Antitrust & Competition Quarterly Updates
Our quarterly series provides analysis and commentary on antitrust developments in technology, life sciences, and healthcare.
Despite the aggressive rhetoric, the change in the leadership and composition at the U.S. Federal Trade Commission (FTC) did not result in more enforcement in 2021. As the calendar turned to 2022, the FTC seems to be stepping up its enforcement track record in the life sciences sector. There are some high level observations relevant to future dealmaking:
- While there is a sense that otherwise “easy” transactions might be getting more scrutiny during the HSR waiting period, the enforcement actions have focused on deals that likely would have been reviewed in a similar way in prior administrations;
- The enforcement actions have been in generics and dialysis clinics, two areas that have been in the FTC’s crosshairs for a long time;
- There has not been a challenge to any transaction involving a “big pharma” acquisition or license of any innovative biotech companies; and
- The consent decrees reflect some of the policy initiatives of the antitrust agencies, including curbing non-competes and requiring that merging parties report future transactions even where a filing under the Hart-Scott-Rodino Act might not be required, and submit to an FTC “approval” process for the same.
Signs of Normalcy: Pfizer/Arena Cleared, but will CSL/Vifor?
It is worth starting with what has not changed. Even amid some strong pro-enforcement rhetoric, there are still signs that not every transaction presenting a material issue will be pushed into a Second Request.
In December 2021, Pfizer reached an agreement to acquire Arena Pharmaceuticals in a $6.7 billion transaction. The crown jewel of the acquisition was Arena’s etrasimod, a promising oral S1P receptor modulator in development for a range of immuno-inflammatory diseases. Although Pfizer does not have a competing S1P asset, etrasimod presented a potentially significant overlap with Pfizer’s blockbuster Xeljanz, a JAK inhibitor with many of the same indications.
While the proposed transaction could have justified a prolonged investigation through a Second Request — to check whether it fits within the FTC’s “killer acquisition” framework — the FTC cleared the deal in March 2022 after the parties gave the agency an additional 30 days to review by pulling and refiling the HSR. In many ways, this clearance is a positive indication that even deals presenting issues can be completed without the need for an extended investigation and that the FTC leadership’s putative overall skepticism towards M&A activity does not uniformly manifest itself in unnecessary Second Request investigations.
As importantly, the FTC likely accepted more traditional arguments during its expedited review, getting comfortable that Pfizer’s procompetitive incentives (particularly in light of potential black-box warnings for JAK inhibitors like Xeljanz) and the crowded competitive landscape in both JAK inhibitors and other immunosuppressants, were sufficiently strong to outweigh any concerns that Pfizer would shelve or slow etrasimod to benefit Xeljanz. While a double-edged sword in other contexts, Pfizer’s publicly-stated policy and history of seeking “first-in-class” science may have provided support for arguments here that its control of etrasimod would be good for the patient community through faster or broader clinical and regulatory development.
It is worth watching the outcome of the FTC’s investigation of the proposed CSL-Vifor transaction, which was announced in December 2021 and remains under review as of this writing. It is expected that the FTC is closely examining the overlaps in hematology, generally between Vifor’s leading iron-deficiency franchise and CSL’s blood-plasma portfolio. Similarly, both are active in the sickle cell disease (SCD) space. Specifically, CSL holds an orphan drug designation from both the European Commission and U.S. FDA while Vifor recently announced the start of a Phase IIa clinical trial for its own orphan drug for the treatment of SCD.
FTC Requires Private Equity Firm to Retain Certain Assets in an Exit Transaction Involving Generic Drug Company
On April 19, 2022, the FTC unanimously approved a final order requiring that Water Street Healthcare Partners divest the injectable triamcinolone acetonide (“TCA”) — a generic injectable corticosteroid — product of its portfolio company Custopharm to another portfolio company, Long Grove Pharmaceuticals, as a condition of the sale of Custopharm to Hikma Pharmaceuticals. The consent decree highlights the agency’s emphasis on potential competition between the merging parties.
Pursuant to a September 2021 merger agreement, Hikma proposed to acquire Custopharm in a transaction valued at approximately $375 million (“the Acquisition”). There are only two incumbent generic injectable TCA corticosteroids in the market from Amneal Biosciences and Teva Pharmaceutical Industries. The merging parties each had pipeline products and, in fact, Custopharm received FDA approval to market its injectable TCA product during the HSR review on January 19, 2022. According to the FTC, Hikma has a pipeline product which it expects to launch in the near future. The FTC expressed concern that the transaction would reduce competition by eliminating the potential fourth generic competitor.
The consent decree requires that for a ten-year period, Hikma not acquire any rights or interests in TCA products or assets, or rights or interests in the therapeutical equivalent or biosimilar of TCA products without the prior affirmative approval of the Commission even if such transaction is not reportable under HSR.
The proposed order also requires Water Street and Long Grove to operate and maintain in the normal course of business, and not sell or dispose of, the TCA assets for a period of four years.
FTC Secures Divestitures for ANI’s Acquisition of Novitium
In another transaction involving generics, on January 12, 2022, the FTC approved a final order regarding ANI Pharmaceuticals’ (ANI) $210 million acquisition of Novitium Pharma (Novitium). The FTC order required, among other things, divestitures of a generic SMX-TMP oral suspension and generic dexamethasone tablets. While the divestitures are the latest in a long line of FTC actions in the pharmaceutical industry, there are a few notable elements of the FTC’s analysis that reflect a more aggressive enforcement approach.
With respect to the substantive analysis, in dexamethasone, the transaction featured a pipeline-pipeline overlap in the 4mg strength. The FTC Analysis to Aid Public Comment (“FTC Analysis”) acknowledges at least four other players in the space, including two marketed products and a “limited number” of other pipeline products. Despite being no worse than a 5-to-4, the FTC still sought a divestiture.
In SMX-TMP, where the parties held current and pipeline products, respectively, the FTC conceded that there were four other companies currently offering the product in the market and at least a one other supplier capable of entering in the near future. Despite this somewhat crowded competitive landscape, the FTC required a divestiture.
In both instances, the FTC’s rationale for divestitures does not appear to have been based primarily on the strict “nose-counting” it has used in recent pharmaceutical transactions. It showed a willingness to either discount present competitors (e.g., by noting manufacturing issues) and/or credit the likelihood of entry particularly by the parties. On the latter point, a touchstone in both divestitures appears to be the FTC’s finding that prices in human pharmaceutical markets “decrease incrementally within the entry of the second, third, fourth, and further pharmaceutical competitors. Accordingly, a reduction in the number of suppliers within each relevant market has a direct and substantial effect on pricing.” This observation is particularly meaningful with respect to pipeline products. Carried to its logical end, it can support a finding that the elimination of any potential entrant deprives the market of meaningful price competition. The FTC’s order here serves as a reminder of how carefully the FTC will scrutinize transactions involving pipeline products/potential competitors and what it may use as a starting point for such analyses.
In addition to these traditional divestiture remedies, the FTC also required that the parties submit to prior approval for future transactions in a product category where the parties did not currently compete, specifically one where ANI was currently present and Novitium had an unexecuted option to acquire a competing drug from another company. The order is notable in this regard for its willingness to reach beyond product areas where the FTC has found a substantial lessening of competition.
Looking forward, companies pursuing deals in the life sciences space should expect the FTC to take a similarly broad look at the merging parties’ portfolios. Parties must also prepare for departures from precedent, including with respect to the number of existing (or pipeline) competitors necessary to provide meaningful competition post-merger.
FTC Adds Prohibition on Non-Competes to Recent DaVita Consent
On the same day as the ANI/Novitium consent, the FTC also granted final approval to an order requiring the divestiture of three dialysis clinics as a condition of its approval of DaVita’s acquisition of the University of Utah Health’s dialysis clinics. Consistent with past FTC practice, the order imposes restrictions on the merging parties’ ability to retain its employees in order to facilitate recruitment and hiring by the divestiture buyer. The FTC order here, though, is notable for its broader prohibitions on DaVita’s behavior with respect to its physicians and patients, and those of the acquired (and not divested) business.
Specifically, the FTC order (i) prohibits DaVita from entering and enforcing non-compete provisions with the physicians employed by the medical practices that DaVita is acquiring and (ii) bars DaVita from soliciting patients of the divested clinics for two years. Importantly, the prohibition against entry and enforcement of non-competes goes beyond the divestiture buyer, the divested assets and the relevant geographic markets. Instead, it covers “any Physician employed by the University of Utah” and their ability to be a medical director at “any Clinic owned or operated by a Person other than [DaVita] within the State of Utah.” The patient non-solicit is similarly notable, as it arguably prohibits for two years the competition between the two entities that the Order seeks to remedy.
The breadth of these protections likely reflects the seriousness of the FTC’s concerns about the divestiture buyer’s ability to compete in the marketplace. The two-year patient non-solicit and, to some extent, the bar on physician non-competes may help the divestiture buyer quickly establish itself from a business perspective and provide a strong competitive counterweight to DaVita. The bar on the physician non-competes also fits squarely within the FTC’s recent emphasis on labor markets, including Chairwoman Khan’s public commitment to “consider the Commission’s full range of tools” to examine the possibility that non-competition clauses “may harm fair competition.”
The Hikma, DaVita and ANI orders reflect the FTC’s enforcement priorities and its willingness to use the matters before it to implement its broader policy goals, even if they stretch consent orders beyond previously-established boundaries. These recent consents are also consistent with the DOJ and FTC’s ongoing efforts to increase antitrust enforcement through revisions to the merger guidelines themselves.
Moving forward, parties should adopt a broad view when examining potential transactions for antitrust issues, looking deeper than the structural analysis/nose-counting and identifying potential labor market issues, particularly for highly-skilled workers, and should anticipate that consent orders going forward will include prior approval provisions both in divested product areas and possibly others. Buyers in particular may consider factoring such potential remedies into antitrust efforts provisions. As the confirmation of Alvaro Bedoya (and the return of Chairman Khan’s 3-to-2 majority) approaches, it is increasingly likely that the FTC will use the leverage it has over merging parties during an investigation to extract (or at least explore) ways in which it can see its policy goals furthered, whether through non-compete prohibitions, broad prior approval requirements, or otherwise.
See, e.g., In the Matter of Pfizer, Inc., et al (divestitures in 5-to-4, 4-to-3 and 3-to-2 product markets) (October 2020), In the Matter of AbbVie Inc. and Allergan plc (divestitures in 4-to-3 product markets) (May 2020); In the Matter of Impact Laboratories, Inc. (4-to-3) (April 2015).
FTC Analysis at p. 3. A similar observation appeared in the October 2020 Order regarding Pfizer’s proposed spin-off of its Upjohn business and combination with Mylan. https://www.ftc.gov/system/files/documents/cases/c47271910182pfizermylanaapc.pdf (at p. 1)
The FTC Order also provides for prior approval over future transactions in the divested product areas. The FTC’s prior approval policy requires that parties secure the FTC’s approval (rather than just HSR clearance) before closing any future transaction in an identified relevant market. The FTC concedes that an investigation under a prior approval provision “is much different than a similar investigation” under the HSR Act, and will not afford parties the due process and timing afforded under the HSR process. https://www.ftc.gov/system/files/documents/public_statements/1597894/p859900priorapprovalstatement.pdf
Although not addressed here, the Order also contains a prior approval provision that requires DaVita to obtain Commission approval before acquiring any new ownership interest in a dialysis clinic in Utah for the next 10 years, which by the FTC’s own admission “extends  beyond the markets directly impacted” by the merger.
Order at II.G, V.E.1.
Order at V.E.1.
It is worth noting that, at the time the FTC was reviewing the proposed transaction, DaVita and its former CEO were under indictment by the Department of Justice for conspiring with competing employers not to solicit certain employees. https://www.justice.gov/opa/pr/davita-inc-and-former-ceo-indicted-ongoing-investigation-labor-market-collusion-health-care. They were later acquitted after a jury trial.
Letter from Chair Lina M. Khan to Chair Cicilline and Ranking Member Buck at 2 (Sept. 28, 2021), https://docs.house.gov/meetings/JU/JU05/20210928/114057/HHRG-117-JU05-20210928-SD005.pdf
See https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-seek-strengthen-enforcement-against-illegal (DOJ/FTC joint issuance of a Request for Information seeking public comment to inform potential revisions to the merger guidelines).