior that drives up drug prices, the U.S. Federal Trade Commission signaled a shifting strategy on deal oversight, experts say.

The largest deal of 2019 — Bristol-Myers Squibb Co.'s $95 billion acquisition of Celgene — was delayed as the agency investigated an overlap in its immunology portfolio. The company was ultimately required to divest the arthritis and psoriasis drug Otezla for $13.4 billion to Amgen Inc. The divestiture was the largest ever required by the FTC or the U.S. Department of Justice involving a merger, according to the agency.

FTC Chairman Joseph Simons said at the time that antitrust laws are designed to protect competition and to promote innovation and development of new treatments. The agency determined that the merger would harm consumers in the U.S. by creating a monopoly.

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Former FTC Bureau of Competition Assistant Director Mike Cowie

Source: Dechert LLP

"The FTC has gotten stricter on divestiture analysis and divestiture policy, and that's across industries and certainly applies in the life sciences, as well," Dechert LLP partner Mike Cowie said in an interview.

Another delayed deal was Switzerland's Roche Holding AG's $4.3 billion acquisition of gene therapy specialist Spark Therapeutics Inc., which closed Dec. 17. The deal was originally announced in February with an April closure deadline. Due to antitrust concerns from the FTC and U.K. regulators, the deal was postponed several times.

Big pharma companies like Bristol-Myers and Roche are not the only entities in healthcare bearing the brunt of increased FTC scrutiny. Life sciences specialist Illumina Inc.'s planned $1.2 billion acquisition of Pacific Biosciences of California Inc. drew a complaint from the agency over concerns that the deal would allow Illumina to "unlawfully maintain its monopoly" in DNA sequencing.

Both the U.K.'s Competition and Markets Authority and the FTC have blocked the Illumina deal, with the U.S. agency sending the matter to the courts Dec. 17. Analysts believe the deal is unlikely to survive the complaints.

"The very, very heavy focus on drug pricing and healthcare pricing is causing FTC leadership to have to explain their decision-making," Cowie said at an October antitrust conference sponsored by Dechert. "We're seeing unprecedented political scrutiny of healthcare and life sciences M&A."

Cowie, who was assistant director of the FTC's Bureau of Competition under the George W. Bush administration, said the agency has shifted to a more thorough approach to examining anti-competitive behavior. The analysis process now also studies a company's entire portfolio, rather than just individual drugs or products.

Within those portfolios, the FTC looks with special interest at the number of competitors for each product, according to Cowie. For example, a merger causing a particular market to fall from four to three competitors would be a red flag.

"The consumer benefits from low prices and better access, but the consumer also benefits from innovation," Cowie said. "Sometimes there's tension between innovation and pricing, so the FTC's mission is to protect the consumer on both sides."

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One of the biggest changes to FTC policy for pharmaceutical mergers came in 2018 when the agency announced that merging companies would be required to divest marketed assets when a product in development would cause an overlap. The policy would place the development risk on the merging companies.

This is precisely the situation that Bristol-Myers fell into, leading to the sale of the blockbuster drug Otezla. The company has an investigational psoriasis therapy called BMS-986165 in its pipeline, which is in phase 2 development.

"The FTC has indicated a willingness to change their approach so that they've looked at competition based on a portfolio of products rather than individual drugs," Cowie said. "There continues to be debate about how to treat early-stage products or products that are still in the pipeline, but the FTC has shown a willingness to revise its analysis based on what it's seen in the marketplace."

Predictability

From an antitrust perspective, White & Case partner and antitrust litigator Eric Grannon said in an interview that the FTC review process has not changed materially in recent years and regulators, companies and attorneys know what to expect.

"In pharma, it's so predictable what the FTC is going to consider problematic that companies go into merger reviews with open eyes," Grannon said. "It's so predictable, in fact, that when parties propose a merger, they basically have an understanding of what they're going to get to keep and not keep."

Grannon said the FTC has not gone to court in recent memory to challenge a large pharmaceutical merger because companies often obtain a mutually acceptable arrangement before approaching a deal.

The Otzela situation, however, surprised industry analysts and insiders, and one former FTC official said the magnitude of the divestiture stood out as an example of changing priorities.

What can slow a review is the FTC's process of finding stakeholders to help in the examination of the true cost of the product. The agency often taps buyers of the product, including pharmacy benefit managers, purchasing organizations, hospital systems, drug wholesalers, and government programs and agencies like the Centers for Medicare and Medicaid Services for this portion of the review.

Grannon said left-leaning presidential candidates, if successful in the 2020 election year, could seek to disrupt the predictable FTC review process with new regulations in an effort to control drug prices.

Cowie encouraged companies to shape the deal's narrative early to get ahead of any merger delays or unexpected divestitures.

"You want a pro-competitive story, so you want to be able to explain that the combination will accelerate the introduction of new medicines," Cowie said. "If you know you have a problem, go in early with the solution and look at market shares drug by drug — finding a divestiture buyer early is one way to take time out of the process."