Antitrust enforcement in pharmaceutical industry mergers

Food and Drug Law Journal

Volumn 54, Issue 3, 1999, Pages 255-278

  Balto, David A ^a   Mongoven, James F ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

COMMERCIAL PHENOMENA; DRUG INDUSTRY; DRUG MARKETING; ECONOMICS; FOOD AND DRUG ADMINISTRATION; GOVERNMENT; LAW; LICENSING; MODEL; REVIEW;

ANTITRUST LAWS; DRUG INDUSTRY; HEALTH CARE SECTOR; HUMANS; INTERINSTITUTIONAL RELATIONS; UNITED STATES; UNITED STATES FEDERAL TRADE COMMISSION;

EID: 0032731307     PISSN: 1064590X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (107)

1. Judy Radler Cohen, M&A Rings in Another Record Year, 12 MERGERS & ACQUISITIONS REP. 1 (1999).
2. 15 U.S.C. § 18a(1994). The Hart-Scott-Rodino Act establishes a premerger notification and waiting period procedure, applicable to a range of transactions defined as to nature and size, that provides the Federal Trade Commission (FTC) and the Department of Justice information about planned transactions and a prescribed time period before the transaction may be consummated, allowing the agencies an opportunity to analyze the transaction to determine whether it raises sufficient risk of an anticompetitive outcome to merit enforcement action.
3. Federal Trade Commission and Department of Justice, 21st Annual Report to Congress Pursuant to Subsection (j) of Section 7A of the Clayton Act, Hart-Scott-Rodino Antitrust Improvements Act of 1976, at 5 (1998).
4. See Mergers and Corporate Consolidation in the New Economy, Before the Senate Comm. on the Judiciary, 105th Cong., 2d Sess. 1 (1998), available at 〈www.ftc.gov/bc/testimony.htm〉 (statement of Robert Pitofsky, Chairman, Federal Trade Commission) (June 6, 1998) "[T]he current merger wave is significantly different from the "junk bond" fueled mergers of the 1980s . . . Today's mergers are more likely to be motivated by fundamental developments in the rapidly changing economy and reflect more traditional corporate goals of efficiency and competitiveness." Id.
5. See Pharma industry Consolidation Accelerating, MARKETLETTER, June 8, 1998.
6. See Consolidation Enters More Frantic Phase, FIN. TIMES, Mar. 15, 1999, at 1.
7. See Drug Industry. European Unions, ECONOMIST, Dec. 12, 1998, at 62 (describing reasons for Zeneca/ Astra consolidation).
8. Mergers and Corporate Consolidation, supra note 4, at 5. A U.S. Senate report amplified a similar idea: Competition is as important in R&D as it is in any other commercial endeavor. Indeed, in many industries, particularly those that are based on rapidly evolving technology, competition in R&D may be crucial to success. Motivated by the benefits of getting ahead of one's competitors as well as the threat of falling behind, firms in such industries have strong incentives to be the first to develop new processes and products. S. REP. No. 98-427, at 202 (1984).
9. Mergers and Corporate Consolidation, supra note 4, at 5. A U.S. Senate report amplified a similar idea: Competition is as important in R&D as it is in any other commercial endeavor. Indeed, in many industries, particularly those that are based on rapidly evolving technology, competition in R&D may be crucial to success. Motivated by the benefits of getting ahead of one's competitors as well as the threat of falling behind, firms in such industries have strong incentives to be the first to develop new processes and products. S. REP. No. 98-427, at 202 (1984).
10. But see FIN. TIMES, supra note 6 (suggesting that the perceived need for economies of scale in R&D is overstated).
11. See Drug Industry, supra note 7, at 62; All Quiet on the Washington Front: Fewer Blockbusters, More Mergers; Pharmaceutical Industry Forecasts for 1999, 34 MED. MKTG & MEDIA 44 (1999); CNNfn, Bruised Biotechs Increasingly Turn to Merger (visited June 3, 1999) 〈www.cnnfn.com〉 (describing the need of small biotech companies to merge to continue R&D efforts).
12. See Drug Industry, supra note 7, at 62; All Quiet on the Washington Front: Fewer Blockbusters, More Mergers; Pharmaceutical Industry Forecasts for 1999, 34 MED. MKTG & MEDIA 44 (1999); CNNfn, Bruised Biotechs Increasingly Turn to Merger (visited June 3, 1999) 〈www.cnnfn.com〉 (describing the need of small biotech companies to merge to continue R&D efforts).
13. See Drug Industry, supra note 7, at 62; All Quiet on the Washington Front: Fewer Blockbusters, More Mergers; Pharmaceutical Industry Forecasts for 1999, 34 MED. MKTG & MEDIA 44 (1999); CNNfn, Bruised Biotechs Increasingly Turn to Merger (visited June 3, 1999) 〈www.cnnfn.com〉 (describing the need of small biotech companies to merge to continue R&D efforts).
14. See, e.g., Alan Cowell, Zeneca Buying Astra as Europe Consolidates, N. Y. TIMES, Dec. 9, 1998, at C1; David J. Morrow, French Drug Makers to Combine in $10.4B Stock Deal, N. Y. TIMES, Dec. 3, 1998, at C24.
15. See, e.g., Alan Cowell, Zeneca Buying Astra as Europe Consolidates, N. Y. TIMES, Dec. 9, 1998, at C1; David J. Morrow, French Drug Makers to Combine in $10.4B Stock Deal, N. Y. TIMES, Dec. 3, 1998, at C24.
16. See Amgen, Guilford and Amgen Announce Start of Neuroimmunophilin Clinical Trials 1 (Aug. 4, 1999) (press release discussing Amgen's licensing of worldwide rights to neuroimmunophilins from Gulford), available in 〈www.amgen.com〉; Converging Biotechs, BARON'S, Aug. 5, 1999, at 33 (noting both trends in the biotechnology sector).
17. See Amgen, Guilford and Amgen Announce Start of Neuroimmunophilin Clinical Trials 1 (Aug. 4, 1999) (press release discussing Amgen's licensing of worldwide rights to neuroimmunophilins from Gulford), available in 〈www.amgen.com〉; Converging Biotechs, BARON'S, Aug. 5, 1999, at 33 (noting both trends in the biotechnology sector).
18. 15 U.S.C. § 18.
19. Ch. 328, 38 Stat. 730 (1914) (codified as amended at 15 U.S.C. §§ 12-21 (1994)).
20. 15 U.S.C. § 18. A merger also can be challenged under the Sherman Act, Ch. 647, 26 Stat. 209 (1890) (codified as amended at 15 U.S.C. §§ 1-7 (1994)), as a restraint of trade or a merger to monopoly, 15 U.S.C. §§ 1, 2. See, e.g., United States v. Grinnell Corp., 384 U.S. 563 (1966); United States v. Syufy Enters., 903 F.2d 659 (9th Cir. 1990). Additionally, the FTC may add a claim under section 5 of the FTC Act, Ch. 311, 38 Stat. 717 (1914) (codified as amended 15 U.S.C. §§ 41-64 (1994)), which prohibits "unfair methods of competition." 15 U.S.C. § 45. The standards for challenging mergers under the three statutes are virtually identical. See United States v. Rockford Mem'l Corp., 898 F.2d 1278, 1281-82 (7th Cir.), cert. denied, 498 U.S. 920 (1990).
21. U. S. DEP'T OF JUSTICE AND FEDERAL TRADE COMMISSION, HORIZONTAL MERGER GUIDELINES (Apr. 2, 1992), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 [hereinafter MERGER GUIDELINES].
22. MERGER GUIDELINES, supra note 16, § 1.11.
23. See Robert Bloch, Scott Perlman & Myles Hansen, Product Market Definition in Pharmaceutical Mergers, ANTITRUST REP., Sept. 1997, at 17, 19.
24. See Glaxo PLC, C-3586, 119 F.T.C. 815 (June 14, 1995) (consent order).
25. Hoechst AG, C-3629, 120 F.T.C. 1010, 1020(Dec. 5, 1995) (consent order) (market defined as oral mesalamine, where mesalamine available in rectal form; defining once-a-day diltiazem as market, but excluding injectable form of drug); see also Glaxo, 119 F.T.C. at 816 (defining market of "non-injectable" anti-migraine drug).
26. See ROY LEVY, THE PHARMACEUTICAL INDUSTRY: A DISCUSSION OF COMPETITIVE AND ANTITRUST ISSUES IN AN ENVIRONMENT OF CHANGE, BUREAU OF ECONOMICS STAFF REPORT, FEDERALTRADE COMMISSION 606 (Mar. 1999); F.M. Scherer, Pricing, Profits, and Technological Progress in the Pharmaceutical Industry, 7 J. ECON. PERSP. 97 (1993).
27. See ROY LEVY, THE PHARMACEUTICAL INDUSTRY: A DISCUSSION OF COMPETITIVE AND ANTITRUST ISSUES IN AN ENVIRONMENT OF CHANGE, BUREAU OF ECONOMICS STAFF REPORT, FEDERALTRADE COMMISSION 606 (Mar. 1999); F.M. Scherer, Pricing, Profits, and Technological Progress in the Pharmaceutical Industry, 7 J. ECON. PERSP. 97 (1993).
28. But see IVAX Corp., C-3565, 119 F.T.C. 357 (Mar. 27, 1995) (consent order) (both generic verapamil and branded version included in the same product market); Dow Chemical Co., C-3533, 118 F.T.C. 730 (consent order) (Sept. 23, 1994) (relevant market included both branded and generic dicyclomine).
29. Hospital Corp. of Am., 106 F.T.C. 361, 466 (1985), aff'd sub nom. Hospital Corp. of Am. v. FTC, 807 F.2d 1381 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987). Products whose value depends in large part on an intellectual property component will tend to compete in broad geographic markets because knowledge-based assets are easier to transport than physical assets. Joseph F. Brodley, Antitrust Law and Innovation Competition, 4 J. ECON. PERSP. 97 (1990).
30. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997).
31. Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987).
32. MERGER GUIDELINES, supra note 16, §§ 2,3.
33. Syufy Enters., 903 F.2d at 1395-96.
34. MERGER GUIDELINES, supra note 16, § 3.
35. Id. § 3,1.
36. Id. § 4.
37. Roche Holding Ltd., C-3809 (May 22, 1998) (consent order).
38. Roche Holding Ltd., C-3809, Analysis of Proposed Consent Order to Aid Public Comment, at 1.
39. Id.
40. Id. at 2.
41. SNIA S.P.A., C-3889 (Aug. 9, 1999) (consent order).
42. SNIA S.P.A., C-3889, Complaint at 2. The antitrust agencies calculate market concentration by using the Herfindahl-Hirschman Index (HHI). The HHI is calculated by summing the squares of the individual market shares of all participants. Thus, a monopoly market would register an HHI of 10,000. An HHI above 100 is considered highly concentrated. See Merger Guidelines, supra note 16, § 1.5.
43. American Home Prods. Corp., C-3740, 123 F.T.C. 1279 (May 16, 1997) (consent order).
44. Medtronic, Inc., C-3842 (Jan. 7, 1999) (consent order).
45. Medtronic, Inc., C-3879 (June 10, 1999) (consent order).
46. Johnson & Johnson, C-3645, 121 F.T.C. 149 (Mar. 16, 1996) (consent order).
47. The U.S. Supreme Court has held that a firm perceived to be a potential entrant may affect competition in a relevant market. See United States v. Marine Bancorporation, 418 U.S. 602, 639-40 (1974); United States v. Falstaff Brewing Corp., 410 U.S. 526, 533-34 (1973).
48. Although the Supreme Court has not ruled on the actual potential entry theory, some lower courts and the FTC have accepted or commented favorably on it. See Roche Holding Ltd., 113 F.T.C. 1086 (1990); B.A.T. Indus., 104 F.T.C. 852 (1984); Tenneco, Inc. v. FTC, 689 F.2d 346, 352 (2d Cir. 1982).
49. When drug manufacturers seek approval for a drug, they file a new drug application. This begins a lengthy testing and review process that proceeds through four separate stages. The applicant must submit to FDA data demonstrating the safety and effectiveness of the drug. In addition, the applicant must provide information on any patient covering the drug for which a claim of patent infringement reasonably could be asserted against an unauthorized party. After a preclinical study (animal), the human testing procedure covers three stages: Phase I tests the safety of the drug (toxicology) in healthy persons, Phase II tests for the drug in small controlled trials in patients, and Phase III tests for efficacy through large-scale controlled trials under actual clinical conditions. See Jennifer Kulynuch, Will FDA Relinquish the "Gold Standard" For New Drug Approval? Redefining "Substantial Evidence" in the FDA Modernization Act of 1997, 54 FOOD & DRUG L.J. 127, 141 (1999); 21 U.S.C. § 355 (1994); 21 C.F.R. §§ 312, 314 (1998). Because of this drug approval process, the FTC, with the assistance of FDA, can identify firms in the drug regulatory "pipeline" that are potential entrants to the market.
50. Zeneca Group PLC, C-3880 (June 7, 1999) (consent order).
51. Zeneca Group PLC, C-3880, Complaint at 2.
52. Zeneca Group PLC, C-3880, Consent Order at 3.
53. Hoechst AG, C-3629, 120 F.T.C. at 1010.
54. Id. at 1012-13.
55. Id. at 1012.
56. Id. at 1013.
57. FTC Press Release, Hoechst Settles FTC Charges of Reducing Competition: For Four Drugs in Connection with MMD Merger, at 2 (Sept. 18, 1995).
58. Id.
59. In several recent merger cases, the FTC considered the acquisitions of patents and related technology where the merging firms were either the only two, or two of only a few, firms capable of innovating in high-technology markets. In such situations, the acquisition likely would lead to anticompetitive effects. See PHILIP AREEDA & HERBERT HOVENKAMP, III ANTITRUST LAW ¶ 707b, at 175 (1996) ("[T]he clearest case [of exclusionary conduct] would be the acquisition of an equivalent patent covering the only known economic alternative to the monopolist's product or process. Such an acquisition forecloses potential competition by rivals who might otherwise have access to that patent. Even the acquisition of one out of several equivalent patents might have exclusionary effects.").
60. The Merger Guidelines recognize that a transaction may lessen competition in such nonprice attributes as "product quality, service, or innovation." MERGER GUIDELINES, supra note 16, § 0, 1 n.6.
61. William J. Baer & David A. Balto, New Myths and Old Realities: Recent Developments in Antitrust Enforcement, 1999 COLUM. BUS. L. REV. 207, 222.
62. See Glaxo, C-3586.
63. Marilyn Dix Smith & William F. McGhan, Don't Let Migraine Be a Financial Headache, 10 BUS. & HEALTH 16, 47 (1998).
64. Susan Riley & Kellie Rivgen, New Product Launches Drive a Good First Half, 10 MED. MKTG. & MEDIA 33, 62 (1998).
65. Ciba-Geigy Ltd., C-3725, 123 F.T.C. 842 (Mar. 24, 1997) (consent order).
66. Id. at 845 (complaint).
67. Id. at 844-45.
68. See Elyse Tanouye & Robert Langreth, Genetic Giant: Cost of Drug Research is Driving Talks of Glaxo, SmithKline, WALL ST. J., Feb. 2, 1998, at A1 (discussing Ciba-Geigy/Sandoz's licensing or gene-therapy technologies and patents); John R. Wilke, U.S. Forces New Drug Giant to Share Genetic Research, WALL ST. J., Dec. 18, 1996, at B4 (reporting on FTC's demand that Ciba-Geigy and Sandoz license rivals in order to preserve competition and innovation).
69. See Elyse Tanouye & Robert Langreth, Genetic Giant: Cost of Drug Research is Driving Talks of Glaxo, SmithKline, WALL ST. J., Feb. 2, 1998, at A1 (discussing Ciba-Geigy/Sandoz's licensing or gene-therapy technologies and patents); John R. Wilke, U.S. Forces New Drug Giant to Share Genetic Research, WALL ST. J., Dec. 18, 1996, at B4 (reporting on FTC's demand that Ciba-Geigy and Sandoz license rivals in order to preserve competition and innovation).
70. Naomi Freundlich et al., A Booster Shot for Gene Therapy: FTC Trust Busters Put Conditions on a Merger Even Though the Technology in in its Infancy, BUS. WK., Jan. 2, 1997, at 92.
71. Upjohn Co., C-3638, 121 F.T.C. 44 (Feb. 8, 1996) (consent order).
72. Id. at 45.
73. Baxter Int'l, Inc., C-3726, 123 F.T.C. 904 (Mar. 24, 1997) (consent order).
74. Mark Thill, The Sealants are Coming! The Sealants are Coming! REPERTOIRE (May 1998), available in 〈www.medicalmag.com/REPertoire/pastissues/mayseal.html〉.
75. Stephen Northfield, Investment Reporter: U.S. FDA Ruling Stirs Interest in Haemacure Stock. THE GLOBE AND MAIL, May 1998, at 6.
76. Baer & Balto, supra note 56, at 222.
77. The Commission's remedial authority is derived from the FTC Act. 15 U.S.C. §§ 41-64, and the Clayton Act, 15 U.S.C. §§ 12-21.
78. FTC v. Rubberoid Co., 343 U.S. 470, 473 (1952).
79. FEDERAL TRADE COMM'N, BUREAU OF COMPETITION STAFF REPORT, A STUDY OF THE COMMISSION'S DIVESTITURE PROCESS (1999).
80. Id. at 31-33.
81. Id. at 41.
82. United States v. E. I. duPont de Nemours & Co., 366 U.S. 316, 331 (1960). See Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972) (noting divestiture is "particularly appropriate" in merger cases).
83. See, e.g., OKC Corp. v. FTC, 455 F.2d 1159, 1161 (10th Cir. 1972) (ruling total divestiture of acquired assets necessary to restore "viable, independent, local competitive entity"); RSR Corp. v. FTC, 602 F.2d 1317 (9th Cir. 1979), cert. denied, 445 U.S. 927 (1980) (ruling partial divestiture sufficient to restore competitive entity).
84. LEVY, supra note 21, at 132 (footnotes omitted).
85. American Home Products, C-3740, 123 F.T.C. at 1288.
86. Id. at 1289.
87. Zeneca, C-3880, at 3.
88. See Glaxo, C-3586.
89. Thomas N. Dahdouh & James F. Mongoven, The Shape of Things to Come: Innovation Markets in Merger Cases, 64 ANTITRUST L.J. 405, 439 (1996).
90. See AREEDA & HOVENKAMP, supra note 54, ¶ 707i, at 184 (advocating "divestiture of sufficient assets to create viable new firms with free access to the monopolist's then-existing technology . . . where an acquisition, or a series of acquisitions, has probably made a substantial contribution to monopoly power").
91. Glaxo, C-3586, 119 F.T.C. at 824.
92. Upjohn, C-3638, 121 F.T.C at 52.
93. Although it may present difficulties, sometimes the divestiture of intellectual property or innovation efforts is necessary to fully restore competition. In these cases, the FTC will not hesitate to order divestiture. See, e.g., discussion of Glaxo, supra part IV.C.1. & Upjohn, supra part IV.C.3.
94. Some commentators have criticized the adequacy of licensing as an antitrust remedy. Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysis, 64 ANTITRUST L.J. 19 (1995). For a response, see Dahdouh & Mongoven, supra note 82, at 438 ("Licensing is usually found to be an appropriate remedy when market participants and innovators agree that access to intellectual property is key.").
95. The third potential competitor expects FDA approval early in 2000. See Fusion Medical Files PMA for FloSeal Herrastatic Sealant with FDA, BUS. WIRE, Feb. 23, 1999.
96. See Ciba-Geigy, C-3725, 123 F.T.C. at 873-77.
97. For a discussion of FTC use of licensing as a remedy, see Mary Lou Steptoe & David A. Balto, Finding the Right Prescription: The FTC's Use of Innovative Merger Remedies, 10 ANTITRUST 16 (1995).
98. Ciba-Geigy, C-3725, 123 F.T.C. at 895 (statement of Chairman Pitofsky and Comm'rs. Steiger, Starek & Varney). Commissioner Azcuenaga dissented from the order licensing gene therapy products, noting that "the Commission has bypassed the obvious, simple and effective remedy of divestiture in favor of a complex regulatory concoction that promises to be less effective and more costly." Id. at 898.
99. See Roche, C-3809.
100. See Ciba-Geigy, C-3725, 123 F.T.C. at 873-77.
101. Id. at 877.
102. See Hoechst, C-3629, 120 F.T.C at 1020-21.
103. See American Home Products, C-3740, 123 F.T.C. at 1292-93.
104. See Ciba-Geigy, C-3725, 123 F.T.C. at 877.
105. See Baxter Int'l. C-3726, 123 F.T.C. 904.
106. Glaxo, C-3586.
107. Ciba-Geigy, C-3725, 123 F.T.C. at 845.