Innovation Industries: The hot topic in global life sciences merger control
1. Overview
Mergers and acquisitions in innovation industries, and in particular in the life sciences sector, have experienced increased regulatory scrutiny and public debate in recent years. 2022 was marked by the whirlwind of regulatory and legal activity arising out of regulators contesting Illumina, Inc.’s acquisition of GRAIL, Inc. in two key jurisdictions, the European Union and the United States, shining a light not only on theories of harm in life sciences mergers but also on the European Union’s jurisdictional approach to mergers in innovation industries.
In the US, on 16 May 2023, the US Federal Trade Commission (FTC) filed a lawsuit seeking to prohibit Amgen, Inc.’s takeover of Horizon Therapeutics plc – a deal valued at USD 27.8 billion. The FTC’s action has caused a widespread outcry from the pharmaceutical industry, with some commentators stating that the FTC’s lawsuit marks a tidal change in the approach to merger scrutiny in the U.S. pharmaceutical sector.
In the UK, the acquisition of Spark Therapeutics by Roche Holdings in 2019 received significant attention due to the UK’s Competition and Markets Authority’s (CMA) expansive approach to its jurisdiction over mergers. More recently, the acquisition of Oticon Medical by Cochlear was scrutinised by Australian and UK regulators as well as the European Union, again shedding further insight on regulators’ jurisdictional and substantive approaches in life sciences transactions.
The two hot topics emerging from these recent acquisitions are first, the question of how such mergers have been assessed by regulators in terms of theories of harm, and second, the increased risk of regulatory intervention in jurisdictions that have lowered the bar in terms of jurisdictional thresholds.
2. Theories of harm in innovation industries
Three recent transactions scrutinised by competition authorities in the US, EU, UK and Australia shed light on the competition concerns arising in mergers and acquisitions in innovation industries. Illumina/GRAIL concerns a vertical merger, Amgen/Horizon a conglomerate merger and Oticon/Cochlear primarily a horizontal merger.
Illumina/GRAIL
From the announcement of Illumina’s proposed acquisition of GRAIL, a manufacturer of certain multi-cancer early detection tests (MECD tests) for USD 7.1 billion in early 2021, the acquisition was investigated by both the FTC and the European Commission. Skipping over a rollercoaster ride of procedural steps in both jurisdictions for now, the below analysis focuses on the theories of harm developed by the European Commission and FTC, leading to the prohibition of the acquisition by the Commission in September 2022[1] and an FTC order requiring Illumina to divest GRAIL in March 2023.[2] Both decisions are under appeal.
The EU and US regulators specifically took issue with the vertical integration of GRAIL with Illumina. Illumina is the unrivalled supplier of next-generation sequencing (NGS) technology on which companies offering and developing MECD tests, including GRAIL, crucially depend.
The European Commission thus pursued a foreclosure theory of harm alleging that following the integration of GRAIL into its business, Illumina would be able and incentivised to restrict access to its NGS technology on which GRAIL’s competitors in the MECD market depend. The MECD market was found to be highly innovative and indeed marked by an innovation race between GRAIL and its competitors, and to have potential for significant commercial exploitation in the future.
As regards Illumina’s ability to foreclose GRAIL’s rivals, the European Commission noted that Illumina’s NGS technology is an indispensable input on the MECD market and that no credible alternative suppliers of NGS technology apart from Illumina exist at present nor in the short to medium term. The European Commission also cited significant barriers to entry, including the risk of prolonged patent litigation against rival NGS suppliers as well as significant costs of switching NGS suppliers.
The European Commission also found that Illumina would have “clear incentives to foreclose GRAIL’s rivals”.[3] While NGS-based MECD technology is a nascent industry, it is expected to be a EUR 40 billion market by 2035. Given the ongoing innovation race between GRAIL and its competitors, Illumina would have a strong incentive to foreclose GRAIL’s rivals even though the benefits of doing so would only materialise in the future.
As such, the merged entity would have both the ability and incentive to stifle innovation on the market for MECD tests and to remove competitive threats to GRAIL’s own MECD research, technology and future commercial exploitation. These concerns were largely reiterated by the FTC in its opinion of 3 April 2023, which supports its order requiring Illumina to divest GRAIL.[4]
Both the European Commission and FTC were dismissive of the parties’ proposed remedies. According to the regulators, the remedies insufficiently removed the merged entity’s ability and incentive to foreclose the MECD market to GRAIL’s competitors. The regulators were left unconvinced that a commitment to licence some of Illumina’s NGS patents and to refrain from certain patent litigation would result in the emergence of a credible competitor on the NGS market in the short to medium term. In particular, the patents proposed to be covered are due to expire shortly anyways and only reflect a small portion of patents shoring up Illumina’s NGS technology. The commitments also did not remove other barriers to entry, such as significant switching costs. Further, a commitment to provide access to Illumina’s NGS technology to GRAIL’s rivals on standard terms was found lacking as it would not prevent Illumina from, for example, degrading its technical support for NGS services, or to provide GRAIL with preferential treatment (evidence of this already happening was cited by the FTC). Lastly, the Commission found that such behavioural commitments were difficult to monitor and accordingly ordered the divestment of GRAIL.
As a result, vertical mergers between a dominant supplier into an innovation market and an innovation business in that market are likely to continue to receive intense regulatory scrutiny on both sides of the Atlantic. Parties will have to consider very carefully any potential remedies they may wish to propose to ensure that regulators’ concerns about vertical foreclosure effects are fully addressed.
Amgen/Horizon
On 16 May 2023, the FTC announced that it filed a lawsuit in federal court to block the planned acquisition of Horizon Therapeutics plc by Amgen Inc.[5] In short, the FTC is concerned that Amgen would leverage its large portfolio of blockbuster drugs to entrench Horizon’s monopoly position in respect of two medications for the treatment of thyroid eye disease and chronic refractory gout.
Amgen is a large biopharmaceutical company with a portfolio of 27 approved drugs, of which Enbrel, Toezla and Prolia are considered blockbuster drugs. Horizon, a much smaller Dublin-based biopharmaceutical company, distributes 11 drugs in the US, including Tepezza and Krystexxa, which face limited to no competition.
While there are no horizontal overlaps between Amgen and Horizon, the FTC is concerned about conglomerate effects arising from combining the companies’ blockbuster drugs to entrench respective (near) monopolies. Specifically, the FTC cites a history of Amgen cross-bundling its blockbuster and other drugs, including by using conditional rebates, to ensure preferential treatment of its drug portfolio by insurers’ and PBM’s lists of covered medications. The FTC fears that Amgen would use the same strategy to entrench Horizon’s Tepezza and Krystexxa, raising barriers to entry for competitors (who are less likely to benefit from cross-subsidies via rebates on portfolios of drugs) thereby lessening competition and innovation on the market for the treatment of thyroid eye disease and chronic refractory gout. Amgen would allegedly be incentivised to do so given how central Tepezza and Krystexxa sales are to the deal valuation. This deal, and the FTC’s lawsuit, has received significant attention as such a bundling theory of harm has not previously been pursued by the FTC in challenging a proposed acquisition.
The FTC stated that “[r]ampant consolidation in the pharmaceutical industry has given powerful companies a pass to exorbitantly hike prescription drug prices, deny patients access to more affordable generics, and hamstring innovation in life-saving markets” adding that the FTC “won’t hesitate to challenge mergers that enable pharmaceutical conglomerates to entrench their monopolies at the expense of consumers and fair competition.”[6]
Responding to the FTC’s lawsuit, Amgen stated its disappointment with the FTC’s decision, reasoning that the deal “will bring significant benefits to patients suffering from very serious rare diseases in the U.S. and around the world.”[7] In the same statement, Amgen confirmed that it had offered commitments not to bundle[8] Horizon’s products with its existing portfolio to alleviate the FTC’s concerns prior to the FTC initiating proceedings.
The prospect of increased antitrust scrutiny in respect of pharmaceutical mergers beyond an assessment of horizontal effects has raised concerns among investors in an industry where vertical and conglomerate mergers are commonplace.[9] It remains to be seen whether the novel bundling theory of harm will find much traction with the federal courts in the United States – if so, it could be a real game changer in the scrutiny of pharmaceutical mergers, with the potential of the theory of harm spilling over into other, similarly structured industries.
Oticon/Cochlear
While vertical concerns dominate the review of the Illumina/GRAIL and Amgen/Horizon acquisitions, the proposed merger between Cochlear Limited and Oticon Medical – two big players in the hearing implant industry – predominantly raised more traditional horizontal concerns. While the deal is pending review by the European Commission and the Australian Competition & Consumer Commission, it is the UK’s CMA that has already published its provisional findings of concerns in the context of a Phase II investigation.[10]
Both parties supply bone conductive solution (BCS) products on the market for hearing implants. In particular, the parties are the only suppliers of passive BCS products in the UK and Cochlear is the largest, of two, suppliers of active BCS products, whereas Oticon has a rival active BCS product in development. The CMA estimates that both parties, following the merger, would have a 90% market share of the supply of BCS products in the UK, giving rise to the following concerns:
(a) A reduction of consumer choice due to the decrease in suppliers of BCS products (of which the parties are two of three); and
(b) Reduced quality and innovation and higher prices due to the loss of competitive pressure.
While discussions between the CMA and the parties remain ongoing in respect of remedies, it appears that structural remedies, as opposed to behavioural ones, will be required to alleviate the CMA’s concerns.[11]
The transaction is a reminder that despite the increased attention given to innovation concerns in vertical and conglomerate mergers, horizontal overlaps between the parties perhaps most obviously lead to a potential loss of competition in innovation, particularly in highly concentrated markets.
Conclusions on theories of harm
The respective cases highlight an increased scrutiny of life-sciences, and in particular healthcare and pharmaceutical mergers, from a loss of innovation point of view. Each of the three cases discussed raises different foreclosure concerns: Illumina/GRAIL concerns a vertical merger giving rise to fears of the upstream business being incentivised, and able, to foreclose downstream competition. Amgen/Horizon concerns a conglomerate merger that may raise barriers to entry in certain portfolio drug markets, entrenching monopoly positions, raising costs for competitors and disincentivising competition in these markets. Oticon/Cochlear concerns horizontal overlaps between two rivals expected to significantly reduce innovative pressures by eliminating an important competitor.
Amgen/Horizon is an especially critical development, given the theory of harm – bundling – being unprecedented in U.S. merger control. The case, if successfully pursued by the FTC, may mark a turning point for U.S. merger control. What is clear is that innovation is now part and parcel of regulators’ rulebooks in assessing mergers in dynamic innovation markets.
3. Expansive jurisdiction in the UK and Europe
While conglomerate and vertical theories of harm have long been part of European regulators’ arsenal in assessing mergers and acquisitions, regulatory scrutiny in Europe has recently expanded via another means: jurisdiction. Competition authorities’ jurisdictional thresholds in Europe primarily focus on turnover, assets and market shares (or in the case of the UK, shares of supply). From a regulators’ perspective, the concern has arisen that in highly innovative and dynamic industries such a life sciences and digital markets, potential future competitors and market disruptors may be picked off by established market players at the development stage of their products, prior to products being marketed and turnover, asset or market share thresholds being crossed by the target entity.
In the UK, the CMA’s investigation of the acquisition of Spark Therapeutics by Roche in 2019[12] proceeded on novel jurisdictional grounds: while Spark Therapeutics did not generate any UK revenues as its drugs were still in the clinical development stage, the CMA considered that Spark Therapeutics was nevertheless active in the supply of treatments for haemophilia A. Questionably, this was based on (i) Spark Therapeutics’ R&D activities and number of UK based research employees, and (b) the parties’ patent procurement for the treatment of haemophilia A in the UK. Overall, the CMA considered that the acquisition would lead to an increment of 5-10% in the supply of novel haemophilia A treatments to about 40-50%, beyond the 25% threshold applied by the CMA for jurisdictional purposes. While the deal was ultimately cleared, parties to mergers in innovation industries should not rely on the fact that one party does not yet market a product that remains in development in ruling out the United Kingdom as a jurisdiction in which to notify the transaction.
On the European level, Illumina/GRAIL is also of interest in that the transaction was not notified in the European Union, nor in any Member State of the EU, on the basis that the parties did not meet the turnover based jurisdictional thresholds for notification anywhere in the EU. Nevertheless, using the Article 22 EUMR procedure, the EU asked several Member States to refer the transaction to the European Commission for review. Article 22 provides that if a merger or acquisition affects trade between Member States and threatens to significantly affect competition within a Member State’s territory, that Member State may refer the transaction to the European Commission for review. Crucially, prior to to the Illumina/GRAIL referral, it was widely assumed that the referring Member State itself had jurisdiction to review the transaction, although historically it is worth remembering that Article 22 was included in the EU Merger Regulation to allow for EU review on a referral up where some Member States had not yet developed their own merger control regimes.
The European Commission subsequently accepted jurisdiction over the transaction and the parties’ appeal to the European Union’s General Court challenging jurisdiction on the basis that the referring Member States themselves did not have jurisdiction to review the transaction failed.[13] The judgment of the General Court has been appealed to Europe’s top court, the European Court of Justice and judgment by the European Court of Justice is pending. The same procedure was used to establish the European Commission’s jurisdiction in the Oticon/Cochlear merger which is presently pending before the European Commission.[14]
The European Commission recently issued guidance in respect of the application of Article 22 EUMR. The guidance states that “in sectors such as pharmaceuticals and others where innovation is an important parameter of competition, there have been transactions involving innovative companies conducting research & development projects and with strong competitive potential, even if these companies have not yet finalised, let alone exploited commercially, the results of their innovation activities.” Noting that certain such transactions have escaped scrutiny in the past, “the Commission intends, in certain circumstances, to encourage and accept referrals in cases where the referring Member State does not have initial jurisdiction over the case.”[15]
Conclusions on jurisdictional approaches
European regulators are increasingly concerned that potentially harmful transactions in dynamic innovation markets escape their scrutiny on the basis that the target company’s commercial exploitation of its innovation activities has not commenced prior to the acquisition. The new approach to Article 22 EUMR, if confirmed by the European Court of Justice, is expected to result in a number of referrals of life sciences mergers that have previously escaped scrutiny by competition authorities on the basis of jurisdictional thresholds not being met. Parties to transactions in innovation markets are increasingly required to look beyond the formalistic application of jurisdictional threshold metrics and undertake a preliminary analysis of potential substantive competition concerns resulting from the acquisition or merger.
4. Concluding comments
Life sciences transactions reveal the tensions at work in the assessment of potential pro- and anticompetitive effects of acquisitions in highly innovative industries that are subject to often significant competitive restraints arising inter alia out (near) monopolies due to the protection of patents and IP rights, network effects and economies of scale, and significant barriers to entry due high research and development costs. Such acquisitions are also politically charged given the enormous public (and private) expenditures especially in the healthcare industry and the pressure to provide affordable healthcare while making strides in the development of new drugs and treatments.
Given the increased level of scrutiny, novel applications of theories of harm, and the lowering of jurisdictional thresholds, parties in the life sciences industry are well advised to carefully consider their acquisitions from a merger control point of view. Given the potentially significant delays caused to transaction timetables by regulatory investigations, sufficient provisions should be made in the transaction plans and agreements: Amgen and Horizon only gave themselves to the end of the year to close the transaction, but its merger control woes may only just be beginning.
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References:
[2] Federal Trade Commission, Opinion in the matter of Illumina, Inc. and GRAIL, Inc., 3 April 2023.
[4] Federal Trade Commission, Opinion in the matter of Illumina, Inc. and GRAIL, Inc., 3 April 2023.
[8] In Amgen’s words: “offer a multi-product discount”.
[9] Reuters, “FTC effort to stop Amgen’s Horizon takeover faces uphill fight”, 19 May 2023.
[11] See Cochlear’s response to the CMA Notice of possible remedies dated 4 May 2023: https://assets.publishing.service.gov.uk/media/645e05cbad8a03000c38b377/Cochlear_Response_to_Notice_of_Possible_Remedies.pdf
[12] CMA, Roche Holdings, Inc./Spark Therapeutics, Inc., Decision of 16 December 2019.
[13] Case T-227/21, Illumina v Commission, ECLI:EU:T:2022:447, Judgment of 13 July 2022
