Pharmaceutical Mergers: Changes in the Regulatory Landscape?

Pfizer’s recent reported approach to Actavis is the latest in an extremely busy period of corporate transaction activity in the pharmaceutical industry, amounting to $317.4 billion in transaction value in the first half of 2014 according to Thomson Reuters. This activity includes the purchase by Actavis of Allergan (which was pursued by Valeant for most of the year), AbbVie’s aborted acquisition of Shire, Pfizer’s abandoned offer for AstraZeneca, the purchase by Novartis of GSK’s oncology business, the purchase by GSK of the vaccines business of Novartis, the purchase of Novartis Animal Health by Eli Lilly, the purchase by Bayer of Merck’s consumer care business, and the sale of KY brand of lubricants by Johnson and Johnson to Reckitt Benckiser.

The stated reasons behind consolidation in this sector are varied but if there are any trends one can identify, these are:

• Increased specialization-life-sciences companies are divesting non-core businesses to companies who view the divested businesses as core.

• Large company mergers-which may have benefits from a tax perspective (i.e., so called “tax inversion” deals). Pfizer’s abandoned bid for AstraZeneca earlier in the year, for example, was reported as being at least partially motivated by a plan to save billions in United States tax by basing the combined entity in the United Kingdom for tax purposes.

Any industry consolidation has the potential to give rise to complications from a regulatory perspective. Transactions might be subject to regulatory intervention in a number of ways:

• Where certain jurisdictional thresholds have been met, transactions may be subject to merger control, which effectively allows competition regulators in any country (and for larger transactions supra-national regulators such as the European Commission) to assess whether or not the merger may give rise to competition concerns and should therefore be prohibited or modified to allay concerns.

• In certain circumstances, there is the possibility of some form of public interest intervention by government, which can either prevent or permit a transaction going ahead if it is in the national interest to do so.

• Finally, there may be intervention under rules governing the conduct of mergers (for example in the UK, the Takeover Code).

Each of these interventions are considered in turn.

Merger control

There is a plethora of examples of merger control intervention in the life-sciences sector. Broadly, the exercise carried out by the merger control authorities is to compare the degree of competition prior to the transaction with the degree of competition that might be anticipated once the parties have merged. In carrying out this analysis, the authorities focus on the portfolio of merging parties’ products to see whether any overlap or synergies created by the merger might lead to competition problems.

The traditional view is that the pharmaceutical sector might be less likely than others to give rise to problems from a merger control perspective. Reasons for this include the following:

• Currently, the pharmaceutical sector is relatively fragmented with a large number of participants and with no business currently having more than 10% of global shares by revenue.

• Pharmaceutical companies tend to have diverse portfolios of drugs.

• Patent-protected drugs may in effect have a monopoly in the treatment of a condition, and drugs with expired patents typically have multiple competitors on the market. In either of these cases, a merger between two parties may not be detrimental to competition-in the first case, because there was no competition prior to the merger; and in the second, because there is likely to be sufficient competition afterwards.

• National purchasers such as the National Health Service (NHS) may be deemed to have sufficient buyer power to counteract powerful sellers and achieve favourable purchasing terms from them.

However, there are a number of reasons why the pharmaceutical sector may anticipate greater regulatory intervention going forward:

• Increased specialization brings with it greater market shares and fewer players and therefore, greater chances of regulatory scrutiny and complications.

• The European Commission errs on the side of caution in narrowly defining pharmaceutical markets, which sometimes results in fairly high market shares in some of those markets. This situation can lead to approval decisions being subject to conditions or obligations (typically the divestment of a competing business that would otherwise be acquired).

• Continued attempts to bring greater competition to the NHS may mitigate the NHS’s purchasing power.

• The increase in merger control activity from regulators in developing or newly developed countries results in a higher risk of transactions being picked up and ultimately prevented.

Public interest intervention

The aborted Pfizer/AstraZeneca transaction led to some controversial suggestions of intervention by government on public interest grounds in order to protect UK interests, and specifically UK jobs at AstraZeneca.

However, in the UK, there is no basis for public interest intervention in mergers in the life-sciences arena. Currently, the scope for public interest intervention in the UK is limited to the grounds of national security, stability of the financial system and media plurality, and has only been used rarely; for example, the UK government allowing Lloyds bank to buy Halifax Bank of Scotland (HBOS) to prevent the latter’s potential collapse, and the intervention in Newscorp’s acquisition of BskyB on media plurality grounds.

It would appear arguable that any public interest type intervention by government in a life sciences merger would be seen by the European Commission as a breach of European Union law; for example, because it might constitute interference with the exclusive competence of the European Commission to review and decide on mergers notified to it.

The Takeover Code

One interesting development arising from the abandoned bid by Pfizer for Astra Zeneca has been a proposed amendment to the Takeover Code to seek to ensure that pre-completion assurances made by companies in the context of bids are binding on them once the bid is accepted. This stemmed from a concern at the time of the Pfizer bid for AstraZeneca that Pfizer might renege on a promise to invest in a UK-based AstraZeneca research facility after any acquisition had been completed. A consultation on the proposed new powers closed on 24 October 2014, and the amendments will take effect on 12 January 2015. This amendment clearly shows an intention by the UK government to seek to protect UK interests, albeit indirectly and in a way that is more likely to be legal from an EU law perspective.

Summary

It follows that regulatory intervention in the pharmaceutical sector as a result of the greater number of transactions is set to increase. There are a number of merger decisions currently outstanding, and it will be interesting to see what precedent arises from these. We can certainly expect closer regulatory scrutiny and intervention, both from a merger control and possibly a public interest perspective.

About the authors

Gustaf Duhs is a partner and heads the Competition and Regulatory team at Stevens & Bolton. 

Maliha Mahmood is a senior associate in the Competition and Regulatory team.

Both Gustaf Duh and Maliha Mahmood are members of Stevens & Bolton’s Life Sciences Sector Group.

Article DetailsPharmaceutical Technology Europe
Vol. 27, Issue 1

Citation: When referring to this article, please cite as G. Duhs and M. Mahmood, “Pharmaceutical Mergers: Changes in the Regulatory Landscape,” Pharmaceutical Technology Europe 27 (1) 2015.