Practical Antitrust Considerations for Combinations in Life Sciences Industries

By: ADAM J. MILLER

January 12, 2011

When Whirlpool wants to buy Maytag, or SABMiller wants to combine with MolsonCoors, you don’t have to be an expert in the appliance or beer industry to sense that there might be  competition issues. Combinations of firms in life sciences are often different and the antitrust issues can be harder to spot. Rarely does the deal merely combine two companies that produce nearly identical products. Deals are frequent, often involving the acquisition of a smaller, earlier-stage company with a new technology by a larger established company with a broad portfolio and the distribution resources to expand the market penetration of the new product. While the price tag for these deals can be substantial, the price often reflects expectations of future market success rather than the past competitive significance of the target. Life sciences companies need to be able to spot issues that are unique to their deals and develop the right strategies to handle them.

When the whole point of the transaction is to acquire a technology that either is not yet commercialized or is in the early stages of commercialization, the antitrust issues are more subtle. Instead of concern about of generating a large combined market share, the issues are more likely to be found in the effect of the transaction on innovation, combining intellectual property that would block competition, and appeasing international competition regulators. This article briefly describes some of the practical considerations for an antitrust strategy to get life sciences deals gone as quickly as possible and without a divestiture or in-depth investigation.

Know Your Audience

Identifying your audience is key to designing an effective strategy and when it comes to merger clearances, it is especially important to identify the competition authorities that are likely to review the transaction early in the process. For sizable deals, a U.S. merger notification under the Hart-Scott-Rodino Act (HSR Act) is a given, but that is only the starting point. Even when the transaction involves two U.S. companies, the fact that life sciences products are often launched outside the U.S. means that non-U.S. merger notifications are often required.

Moreover, if the target is an early stage company, the competition authorities of individual European member states may come into play because the transaction lacks a “community dimension” under European competition rules and does not trigger a notification to the European Commission. Member-state notifications can raise the potential for disparate antitrust standards, which may deviate from those used in the U.S. and/or at the European Commission. For example, the customer convenience that flows from being able to purchase a more complete product portfolio from a single supplier, which is likely a helpful “efficiency” in the U.S., could be viewed by the German Federal Cartel Office as impermissible “conglomerate effects” that disadvantage your less diversified rivals.

Get Help and Get It Early

Because of the potential for differing standards, the optimal antitrust strategy requires good information about the process and standards of the reviewing authorities. In addition to having counsel experienced in coordinating across the relevant jurisdictions, it is important to chose capable and pragmatic local counsel. Less experienced, or sadly less scrupulous, local counsel have incentives to advise to the parties to file in their jurisdiction (it is work for them, and they can not be faulted if something goes wrong) and highly regulated life sciences companies generally do not like to appear to have failed to comply with the letter of all applicable laws. The parties to these combinations need solid advice on whether to file, what information needs to be presented and what the strategy should be from an expert in each relevant jurisdiction.

Timing and Strategy

A key component of just about every merger control regime is a waiting period that the parties must observe to give the investigating agency time to review the competitive effects of the transaction. In addition to waiting periods, some countries, such as Brazil and Portugal, have filing deadlines. While it can be hard to focus the parties’ attention on merger filings while the transaction is still being negotiated, it’s important to get the timing right.

Moreover, non-U.S. notifications typically require far more substance than is needed for a HSR notification and typically require the parties to identify relevant markets, competitors, customers and suppliers in the country in question. These notifications take longer to prepare and often require involvement of local business people because the competitive landscape may vary significantly due to local regulation, reimbursement, or idiosyncratic preferences.

The Agreement

Sellers often want the agreement to require that competition filings be done immediately, but that may not always be the best strategy. In rare cases there may be some marginal benefit from filing first in the least problematic jurisdictions in the hopes of using early clearances as momentum to demonstrate that the transaction does not harm competition. Alternatively, in some jurisdictions it is traditional to file a draft of the notification or otherwise consult with the agency before lodging the formal notification. It can be particularly important to abide by the local practice in jurisdictions where the competition authority can unilaterally extend the waiting period by requesting more information. Finally, there may be local holidays or scheduling conflicts that may counsel toward waiting a day or two. Ultimately, maintaining a good working relationship with reviewing agency staff, especially outside the U.S., can be paramount in achieving early clearances.

It is often important that the agreement spell out the parties’ respective roles in the merger review process. Outside the U.S. and Canada, typically only one filing is required, and the filing obligation falls on the buyer. At the same time, information that only the seller has can be critical to completing the notification (in particular if the buyer is expanding into a new product area). The agreement should address how the parties will cooperate in the merger review process and how they will share the required information.

Finally, the parties need to decide whether the agreement will spell out exactly which notifications will be made. Including a list of jurisdictions provides certainty but comes at the cost of difficulties if further market investigation, revised strategic thinking, or consultation with the competition authorities leads to additions or deletions.

The Substance

As alluded to above, substantive competition issues can be harder to spot in life sciences deals, where competing products may use different technologies and may not look much alike. In challenging Kyphon’s acquisition of Disc-O-Tech, for example, the Federal Trade Commission alleged that two products that improved the treatment for certain types of spinal fractures were each other’s closest substitutes, even though they used different technologies to prevent leakage of bone cement during treatment. In the FTC’s view, the combined firm would not have been adequately constrained by the remaining competition from other products.

The challenge, therefore, is often in identifying not only which products are already on the market and how they compete with each other, but what is in the pipeline and whether alternative therapies can provide a competitive restraint. Being able to credibly demonstrate that the target’s current high share in a market segment will be mitigated by imminent competing innovations can be the difference between first-phase clearance and the launch of an in-depth antitrust investigation.

In addition to the impact the transaction may have on prices and output (the typical concerns in merger review), the regulators may also be particularly sensitive to how it effects innovation. Any sense that the motivation for the transaction is defensive or will have the effect of slowing the development or commercialization of new products (e.g. locking up required intellectual property or delaying the target’s product launch) can trigger an in-depth investigation.

Control Your Message

Business people, and even more so investment bankers, have limited time to spend on the antitrust issues that the deal may present, even though they tend to be the ones creating documents and drafting public statements that can influence an antitrust regulators’ view of a transaction. Unfortunately statements that are effective in selling the deal to the board of directors and shareholders can meaningfully impede antitrust clearances. For instance saying that the transaction will “prevent the target’s new product from cannibalizing our market share,” “give us the IP to block new entrants,” “relieve pricing pressure,” or “give us the opportunity to control the market for extra-special-fancy-new widgets” can hamper your ability explain the full scope of the competitive landscape to the regulators. It is key to avoid boasting, red flags and careless references to poorly defined markets. For everything to go smoothly, antitrust counsel should be kept in the loop on creating internal and external communications about the transaction.

Key Takeaway

Life sciences deals are different. They often involve new products or products in development, implicate innovation and intellectual property, and tend to trigger filings in countries with disparate antitrust regimes. Crafting the right messaging and building the required evidence can involve threading a needle between different merger review standards. Clients need good antitrust advice from the earliest stages of the transaction to assure smooth and timely merger clearances.

Fredrikson & Byron welcomes Adam Miller, who is now practicing in the firm’s Antitrust and Trade Regulation, Corporate, and Litigation Groups. He focuses on advising clients through a full range of antitrust and competition law issues, including advocacy before the U.S. Department of Justice, Federal Trade Commission and foreign competition authorities; defense of criminal and civil government investigations; litigating civil damages actions involving monopolization, cartelization or other anticompetitive conduct; coordinating multi-jurisdictional merger notifications and investigations; defense of government merger challenges; representation of companies and individuals in grand jury investigations; and counseling client on antitrust compliance.

Before joining Fredrikson & Byron, Adam practiced in Washington, DC. with clients in industries ranging from chemicals and basic materials to medical devices, pharmaceuticals, data storage systems, beer, home appliances and electronic trading platforms. Click Here for more information on Adam Miller and his experience.