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ARTICLE

Challenges to Acquisitions of Nascent Competitors in Biotech

Allison Smith and Jordanne M. Steiner

Summary

  • The FTC’s “actual potential entrant” doctrine requires four elements: “(1) the relevant market is highly concentrated, (2) the competitor ‘probably’ would have entered the market, (3) its entry would have had pro-competitive effects, and (4) there are few other firms that can enter effectively.”
  • The experience of four deals, Thoratec/HeartWare, Steris/Synergy Health, Mallinckrodt/Synacthen, and Illumina/Pacific Biosciences of California, shows that the Commission will challenge deals it views as eliminating a nascent competitor and often successfully.
  • Yet the examples also illustrate the difficulty of the competitive analysis, particularly the last two elements of the FTC’s actual potential entrant doctrine: the target’s entry would have had procompetitive effects and few other firms can enter effectively.
Challenges to Acquisitions of Nascent Competitors in Biotech
vm via Getty Images

Antitrust enforcement agencies, antitrust practitioners, Congress, and the public press are having a vibrant discourse on acquisitions of nascent competitors by “Big Tech” companies, and whether the agencies are aggressive enough in their enforcement actions. The Federal Trade Commission (FTC), however, has been active in investigating and challenging potential competition cases in the biotechnology sector for some time.

One recent study by FTC personnel identified 82 cases from the last 25 years where the FTC challenged proposed or consummated transactions on a theory of harm to future competition. Forty-eight of the cases (59 percent) were in the pharmaceuticals sector, and 15 cases (18 percent) were in medical devices, equipment, and tests. Only three were classified as technology and software.

The FTC’s attention to biotech deals continues. In 2020, when the Commission issued Special Orders to five large technology firms for information on prior acquisitions not reported under the Hart-Scott-Rodino Act, FTC Commissioners Christine Wilson and Rohit Chopra called for a retrospective of non-reportable transactions in the healthcare industry. The Commissioners noted that “non-reportable deals involving technology companies garner significant attention,” but the healthcare industry, including pharmaceuticals and hospitals, also have seen patterns of consolidation through non-reportable deals.

Acquisitions of potential competitors in the biotech sector is a natural focus given the FTC’s expertise in healthcare and the potential impact of innovative products on consumers’ well-being and wallets. The highly innovative sector involves large upfront R&D expenditures, creating barriers to entry and possibly raising concentration concerns. And biotech acquisitions may involve more readily definable relevant product markets since they often involve specialized technology with specific applications or uses. These features make competing products easier to identify (and prove) than, for example, technology platforms.

To illustrate, in the first case example below, the relevant product market was “U.S. left ventricular assist device[s],” which “replac[e] the function of the left ventricle” and provide “full circulatory support for end-stage heart failure patients” after all other treatment options “have been exhausted.” Compare that to the FTC’s definition of a relevant market in Federal Trade Commission v. Meta Platforms, Inc.: “personal social networking services,” defined as “online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space,” and distinct from (i) mobile messaging services, (ii) specialized social networking services, (iii) online services that focus on the broadcast or discovery of content based on users’ interests, and (iv) online services focused on video or audio consumption.

Acquisition prices that fall under HSR notification thresholds provide another rationale for the FTC’s activity in this area. Given the high initial investments, new products are often high risk / high reward endeavors. Emerging biotech companies may seek to be acquired by larger companies with existing clinical testing abilities and the scale needed to commercialize a new product. Early-stage valuations may make the deal non-reportable.

While the high risk / high reward structure of the industry may explain the FTC’s attention, it also complicates the competitive analysis. Gauging the competitive effect of a potential entrant is difficult and made even more so by the complex product development process in biotech. While product development continues in the lab, the product must continue to present a viable business case. Biotech products need to undergo clinical trials and gain U.S. Food and Drug Administration (FDA) approval, both expensive and uncertain.

If approved to launch from a business and regulatory standpoint, the product still needs to gain market acceptance to have any competitive impact on the relevant market. Each step carries uncertainty, making the regulators’ job particularly difficult when trying to predict the competitive impact of a product in development. Though the FTC seeks to protect potential competition “even when a potential entrant faces regulatory hurdles on the path to entry,” regulatory uncertainty has to enter the equation.

The FTC’s “actual potential entrant” doctrine requires four elements: “(1) the relevant market is highly concentrated, (2) the competitor ‘probably’ would have entered the market, (3) its entry would have had pro-competitive effects, and (4) there are few other firms that can enter effectively.” Four examples are particularly illustrative of potential competition cases in the biotechnology sector:

Thoratec Corp. / HeartWare International, Inc.

In July 2009, the FTC filed an administrative complaint challenging the proposed acquisition of HeartWare International, Inc. by Thoratec Corporation. The FTC alleged that HeartWare was “the one company poised to seriously challenge Thoratec’s monopoly of the U.S. left ventricular assist device (‘LVAD’) market.” Thoratec had the only two LVADs commercially available, and HeartWare was one of a few potential competitors with FDA approval to sell limited amounts of its device under an Investigational Device Exemption.

The parties argued the merger would provide a broader portfolio of products and complementary product development capabilities for Thoratec, given HeartWare’s R&D focus. HeartWare would benefit from Thoratec’s existing support infrastructure and financial support while HeartWare approached a full market release.

The FTC alleged that HeartWare’s device was the next LVAD expected to be approved for commercial sale by the FDA and that its novel design would provide superior performance to Thoratec’s devices. The FTC argued HeartWare would “rapidly erode” Thoratec’s monopoly following FDA approval while other companies working on LVADs likely would not be able to challenge Thoratec.

The day after the complaint was filed in 2009, the parties abandoned the transaction. In 2012, HeartWare received FDA approval for its device. Medtronic acquired HeartWare in 2016 and pulled the HeartWare device from the market in June 2021 due to safety concerns. No other LVADs have entered, leaving only Thoratec’s products.

Steris Corp. / Synergy Health PLC

On May 29, 2015, the FTC issued an administrative complaint challenging Steris Corp.’s proposed $1.9 billion acquisition of Synergy Health PLC. The two companies were the second- and third-largest sterilization companies in the world.

Steris was one of two companies providing gamma sterilization services in the United States. Synergy had electron-beam radiation facilities in the U.S. and planned to open x-ray sterilization facilities. The FTC alleged that electron-beam radiation sterilization was not cost-effective for many products that undergo gamma sterilization, but x-ray sterilization was expected to be a close substitute. No company offered x-ray sterilization in the U.S. at the time.

Four months after the merger was announced and while the FTC was still investigating, Synergy discontinued the U.S. x-ray project. The FTC alleged the merger caused Synergy to abandon the project and accordingly would reduce future competition for radiation sterilization of medical products.

Simultaneously with the administrative complaint, the FTC filed a complaint for a temporary restraining order and preliminary injunction in federal court. The district court denied the preliminary injunction, finding that Synergy discontinued its U.S. x-ray sterilization project because of a lack of customer commitments (mainly due to the high cost of switching their products from gamma to x-ray sterilization and obtaining new regulatory approvals) and significant capital costs to build the facilities. In short, the FTC did not show that Synergy would have launched the competing x-ray sterilization technology in the U.S. absent the acquisition.

The Commission did not appeal the denial of a preliminary injunction and subsequently voted to dismiss the administrative complaint. Steris and Synergy completed the acquisition on November 2, 2015. In the years since, companies such as Steri-Tek have developed and marketed x-ray sterilization procedures in the United States.

Mallinckrodt / Synacthen Depot

On January 18, 2017, the FTC filed a complaint against Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals) and parent company Mallinckrodt plc, alleging Mallinckrodt illegally monopolized the market for therapeutic adrenocorticotropic hormone (ACTH) drugs used to treat infantile seizures. Questcor sold H.P. Acthar Gel, the only ACTH available in the U.S., and had increased its price by 85,000 percent since acquiring Acthar from Aventis in 2001.

In June 2013, Questcor acquired the U.S. rights to Synacthen Depot, a synthetic ACTH drug, from Novartis AG. Synacthen was, at the time, used similarly to Acthar in other parts of the world. The FTC alleged Questcor acquired the U.S. rights to Synacthen to prevent another bidder from developing and launching the drug in the U.S., which would challenge Questcor’s monopoly over ACTH drugs. Mallinckrodt subsequently acquired Questcor in 2014, changing its name to Mallinckrodt ARD.

Simultaneously with the complaint in January 2017, the parties filed a Joint Motion for Entry of Stipulated Order for Permanent Injunction and Equitable Monetary Relief, under which Mallinckrodt agreed to grant a limited sublicense to commercialize Synacthen in the U.S. for certain uses. It also agreed to pay $100 million in fines, but did not admit culpability. By mid-2018, the price of a vial of Acthar had risen by $7,000 since Mallinckrodt acquired Questcor in 2014, and by 97,000 percent since Mallinckrodt acquired Acthar in 2001. Synacthen Depot does not appear to be available in the U.S. to treat infantile seizures.

Illumina Inc. / Pacific Biosciences of California, Inc.

In December 2019, the FTC filed an administrative complaint challenging Illumina Inc.’s proposed $1.2 billion acquisition of Pacific Biosciences of California, Inc (“PacBio”). The FTC alleged that Illumina, the leader in DNA sequencing and next-generation sequencing in the U.S., sought to acquire PacBio to “extinguish it as a competitive threat.”

PacBio offered a DNA sequencing system that had some benefits over Illumina’s technology but was more expensive. The FTC alleged recent technological improvements made PacBio’s long-read sequencing system a closer alternative to Illumina’s short-read technology, and that PacBio marketed the system as a closer competitor to Illumina. The FTC alleged Illumina had a market share of over 90 percent and that only three other companies manufactured next-generation sequencing products, but their products were not substitutes.

Less than a month after the complaint, the parties abandoned the transaction. As of 2019, Illumina remained the largest player in the next-generation sequencing market in the United States, but Thermo Fisher Scientific Inc. and Oxford Nanopore Technologies, mentioned in the FTC Complaint, remain in the U.S. market along with PacBio. F. Hoffman-La Roche Ltd. has also emerged as a significant player.

Conclusion

While estimating the competitive effect of a potential entrant is difficult, the FTC is willing to challenge deals it views as eliminating a nascent competitor. As these examples demonstrate, the FTC has been largely successful in these challenges, prevailing on three out of the four discussed above. Yet the examples also illustrate the difficulty of the competitive analysis, particularly the last two elements of the FTC’s actual potential entrant doctrine: the target’s entry would have had procompetitive effects and few other firms can enter effectively.

For HeartWare and Synacthen Depot, the market looks much the same as it did before. HeartWare’s product did gain regulatory approval and enter the market, but was removed due to safety concerns. Thoratec remains the only player in the defined market. The FTC approved the sublicense to commercialize Synacthen in the United States for infantile spasms to West Therapeutic Development, LLC six months after the stipulated order. We have not determined that this sublicense has resulted in commercialization of Synacthen in the U.S. for infantile spasms, and the price of Mallinckrodt’s drug continued to increase after the settlement.

In contrast, other competitors have entered the relevant market since the FTC lost its challenge to the Steris Corp. / Synergy Health acquisition. And while PacBio remains an alternative to Illumina after the FTC’s successful challenge, other companies now also offer similar products.

These are high-profile matters where the FTC publicly challenged the transaction and do not necessarily reflect the FTC’s enforcement decisions in other biotech-related transactions. Nonetheless, they illustrate the basic analysis and are instructive for evaluating antitrust risk. Counsel should consider this theory of harm in a biotech transaction, including a non-reportable deal, involving an acquirer that is the only, or virtually only, participant in the relevant market (assuming the FTC’s market definition); the target company is on the cusp of entering or has already entered the relevant market; and there are significant barriers, including intellectual property and regulatory structures, impeding rapid entry by another competitor.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients.

This article was prepared by the Antitrust Law Section's Media & Technology Committee.

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