The Neglected Concern of Firm Size in Pharmaceutical Mergers

• Author: Patricia M. Danzon and Michael A. Carrier
• Position: Respectively, Celia Moh Professor Emeritus, The Wharton School, University of Pennsylvania, and Distinguished Professor, Rutgers Law School
• Pages: 487-520

THE NEGLECTED CONCERN OF FIRM SIZE IN

PHARMACEUTICAL MERGERS

P

ATRICIA

M. D

ANZON

M

ICHAEL

A. C

ARRIER

*

Pharmaceutical markets are complex. Multiple agents, including doctors,

insurers, and pharmacies, play critical roles that affect competition between

manufacturers and patient choice between drugs. This complexity, however, is

neglected in standard merger analysis of pharmaceutical firms. In evaluating

proposed “horizontal” mergers, the antitrust agencies have focused almost ex-

clusively on whether the merging firms have potentially competing or over-

lapping products in specific drug markets. If they do, the remedy sought in

nearly every case is divesture of the overlapping products.

1

This approach is consistent with the Horizontal Merger Guidelines,

2

which

the federal antitrust agencies have followed, and which the courts have ac-

cepted.

3

These Guidelines focus on ensuring that the combined entity does not

have increased market power in specific drug markets, which includes ensur-

ing that the buyer of any divested products can compete with the merged

entity.

4

The traditional approach is also consistent with the Hart-Scott-Rodino

* Respectively, Celia Moh Professor Emeritus, The Wharton School, University of Penn-

sylvania, and Distinguished Professor, Rutgers Law School. We are grateful to anonymous refer-

ees from the Antitrust Law Journal for very helpful comments.

1

See, e.g., F

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N

, N

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ERGER

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EMEDIES

: S

TATEMENT OF THE

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EDERAL

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OMMISSION

4 (2012), www.ftc.gov/system/

files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf (“Anticompetitive hori-

zontal mergers are most often remedied by a divestiture.”).

2

U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 4 (2010),

ftc.gov/os/2010/08/100819hmg.pdf (“In any merger enforcement action, the Agencies will nor-

mally identify one or more relevant markets in which the merger may substantially lessen

competition.”).

3

See, e.g., Hillary Greene, Guideline Institutionalization: The Role of Merger Guidelines in

Antitrust Discourse, 48 W

M

. & M

ARY

L. R

EV

. 771 (2006).

4

See Frequently Asked Questions About Merger Consent Order Provisions, F

ED

. T

RADE

C

OMM

’

N

, www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/merger-

faq (explaining divestiture packages, buyers, and goal “to preserve fully the existing competition

in the relevant market”).

487

488 A

NTITRUST

L

AW

J

OURNAL

[Vol. 84

Antitrust Improvements Act, which, in providing the agencies with the ability

to review transactions before completion, “create[s] a natural opportunity for

negotiation as the government identifies possible problems and brings them to

the attention of the merging parties.”

5

A market-by-market analysis can be

viewed as reflecting the burden on the agencies to show a “likely effect” of

“substantially . . . lessen[ing] competition”

6

in a setting in which courts tend to

be guided by precedent and may be skeptical of novel theories of harm.

7

In

many cases, this approach adequately addresses competitive concerns.

There is growing unease, however, with analysis of pharmaceutical mergers

that focuses solely on overlapping products in individual markets. For exam-

ple, then-Commissioner Rohit Chopra dissented from the majority’s analysis

in AbbVie’s acquisition of Allergan, lamenting that “[t]he FTC’s strategy of

focusing on whether pharmaceutical companies have any overlaps in their

drug product lineup is narrow, flawed, and ineffective” because it “fails to

account for how executives make decisions about their drug product portfo-

lios, how larger portfolios can suppress new entry, and how companies use

portfolios to increase bargaining leverage across the supply chain.”

8

Similarly,

Commissioner Rebecca Kelly Slaughter dissented from the majority’s disposi-

tion of Bristol-Myers Squibb’s (BMS) acquisition of Celgene, “support[ing]

the Commission’s effort to remedy [the] drug-level overlap” but “remain[ing]

concerned that this analytical approach is too narrow” and that “the Commis-

sion should more broadly consider whether any pharmaceutical merger is

likely to exacerbate anticompetitive conduct by the merged firm or to hinder

innovation.”

9

5

A

NDREW

I. G

AVIL ET AL

., A

NTITRUST

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AW IN

P

ERSPECTIVE

: C

ASES

, C

ONCEPTS AND

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ROBLEMS IN

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OMPETITION

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OLICY

867 (3d ed. 2017).

6

Statement of Chairman Joseph J. Simons, Commissioner Noah Joshua Phillips, and Com-

missioner Christine S. Wilson Concerning the Proposed Acquisition of Allergan plc by AbbVie

Inc. 1 (May 5, 2020), www.ftc.gov/system/files/documents/public_statements/1574619/abbvie-

allergan_majority_statement_5-5-20.pdf. See FTC v. Procter & Gamble Co., 386 U.S. 568, 577

(1967) (“The core question is whether a merger may substantially lessen competition, and neces-

sarily requires a prediction of the merger’s impact on competition, present and future.”).

7

See Jonathan B. Baker & Carl Shapiro, Detecting and Reversing the Decline in Horizontal

Merger Enforcement, A

NTITRUST

, Summer 2008, at 29, 32 (criticizing United States v. Oracle

Corp., 331 F. Supp. 2d 1098 (N.D. Cal. 2004), for “clear error in economic reasoning” in apply-

ing unilateral-effects theory by requiring plaintiff to “prove a relevant market in which the merg-

ing parties would have essentially a monopoly or dominant position”).

8

Dissenting Statement of Commissioner Rohit Chopra at 3, AbbVie, Inc./Allergan plc,FTC

File No. 191-0169 (May 5, 2020).

9

Dissenting Statement of Commissioner Rebecca Kelly Slaughter at 1, Bristol-Myers Squibb

and Celgene, FTC File No. 191-0061 (Nov. 15, 2019). But see Statement of Commissioner Noah

Joshua Phillips at 2, Bristol-Myers Squibb and Celgene, FTC File No. 191-0061 (Nov. 15, 2019)

(“First, to block a merger outright, U.S. antitrust enforcement agencies must convince a judge

that it violates the law. . . . Second, we need to articulate a viable theory of harm to competition

posed by the merger and produce evidence to support that theory.”).

2022] P

HARMACEUTICAL

M

ERGERS

489

A recent comprehensive report by the American Antitrust Institute (AAI)

found that between 1994 and 2020, the Federal Trade Commission “chal-

lenged 67 pharmaceutical mergers worth over $900 billion, moved to block

only one, and settled virtually all of the remainder subject to divestitures.”

10

As the AAI report explained, the result of this narrow focus on drug-specific

markets has been “the swapping of assets within a relatively small group of

large and increasingly powerful firms.”

11

After examining all 67 pharmaceuti-

cal mergers the FTC challenged between 1994 and 2020, AAI concluded that

the largest companies “have grown through hundreds of mergers and

acquisitions.”

12

This article examines potential inadequacies of the traditional analysis for

mergers of originator pharmaceutical firms by evaluating the potential firm-

wide effects of mergers, particularly those involving large firms. By focusing

on individual product markets in isolation, the traditional analysis neglects the

advantages of overall firm size and the potential for spillover or cross-market

effects across product markets. Size, measured by a firm’s number of products

and overall sales value, conveys significant advantages in negotiations, mar-

keting, and financing that a large firm can exploit to impede entry and thwart

competition in multiple drug markets. Mergers and acquisitions (collectively

“mergers”) involving large firms exacerbate these size advantages.

13

These

cross-market effects, however, are not considered in the standard antitrust

analysis that focuses more narrowly on increased concentration in individual

drug markets to determine whether—as the Clayton Act provides—the

merger threatens to “substantially lessen competition.”

14

In this article, we first document the stability of leading firms in the phar-

maceutical industry and contend that mergers, not innovation, have enabled

these firms to maintain their dominance. We then identify three contexts of

10

D

IANA

L. M

OSS

, A

MERICAN

A

NTITRUST

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NSTITUTE

, F

ROM

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OMPETITION TO

C

ONSPIRACY

:

A

SSESSING THE

F

EDERAL

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RADE

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’

S

M

ERGER

P

OLICY IN THE

P

HARMACEUTICAL

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EC-

TOR

10 (Sept. 3, 2020) [hereinafter AAI R

EPORT

], www.antitrustinstitute.org/wp-content/

uploads/2020/09/AAI_PharmaReport2020_9-11-20.pdf; see id. at 2–4 (pointing to the FTC’s

merger policy as a “major root” of the problems of industry consolidation and “high drug prices”

and citing examples from the generic drug industry). The AAI Report does not distinguish be-

tween originator and generic drugs. Our focus in this article is on mergers of originator drug

firms. The differences between originator and generic pharmaceutical mergers are discussed in

Patricia M. Danzon, Firm Size and Pharmaceutical Mergers: A Cross-National, Cross-Sector

Perspective, C

ONCURRENCES

, Sept. 2021, www.concurrences.com/en/review/issues/no-3-2021/

law-economics/firm-size-and-pharmaceutical-mergers-a-cross-national-cross-sector-perspective-

en.

11

AAI R

EPORT

,supra note 10, at 3.

12

Id. at 11. For example, during that period, Johnson & Johnson and Roche each made more

than 40 acquisitions while Pfizer made more than 30. Id.

13

Our observations on size apply equally to mergers and acquisitions.

14

15 U.S.C. § 14.