CHAPTER § 4.03 Pharmaceutical and Device Company Mergers

• Jurisdiction: United States

§ 4.03 Pharmaceutical and Device Company Mergers

[1] The Hart-Scott-Rodino Antitrust Improvements Act of 1976

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")¹⁵¹ authorizes the DOJ and the FTC to evaluate certain proposed transactions.¹⁵² Unlike other countries' merger-control laws, the HSR Act is a clearance, rather than an approval, process—meaning that clearance does not immunize a transaction from challenge later on, either by private parties or the government itself. Pursuant to the HSR Act, the Antitrust Agencies are concerned primarily with mergers that significantly increase concentration within defined markets.¹⁵³ According to the Antitrust Agencies' Merger Guidelines, the regulators attempt to determine what, if any, anticompetitive effects may result from the transaction. Pursuant to the HSR Act, parties to a transaction must notify the DOJ and the FTC by filing a form with various attachments and paying certain fees.¹⁵⁴ Although both Antitrust Agencies have pre-merger review powers, only one agency will conduct a substantive inquiry of a given transasction after the parties submit an HSR filing.¹⁵⁵ Typically, the FTC has reviewed proposed mergers that involve pharmaceuticals, medical equipment, and devices, as well as hospitals.¹⁵⁶ DOJ has historically reviewed mergers involving health insurers as well as pharmacy-benefit managers ("PBMs"), which manage pharmacy benefits for employers and health-insurance companies.¹⁵⁷

[2] 2010 Horizontal Merger Guidelines

The DOJ and FTC issued the most recent version of the Horizontal Merger Guidelines on August 19, 2010 (the "Guidelines"). The Guidelines are designed to more accurately reflect the way that the Antitrust Agencies conduct merger reviews and aim to make the merger-review process more transparent to businesses and courts. The Guidelines: (1) clarify that merger analysis does not use a single methodology, but is a fact-specific process and that the Antitrust Agencies use a variety of tools to analyze the evidence to determine whether a merger may substantially lessen competition; (2) include a section on "Evidence of Adverse Competitive Effects," discussing several categories and sources of evidence that the Antitrust Agencies have found informative in predicting the likely competitive effects of mergers; (3) explain that market definition is not an end in and of itself or a necessary starting point of merger analysis, but instead a tool useful to the extent it illuminates the merger's likely competitive effects; (4) provide an updated explanation of the hypothetical monopolist test used to define relevant antitrust markets and how the Antitrust Agencies implement that test in practice; (5) update the concentration levels likely to warrant further scrutiny or challenge from the Antitrust Agencies; (6) provide an expanded discussion of how the Antitrust Agencies evaluate unilateral competitive effects; (7) provide an updated section on coordinated effects, clarifying that coordinated effects, like unilateral effects, include conduct not otherwise condemned by the antitrust laws; (8) provide a simplified discussion of how the Antitrust Agencies evaluate whether entry into the relevant market is so easy that a merger is unlikely to enhance market power; and (9) add new sections on powerful buyers, mergers between competing buyers, and partial acquisitions.

[3] Overview of the DOJ and FTC Merger-Review Process

The HSR Act pre-merger notification requirement applies only to certain transactions meeting some combination of the following three thresholds: (1) the in-commerce test; (2) the size-of-transaction test; and (3) the size-of-person test. First, a transaction must satisfy the commerce test, which requires that either party involved in the proposed transaction must be engaged in U.S. interstate commerce or conduct that directly affects U.S. interstate commerce.¹⁵⁸ Second, all transactions must be evaluated using the "size-of-transaction" test.¹⁵⁹ Currently, transactions where the acquiring party acquires less than $90 million in assets are not subject to the notification requirement.¹⁶⁰ Transactions where the acquiring party obtains at least $359.9 million must automatically be reported to the DOJ and FTC. All transactions between these two thresholds, greater than $90 million and less than $359.9 million, are subject to an additional test: the size-of-person test. Under this test, if either party has at least $18 million in sales or assets and the other party has at least $180 million in sales or assets, and the transaction is between $90 million and $359.9 million, the parties must notify the DOJ and FTC.¹⁶¹ Despite these complicated thresholds, the DOJ and FTC have the power to investigate any proposed transaction that may have an adverse effect on competition and public welfare—even those that fall outside of limits discussed above. Ultimately, the Antitrust Agencies have significant powers to investigate all transactions.

Once notified, the DOJ or FTC has a definite time period, typically 30 days, to clear the proposed transaction—although periodically the Antitrust Agencies choose to conclude the inquiry early—or extend the waiting period by issuing a request for additional information (also known as a "Second Request"). Generally, once both parties certify substantial compliance with the Second Request, the DOJ or FTC has another 30 days to review the transaction, which may only be tolled by the government filing a lawsuit to block the transaction. Parties may not close a transaction until the HSR waiting period closes.

A core issue relating to any merger-review analysis is whether a transaction is likely to lessen competition to such a degree as to raise anticompetitive concerns. There are two primary models for understanding the competitive effects of a transaction and for determining whether a transaction will substantially lessen competition. First, does the transaction enable the merged entity to unilaterally exercise market power by successfully sustaining a price increase or restricting output in a relevant market (a "Unilateral Effects" model). Second, does the transaction change the market in such a way that facilitates collusion among competitors (a "Coordinated Effects" model).

[4] Market Definition

Defining the relevant market at issue is a fundamental component of any analysis to determine the competitive effects of a merger.¹⁶² Market definition focuses on an area of competition and enables the identification of market participants and the measurement of market shares and market concentration.¹⁶³ The Antitrust Agencies' analysis need not start with market definition, but "evaluation of competitive alternatives available to customers is always necessary at some point in the analysis."¹⁶⁴

The relevant market will always include a product market, which identifies products or services that compete with each other, and a geographic market that describes the physical area within which those products or services compete.¹⁶⁵ To determine the relevant market, the Antitrust Agencies usually consider the likely reaction of buyers to a "small but significant and non-transitory increase in price" of products in that area (known as the SSNIP test).¹⁶⁶ Ultimately, the relevant market is the smallest collection of product and geographic areas within which a hypothetical monopolist could raise prices.

The merging parties, customers, and competitors provide much of the data necessary for the Antitrust Agencies to determine the appropriate market.

[a] Product Market

Defining a product market requires an assesment of the products or services that are sufficiently similar and substitutable so that they compete against one another.¹⁶⁷ Said another way, the heart of defining a relevant product market is determining the products or services that are "reasonably interchangeable" for the same purpose.¹⁶⁸

The Guidelines define product markets by asking which products buyers would substitute in response to a SSNIP in a series of possible markets.¹⁶⁹ This test is called the "Hypothetical Monopolist Test."¹⁷⁰ The Antitrust Agencies typically determine the effects of the small but significant and nontransitory increase in price by typically using a five-percent price increase.¹⁷¹ The demand-side analysis begins with identifying the overlapping products sold by the merging firms. The relevant market includes those products that consumers are willing to purchase as a substitute in the face of a small but significant and nontransitory increase in price.¹⁷² This is also frequently referred to as the cross-elasticity of demand.

In considering customers' likely responses to higher prices, the Antitrust Agencies take into account any available and reliable evidence, including, but not limited to: (i) how customers have shifted purchases in the past in response to price changes; (ii) statements from customers as to how they would respond to price changes; (iii) past conduct of industry participants (including supply-side business decisions); (iv) product characteristics and switching costs; (v) percentage of lost sales in response to price increases as compared to the percentage of those sales recaptured by a substitute product; and (vi) legal or regulatory requirements as barriers to entry for alternative products or services.¹⁷³

Product-market definition is not an exact science. On the continuum of substitut-ability, there are products that are fundamental equivalents and those that compete in a more general sense. The fact that a firm may compete with another firm generally in the industry does not automatically mean that all products sold by the firms are a part of the same market for antitrust purposes.¹⁷⁴ In fact, the Antitrust Agencies have found products that are, as a practical matter, functional equivalents to be in different product markets for antitrust purposes.¹⁷⁵ Evidence of substitutability is drawn from "industry or public...