A “killer acquisition” describes the situation where an “incumbent firm acquire[s] an innovative target and terminate[s] development of the target’s innovation to preempt future competition with the aim of “kill[ing] potentially promising, yet likely competitive, innovation.” Transactions fitting squarely into that definition are highly likely to lead to a loss of consumer welfare from the innovative product and the benefits brought about by increased competition between the innovator and the incumbents.
What is less clear is whether changes should be made to the current European Commission (“EC”) and member state merger control rules to allow antitrust agencies to challenge such transactions. Is there truly an enforcement gap? Do the current rules allow the EC and other European antitrust agencies to separate welfare-diminishing “kills” from welfare-enhancing transactions? These distinctions become particularly relevant in the pharmaceutical sector, where large, well-resourced companies can provide much-needed capital, marketing, and distribution infrastructure, as well as the research and development (“R&D”) investment required to launch new products. The following analysis examines whether agencies already have the tools at their disposal to review potential “killer acquisitions” under the existing rules. It will then examine whether there is an enforcement gap and argue that, if there is an enforcement gap (which is not certain), it is likely to be small. Any proposed changes must therefore ensure they are not disproportionate to the concern.
This article is the third in an ongoing series on this topic in this publication and offers a European perspective.
Existing Jurisdictional Rules Can Catch Potential “Killer Acquisitions”
European Commission
One area of concern is that the EC jurisdictional rules are unlikely automatically to capture all potential “killer acquisitions” for suspensory merger review, and certainly not where the target is an innovative pre-commercial rival. The EC’s jurisdictional thresholds are based on two alternative turnover tests. Under the first test, two parties must generate revenues within the European Union of EUR 250 million. Under the alternative test, two parties must generate EUR 100 million in the European Union and they must generate at least EUR 25 million each, and EUR 100 million combined, in the same three member states. When the target company or asset is at the pre-commercial stage and not generating substantial (or any) revenues, neither of these tests is likely to be met and the acquisition would not meet the EC’s thresholds for mandatory review.
The EC has jurisdiction to review a transaction where the acquirer’s and target’s revenues meet the prescribed revenue thresholds. If these thresholds are not met, the EC may also have jurisdiction where the parties request a referral of the transaction to the EC. This is possible if the transaction meets the thresholds of at least three member states under Article 4(5) of the EC Merger Regulation (“EUMR”), or where a Member State competition authority refers the transaction to the EC under Article 22 EUMR. Article 22 referrals are possible where the transaction “affects trade between Member States” and “threatens to significantly affect trade in the Member State making the request”.
Where the EC does have jurisdiction, it has shown substantial willingness to examine whether a transaction will lead to harm to potential competition and innovation. The EC’s Horizontal Merger Assessment Guidelines (“EC Guidelines”) state that the EC will scrutinize the impacts of a merger on innovation: “[E]ffective competition may be significantly impeded by a merger between two important innovators, for instance between two companies with ‘pipeline’ products related to a specific product market.” Further, the EC Guidelines provide for an analysis of harm to potential competition: “Concentrations where an undertaking already active on a relevant market merges with a potential competitor in this market can have similar anti-competitive effects to mergers between two undertakings already active on the same relevant market […]”. In order for a merger to harm potential competition, the EC Guidelines provide two requirements, both of which must be fulfilled: (1) “the potential competitor must already exert a significant constraining influence or there must be a significant likelihood that it would grow into an effective competitive force” (e.g., there must be evidence that the potential competitor has plans to enter the market in a significant way); and (2) there must be insufficient competition remaining after the merger. Therefore, an assessment of a merger’s impact on future innovation is nothing new where the transaction meets the relevant thresholds.
For example, in Medtronic/Covidien, the EC considered the transaction’s impact on potential competition between Medtronic’s marketed drug-coated balloon (“DCB”) and Covidien’s DCB pipeline product, which would, with “reasonable certainty”, reach the market “in the near future.” In this case, the EC required the divestiture of Covidien’s DCB product as a condition of approval.
National Competition Authorities
In contrast to the EC, jurisdictional tests in the UK, Austria, and Germany do allow agencies the ability to consider transactions where the target has not yet begun to generate revenues.
UK
The UK has two alternative thresholds and operates a voluntary notification regime. Transactions may meet the thresholds based on either (1) the target’s revenues in the UK (GBP 70 million) or, (2) the parties’ having a combined share of supply of goods or services in the UK of 25% (“share of supply test”). The test requires an increment to the share of supply, so the parties’ activities must overlap in some way.
In practice, the UK’s Competition and Markets Authority (“CMA”) adopts an expansive approach to the share of supply test, which makes it possible to review transactions involving pre- commercial rivals. For example, in its recent review of Roche’s acquisition of Spark Therapeutics, the CMA held that the share of supply test can be met where the acquirer’s marketed therapies overlap with the target’s pipeline therapies when determining whether both parties are active in the supply of goods or services in the UK. The CMA found that both companies were active in therapies used for the treatment of Hemophilia A, a genetic blood disorder. Roche’s drug, Hemlibra, is a relatively recent market entrant that has become recognized as an important innovative therapy (a so- called “novel” non-gene therapy) for Hemophilia A in the UK. Spark was in Phase 1 and 2 trials for a gene therapy treatment for Hemophilia A that is expected to compete with Hemlibra in the future. The CMA held that “significant competition exists between firms before their products are fully commercialised,” and “a firm engaged in R&D activities relating to [Hemophilia] A treatments in the UK, in particular where those activities are at a relatively advanced stage, should be understood to be active in the process of supplying such pharmaceutical treatments in the UK, even in cases where that process has not yet culminated in actual sales of that treatment.” Specifically, the CMA considered treatments at Phase 2 or more advanced stages of development to be particularly relevant. The parties met the 25% share of supply test based on their share of procurement of patents for Hemophilia A treatments in the UK and/or the number of UK based employees carrying out activities related to the supply of Hemophilia A treatments.
Having established that Roche / Spark met the jurisdictional tests, the CMA analyzed the transaction under a “loss of potential competition” theory of harm and gave the following reasons for its decision to clear the transaction:
Treatment for Hemophilia A is a developing sector, and other companies are developing both gene and non-gene therapies that are likely to come to market and compete with both Roche’s and Spark’s treatments.
o Gene Therapies: In addition to Spark, BioMarin and Sangamo are developing gene therapy treatments. Although giving “little weight” to it, the CMA did consider that BioMarin’s product would be first to market (before Spark) and would gain at least some first- mover advantage.
o Non-gene therapies: There are several innovative non- gene therapy products that are likely to become viable alternatives to both Roche’s and Spark’s products. Hemlibra currently faces competition from other marketed Hemophilia A treatments, including several novel non-gene therapy treatments, which are at an advanced stage of development (Sanofi’s fitusiran, Novo Nordisk’s concizumab and Pfizer’s PF- 06741086). Novel non-gene therapies are likely to deliver improvements in dosing efficacy and/or treatment administration that will make them more similar to, and directly competitive with, Hemlibra.
Consequently, due to the existing and potential competition from both pipeline non-gene and pipeline gene therapies, Roche would not be incentivized to delay or postpone development of Spark’s gene therapy. “The remaining competitors whose products have a realistic potential of being commercialized will pose a strong constraint on the merged entity post-Merger which will, as a consequence, retain incentives to invest in commercializing Spark’s GT products and compete on pricing, improvements in product quality and marketing activities post- merger.”
Notably, the CMA recognized, but did not attribute significant weight to, the potential first-mover advantage for the first gene therapy to market (i.e., the theory that the first gene therapy to market would have a significant competitive advantage, potentially knocking out competition for all other therapies) and whether new treatments would be granted possible orphan designation exclusivity. In other words, the CMA did not “pick a winner,” and commented that it “placed limited weight on this evidence [suggesting Biomarin’s drug had a competitive edge] given the potential for this profile to change as clinical trials progress.” The CMA noted a third-party statement that “with every data release the industry can see one GT program leap-frogging another and it is difficult to say which product is the leader.”
As the CMA’s decision reflects, the burden of proving which pipeline product will come to market first, where one clinical trial result can shift the fate of drugs in which companies invest billions, is difficult to satisfy. A wrong choice might result in a transaction being blocked unnecessarily and might deprive a small innovator of access to the investment, expertise, and infrastructure of a major incumbent, which could ultimately result in preventing an otherwise promising drug from coming to market.
Roche/Spark is not the first decision in which the CMA has substantively considered a theory of harm to potential competition. Like the EC, the UK CMA also considers potential harm to innovation as part of its substantive assessment of mergers that meet its thresholds. Several examples of this approach have arisen in cases in the technology sector. In its review of the acquisition by PayPal of mobile point of sale (“mPOS”) service provider iZettle, the CMA found the parties overlapped in the provision of offline mPOS and that iZettle had taken steps to enter the nascent omni-channel sector. The CMA reviewed internal documents in reaching its conclusion that iZettle would not have been likely to increase its position in omni- channel services significantly in the absence of the transaction. Ultimately, the CMA decided, “we are satisfied that it is likely that the effect of the acquisition has not been to achieve a tactical elimination of a potentially significant, nascent competitor to PayPal in omni-channel services.”
Similarly, the CMA’s decision to block the acquisition by Sabre of Farelogix, an innovator in the airline booking sector, was based on the CMA’s view that the merger “would remove the only significant independent, channel-agnostic provider of merchandising solutions, which we consider to be an important attribute in driving innovation in both NDC-compatible retailing and distribution solutions.”
Germany and Austria
In 2017, Germany and Austria changed their respective merger control thresholds to include a transaction-value element to capture transactions in innovation- driven industries. In these jurisdictions, a transaction may be notifiable based on either: (i) the parties’ worldwide and local revenue; or (ii) the transaction value meeting certain thresholds (EUR 400 million in Germany and EUR 200 million in Austria) and the target is active locally to a “significant extent.” The latter “local nexus” requirement may be satisfied based on revenues generated locally, or, if the target does not yet generate revenues, by other domestic activities, such as R&D. Both limbs of the “transaction value” test potentially could trigger a review of acquisitions of targets with pre-commercial assets.
Joint Guidelines issued by the German and Austrian competition agencies elaborate on the “local nexus” test in ways that may be relevant to the pharmaceutical sector:
Current Activity. Domestic activity is deemed “current” if it is carried out for market entry, e.g., towards launch of an approved drug in the domestic market.
Relevant Activity. R&D can be a relevant activity, as long as (1) the results are marketable, and (2) the products and services are likely to be sold domestically. Staff engaged in R&D activity locally, or local infrastructure and equipment, or the address of patent applicants may be relevant to determining whether R&D is carried out “locally”. It is irrelevant for this assessment “whether turnover has been generated, or whether the product has already launched.” “Marketability” will generally be assumed if Phase 3 trials have commenced.
The German and Austrian competition authorities have yet to challenge acquisitions of pre- commercial targets and have made clear in the Guidance outlined above that they will only have jurisdiction under the “local nexus” test where the R&D has reached Phase 3 trials.
Is There a Genuine Enforcement Gap?
This discussion of killer acquisitions fits within a broader international discussion of the merits of antitrust scrutiny of such transactions, which is relevant to all innovation-led sectors, with pharmaceuticals, technology, biotechnology, and chemicals as obvious examples. There is extensive literature from antitrust agencies and leading academics warning of the consumer harm that can arise from a market incumbent seeking to acquire a potentially innovative rival merely to “kill” investment in bringing that product to market.
As shown above, the EC and agencies in Member States that function as a hub for the pharmaceutical industry (particularly the UK and Germany) have the ability to, and do, review transactions that might be potential killer acquisitions. Even if the EC’s jurisdictional tests are not met, national agencies such as Germany and Austria have the ability to refer a merger to the EC where the transaction “affects trade between Member States” and “threatens to significantly affect trade in the Member State making the request.” Such rules ensure the availability of review of these transactions and EU-wide coverage. One important caveat to that is the UK, which will not have this availability post-Brexit transition period. However, as outlined above, the UK’s own rules have the scope to catch many of these acquisitions.
In addition, even if there were a potential killer acquisition that fell outside the jurisdiction of the UK, Germany, and Austria (or just Germany and Austria, post-Brexit transition), other Member States with jurisdiction still have the ability to refer the transaction to the EC for review under Article 22.
Potentially reflecting the uncertainties of clinical trials and pharmaceutical development (including patient heterogeneity, differences in mechanism of action, and the importance of route of administration), there is also a low rate of challenges in pharmaceutical transactions involving a pre- commercial target. This could mean that the number of “killer acquisitions” in the pharmaceutical industry is lower than some have suggested.
Conclusion
The suggestion that there should be rule changes to allow for more enforcement against “killer acquisitions” in Europe must be weighed against the fact that European agencies already have the ability to review, and have reviewed, such transactions. In addition, European competition authorities routinely consider potential competition theories of harm in their review of transactions that are reportable. Therefore, any proposals of stronger enforcement in this area should carefully consider the usefulness of existing tools and whether a heavier hand might decelerate a large number of transactions that are not likely to raise competitive concerns. In addition to halting pro-competitive transactions, over-enforcement would also have the negative consequence of increasing unnecessarily the administrative burdens and transaction costs for agencies and businesses.
It is noteworthy that the European agencies that have so far reviewed acquisitions of pre-commercial targets in pharmaceuticals have avoided drawing on firm counterfactuals and predictions. Instead, their analyses have given due consideration to the unpredictability of clinical trials and the probability of technical and regulatory success. Biopharmaceutical therapies and gene therapies are of increasing importance for a wide range of indications. These therapies are currently the most costly and risky to bring to market due to, amongst many other factors, the difficulty in producing the underlying biologic components in sufficient quantities and the lack of clinical trial data supporting important gene therapy indications. The price of innovation is high; and so are the consumer welfare benefits. Against this landscape, European agencies have been right to tread carefully and avoid the chilling effect of over-enforcement.
This article was prepared by the Antitrust Law Section's Health Care & Pharmaceuticals Committee.
