United States: technology and pharmaceutical mergers

In summary

Enforcement priorities in the technology and pharmaceutical industries continue to be front of mind for antitrust enforcers at the US Department of Justice and the Federal Trade Commission. Bolstered by a supportive Democratic administration under President Biden, firms can expect intense scrutiny on deals in this space. In this article, we discuss trends and insights from recent merger review activities with specific focus on the impact on tech and pharmaceuticals companies.

Discussion points

• Unified antitrust reform and enforcement
• Public comments and forums influencing merger guidelines
• Retrospectives of recent pharmaceutical and life sciences merger remedies
• Merger enforcement trends for technology firms

Referenced in this article

• Department of Justice
• Federal Trade Commission
• Merger Guidelines
• ANI/Novitium
• Medtronic/Intersect ENT
• Nvidia/Arm
• FTC v Facebook

US antitrust enforcers are keyed into merger enforcement in the healthcare and technology industries

The Antitrust Division of the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) are as unified as ever in their goals to vigorously enforce anticompetitive mergers in the healthcare and technology industries.

Senior leadership of DOJ, led by Assistant Attorney General (AAG) Jonathan Kanter, remarked in spring 2022 that there is ‘no greater enforcement priority than safeguarding competition in the health care sector’^[1] and that there is ‘no more consequential topic in antitrust enforcement today than digital markets’.^[2]

FTC chair Lina Khan has largely echoed the DOJ’s sentiment, calling for increased scrutiny of potential killer acquisitions in the pharmaceuticals and technology sectors. Specifically, Chair Khan observed: ‘acquisitions that are made for the purpose of shutting down potential competitors may be relatively common in the pharmaceutical industry’ and ‘dominant technology firms’ are acquiring ‘emerging competitors . . . before they can fully emerge to be a threat’.^[3]

Mergers continue in these sectors despite the enforcers’ rhetoric signalling a more hostile environment for pharmaceutical and technology M&A activity. Achieving merger clearance will require careful navigation of an uncertain and ever-changing landscape with the enforcers pursuing new procedures and the implementation of new guidelines, questioning the efficacy of merger remedies and attempting to shape competition policy.

Merger guidelines expected imminently

In January 2022, in response to President Biden’s July 2021 Executive Order,^[4] the DOJ and FTC jointly announced an intention to ‘modernize’ the analytical framework used to assess mergers.^[5] The effort to revamp the merger guidelines has multiple dimensions and is expected to result in a publication of revised guidelines by the end of 2022.^[6]

One dimension of the Executive Order was the agencies’ joint publication of a request for information (RFI) to the public,^[7] which solicited feedback on a broad set of questions aimed at informing revisions to the merger guidelines to ‘strengthen enforcement against illegal mergers’ and combat ‘mounting concerns’ that ‘many industries across the economy are becoming more concentrated and less competitive’.^[8] The public responded with over 5,800 comments, ranging from individuals to non-profit corporations. Of the 1,900 published comments, most are from individuals but over 700 comments refer to ‘healthcare’, ‘health care’ or ‘pharmaceuticals’ and over 350 discuss ‘tech’ or ‘big tech’, with many condemning the consolidation found in these industries.^[9]

In parallel, the agencies jointly hosted listening forums, hearing from members of the public about the effects of mergers. These listening forums purported to influence and inform the revision of the merger guidelines and two of the forums were specific to the healthcare and technology sectors.^[10]

Feedback from the public and commentary from the DOJ and FTC over the first half of 2022 offer a glimpse into what the proposed merger guidelines will offer. In a press release announcing the FTC’s and DOJ’s RFI, for example, the FTC noted, among other areas of interest, focus on the impact of mergers on labour markets and buyer power.^[11]

There is broad consensus among agencies that mergers may harm competition in labour markets, in particular, even beyond the DOJ and FTC. A recent report from the US Department of the Treasury found that employer concentration and anticompetitive labour practices had led to lower wages for workers, with employers ‘us[ing] their market power to impose other costs on workers’, such as punishing work conditions and lack of opportunity for advancement.^[12] Commenting on the report, Chair Khan noted that one of her priorities was ‘investigating whether deals may harm workers in ways that prove unlawful’.^[13] Beyond labour and buyer power, the FTC press release also highlighted inquiries into digital markets and how to weigh ‘characteristics on zero-price products, multi-sided markets, and data aggregation’ in merger analysis.^[14]

And perhaps most significantly, the merger guidelines are expected to shift away from the ‘consumer welfare standard’, which has been the foundation of the agencies’ merger analysis for decades.^[15] At a high level, in the merger context, the agencies have utilised this standard to evaluate whether a transaction will harm consumers in any relevant market to assess competitive effects.^[16] The FTC’s website reflects this standard, noting that FTC staff will ‘investigate market dynamics to determine if the proposed merger will harm consumers’, such as by ‘higher prices, lower quality goods or services, or less innovation’.^[17]

AAG Kanter has been a leading critic of this standard, describing it as ‘a catch phrase, not a standard’.^[18] He has characterised the consumer welfare standard as not only lacking significance due to the absence of a consistent definition, but also as a non-comprehensive proxy to the ultimate question Congress has tasked the DOJ and FTC to enforce under Section 7 of the Clayton Act (ie, does a transaction ‘substantially lessen competition or tend to create a monopoly’?).^[19]

The logical inference of AAG Kanter’s remarks is that the merger guidelines will identify broader theories to establish a Section 7 violation that are homed in on potential harm to competition and the competitive process. These are sure to encompass traditional harms such as price increases and harm to innovation, but they also likely expand to relatively untested theories, including on effects on labour (eg, employee salaries and conditions) and privacy (eg, how data is provided, used and safeguarded).^[20]

Consistent with that view, Commissioner Rebecca Slaughter’s comments at a June 2022 workshop entitled ‘The Future of Pharmaceuticals: Examining the Analysis of Pharmaceutical Mergers’ emphasised the need to expand enforcement of pharmaceutical mergers by not limiting ‘enforcement to existing products and pipeline products’.^[21] Commissioner Slaughter called for considerations of how a pharmaceutical merger not only affects the incentives of the merging parties, but also how it affects the incentives of non-merging parties.

The scope of the revised guidelines remains to be seen, but is expected to position the DOJ and FTC to take more aggressive enforcement positions and result in an increased number of enforcement actions. Yet, courts will remain a core check and balance on enforcement actions that proceed to litigation because the guidelines will at a minimum be non-binding and at most be influential authority.^[22]

The persuasiveness of the merger guidelines to courts will hinge on how they ‘reflect judicial precedent’ and ‘incorporate sound developments in economic analysis’.^[23] Chair Khan has implicitly acknowledged the import of gaining the support of the judiciary, signalling that the government must be able to explain to and convince ‘courts why these guidelines reflect the market realities and how they’re grounded in the case law and letter of the law’.^[24]

DOJ and FTC, now at full strength, prepared ‘to go to court to block a deal’, questioning the efficacy of merger remedies

Soon after the introduction of the revised merger guidelines, the agencies will be targeting strategic cases in which to apply the new guidelines, seeking to influence and develop competition law and precedent. The DOJ and FTC have been unequivocally clear about their increased appetite to litigate mergers going forward. AAG Kanter voiced that the DOJ ‘should seek a simple injunction to block’ mergers likely to lessen competition.^[25] In a similar vein, Chair Khan expressed that the FTC will be ‘focusing [its] resources on litigating, rather than on settling’.^[26] The FTC is well-positioned to bring litigation with there being a reliable three Commissioner Democratic majority since the confirmation of Alavaro Bedoya in spring 2022.^[27] Commissioner’s Bedoya’s first few months in office signal alignment with Chair Khan’s positions on merger review, and therefore parties should expect aggressive enforcement tactics that could put them in the middle of a potentially lengthy court battle.

Underlying the agencies’ emerging litigious mindset is a collective DOJ–FTC perspective that the historic approach to merger review has been unsuccessful and resulted in failure to challenge ‘too many transactions that ultimately did substantially lessen competition and spur undue consolidation’.^[28] The agencies’ critique of historic practice also extends to transactions that involved negotiation with the agencies and resulted in settlements. AAG Kanter questioned the ability of the agencies to impose effective remedies that preserve competition and to ensure divestitures will ‘actually serve to keep a market competitive’ and noted that ‘will often mean [the DOJ] cannot accept anything less than an injunction blocking the merger – full stop’.^[29]

The remarks of Chair Khan and AAG Kanter suggest the agencies will enhance scrutiny of proposed remedies by merging parties in the face of a merger challenge and, in some cases, will reject remedies outright. Potential divestiture buyers that had involvement in generic drug price-fixing, in particular, are more likely to be disfavoured by the FTC as acceptable buyers.^[30] For some merging parties, this may result in an elongated merger review process. For others, however, this may result in expedited litigation with the reviewing agency.

These warning shots signalling a future increase in merger litigation should not be construed to only apply to pending mergers reported to the agencies pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act).^[31] They also apply to consummated transactions that were not reportable under the HSR Act and even those transactions that were reported.

The FTC in particular has been laser focused on the impact on competition from consummated transactions that were not required to be reported pursuant to the HSR Act. In September 2021, the FTC issued a report, which concluded that five major technology companies in the United States made over 800 transactions, in the aggregate, that were not reportable under the HSR Act over a 10-year period.^[32]

On the other hand, while exceedingly rare, merging parties should brace themselves for challenges to consummated transactions that went through the rigours of DOJ or FTC merger review, including the mandatory 30-day waiting period of the HSR Act.^[33] AAG Kanter participated in a June 2022 Organisation for Economic Co-operation and Development Competition Committee specific to ‘disentangling consummated mergers’.^[34] And Chair Khan has repeatedly admonished the 30-calendar-day waiting period of the HSR Act as an insufficient amount of time to analyse complex merger and warned of the FTC’s ‘authority and the ability to challenge consummations after the fact’.^[35]

A brief retrospective on pharmaceutical merger remedies and enforcement policies

While an increase in merger litigation appears likely, the agencies have left open willingness to consider divestitures to fix potentially problematic mergers on a case-by-case basis. And despite the strong rhetoric from the agencies, it remains likely that this willingness to engage with merging parties will remain. Many mergers ‘benefit consumers, our society, and our economy’.^[36]

Using its recent life sciences merger enforcement as a proxy for what the future holds, the FTC is likely to work with merging parties to accept remedies, albeit subject to policies implemented over the past year, some of which have been characterised as intended to deter mergers.^[37] Navigating this landscape requires managing strategic and timing considerations.

A consistent touchstone of FTC enforcement actions has been – and will continue to be – the FTC’s insistence on the merging parties and divestiture buyer or buyers accepting ‘prior approval’ provisions in the settlement papers, which would require the FTC to bless certain future transactions of these entities prior to consummation.^[38] In announcing the policy in October 2021, the FTC expressed that these provisions will be present in ‘all merger divestiture orders for every relevant market where harm is alleged to occur, for a minimum of ten years’ and left open coverage of ‘product and geographic markets beyond just the relevant product and geographic markets affected by the merger’.^[39] The broad articulation of this policy, however, has seen a narrower application in practice.

For example, in ANI Pharmaceuticals’ acquisition of Novitium Pharma, the FTC required the merging parties to divest certain generic drugs to a third party, where there was an overlap within their portfolios.^[40] As part of the final order, which was unanimously (4-0) approved, the merging parties agreed to seek and receive the prior approval of the FTC before acquiring products in certain markets.^[41] Notably, the FTC imposed narrower conditions on the divestiture buyer to that transaction, Prasco LLC.^[42] The final order only required Prasco to receive prior approval of the FTC for selling or licensing the products it acquired for a period of three years.^[43] After that three-year period, the prior approval provisions were applicable for an additional seven-year period, but only if the sale or license was to a buyer in an overlap area.^[44]

Where the agency and the merging parties are negotiating a divestiture remedy, one critical issue for the merging parties is timing to achieve an antitrust closing condition to the merger agreement, which is often expiry or termination of the HSR Act waiting period after the issuance of a request for additional information or second request. That procedural posture generally presents two paths to achieve antitrust clearance: (i) the waiting period expires 30 calendar days after the merging parties certify substantial compliance with the second request; or (ii) the agency grants ‘early termination’ of the waiting period.

The first path presents the most certainty for timing, but it comes with great cost and may be unnecessary where the merging parties reach an agreement with the agency on a suitable remedy. While the granting of early terminations has been ‘temporarily’ suspended under DOJ and FTC policy since February 2021, there is a notable exception to that policy where the parties have reached agreement with the agency on a remedy.^[45]

Medtronic’s acquisition of Intersect ENT reflects the availability of this path. On 9 May 2022, Intersect ENT announced in its Securities and Exchange Commission filings that the FTC granted early termination of the waiting period.^[46] This fact has not yet been reflected on either the FTC’s website^[47] (which purports to identify the last grant of early termination in July 2021) or in the Federal Register, but merging parties should be aware that early termination does in fact remain available in limited circumstances.

Another common touchstone of pharmaceutical mergers (although not limited to them) has been the FTC’s use of boilerplate ‘warning letters’.^[48] Shortly before expiry of the HSR Act waiting period, the FTC has selectively sent merging parties these letters, warning that the FTC’s ‘investigation remains open and ongoing’ and ‘if the parties consummate [the] transaction before the Commission has completed its investigation, they would do so at their own risk’.^[49] But enforcement has not transpired from at least 60 of these letters being sent over the past year.^[50] Commissioner Noah Phillips highlighted the hollowness of at least some of these letters identifying some matters in which no investigation ever began and stating that, of others, ‘the real investigation is over’. Chair Khan’s FTC will likely continue to utilise this tool in the toolbox and merging parties must plan accordingly.^[51]

Merger enforcement trends for technology firms

As focused as the DOJ and FTC have been on pharmaceuticals and the healthcare industry, they also appear eager and willing to continue targeting big tech and other technology transactions that could potentially stifle innovation or reduce potential competition in emerging technologies. In late 2021, the FTC sued to block US chip supplier Nvidia’s US$40 billion acquisition of UK chip design provider Arm Ltd.^[52] Per the FTC’s press release, the suit was filed to block the combined firm from stifling ‘innovative next-generation technologies’.^[53] Among other concerns, the FTC noted that the sharing of competitively sensitive information with Arm by Nvidia’s competitors could result ‘in a critical loss of trust in Arm’. The deal was a vertical integration where Arm licenses microprocessor designs to Nvidia and other companies to use in the manufacturing of smart phone, tables, data centres and other devices. The FTC’s block highlights an increasing focus that regulators are taking into transactions with vertical components. While previously, companies could rely on arguments that these deals created efficiencies and synergies beneficial to consumers, concerns on steering and the impact on research and development have brought scepticism to some of these tie-ups. Moving forward, companies should expect to be pushed on potential anticompetitive effects of data sharing and innovation as the agencies look to expand their merger enforcement toolbox on vertical deals.

Given the scope and scale of ‘dominant’ technology platforms, some have argued that breaks-ups of big tech should be available to enforcers as they grapple with how to review and assess mergers and conduct issues related to these players. What started in the FTC’s lawsuit to break up Facebook by unwinding its prior acquisitions of Instagram and WhatsApp has now gained wider traction in Congress. Earlier this year, Senator Elizabeth Warren introduced a bill providing the FTC and DOJ with the authority to reject ‘anticompetitive’ mergers without seeking a preliminary injunction in federal courts and that would extend the review period for mergers consummated since 1 January 2000.^[54] The DOJ endorsed that legislation in a letter obtained from the Wall Street Journal in which acting AAG Peter Hyun stated that the DOJ ‘views the rise of dominant platforms as presenting a threat to open markets and competition, with risks for consumers, businesses, innovation, resiliency, global competitiveness, and our democracy’.^[55]

The heightened scrutiny of tech and platform firms have important implications for how the DOJ and FTC may review a technology transaction. Big-named technology firms in front of the agencies for investigations into anticompetitive conduct will likely face increased scrutiny, even on deals without direct horizontal overlaps or deals posing purely vertical issues, as shown in the Nvidia/Arm transaction. Moving forward, deals such as these may survive scrutiny, but firms should expect more questions and longer timelines.

Conclusion

The focus on pharmaceutical and technology sectors continues to be top of mind for enforcers at the DOJ and FTC. That focus is now being coupled with an aggressive FTC chair who is using her Democratic majority to push through structural and procedural changes to the merger review process. With the Biden administration’s backing, Chair Khan, the Democratic commissioners, AAG Kanter and the DOJ’s Antitrust Division are joined by a cohort of progressive lawmakers encouraging heightened scrutiny and aggressive enforcement even as federal courts are quick to block and scale back novel theories of harm. How the upcoming November midterms will affect the momentum currently building remains to be seen. However, what is clear is that firms looking to transact in this regulatory climate should expect greater deal uncertainty and carefully consider the tools and mechanisms available to mitigate risk.

Notes