On May 5, 2020, the FTC approved AbbVie Inc.’s (“AbbVie”) $63 billion acquisition of Allergan plc (“Allergan”) on the condition that the merging parties divest three minor products. The consent agreement was approved by a 3-2 party line vote.
The FTC has a long history of scrutinizing transactions in the pharmaceutical industry, but Commissioners’ statements demonstrate that they are not on the same page with regards to the analytical approach of analyzing pharmaceutical mergers and how to remedy the competitive problems that are identified.
The three Republican Commissioners in the majority adhere to the traditional framework, which examines actual competition between existing treatments and potential competition between existing and pipeline treatments, and then tailors very narrow remedies to address those competitive overlaps.
AbbVie and Allergan compete in the manufacture and sale of pancreatic enzyme therapies for exocrine pancreatic insufficiency (“EPI”). AbbVie’s Creon is a pancreatic enzyme therapy for EPI, a condition that results in the inability to digest food properly. Creon is the market leader. Meanwhile, Allergan’s Zenpep (pancrelipase) was a strong competitor in a concentrated market where the other two players have only one or two percent share. Indeed, AbbVie and Allergan together control 95 percent of the market for these drugs. As a result, the FTC concluded that the merger lessened competition in the market for treatment of EPI.
AbbVie and Allergan have investigative biologic drugs working their way through the U.S. Food and Drug Administration (“FDA”) approval process that are indicated to treat moderate to severe Crohn’s disease and ulcerative colitis. AbbVie’s Skyrizi, an IL-23 inhibitor, is already on the market to treat moderate-to-severe psoriasis, but Skyrizi and Allergan’s IL-23 inhibitor, brazikumab, will potentially compete in the future. The FTC alleges that the acquisition would eliminate future direct competition between AbbVie and Allergan in the development and sales in the United States of IL-23 inhibitor drugs for treatment of moderate-to-severe Crohn’s disease and moderate-to-severe ulcerative colitis.
Under the proposed consent agreement, AbbVie and Allergan are required to divest to Nestlé, S.A. (“Nestlé”) Allergan’s assets related to EPI drugs Zenpep and Viokace. AbbVie and Allergan also are required to transfer to AstraZeneca plc (“AstraZeneca”) Allergan’s rights and assets related to brazikumab — its IL-23 inhibitor that is in development to treat moderate-to-severe Crohn’s disease and ulcerative colitis.
Commissioners Rohit Chopra and Rebecca Slaughter, the two Democrats, continue to call for a fundamentally different approach to analyzing pharma mergers especially when the merger combines two firms that have engaged in a laundry list of egregious anticompetitive practices that have resulted in higher prices and less consumer choice. Commissioner Chopra remains skeptical that the FTC’s traditional framework identifies the complete set of harms to patients and favors taking a more expansive approach to analyzing the full range of competitive consequences of pharmaceutical mergers. Commissioner Slaughter agrees with Chopra’s dissent but also expresses concern about the lessening of innovation that occurs from a massive pharmaceutical merger.
Commissioner Chopra criticizes the FTC’s myopic approach to analyzing pharmaceutical mergers as he points out that “he agency’s default strategy of requiring merging parties to divest overlapping drugs is narrow, flawed, and ineffective”. He added that “it misses the big picture, allowing pharmaceutical companies to further exploit their dominance, block new entrants, and harm patients in need of life-saving drugs.”
However, the main focus of his dissent is on the FTC’s willingness to accept “risky or questionable buyers”. He questions whether Nestlé, the maker of candies such as KitKat is a suitable buyer for a prescription drug and whether the divestiture of a pipeline drug to AstraZeneca would actually restore competition.
His main complaint about Nestlé is that the company is not a pharmaceutical manufacturer so it lacks the experience necessary to succeed. And, while the divestiture of brazikumab rids the overlap, AstraZeneca is getting the asset for nothing and Allergan will continue to pay for the development costs of the drug so AstraZeneca gets a “windfall”, has no financial stake in the development of brazikumab, and will have little to no financial incentive to market the product aggressively when and if it is ever approved.
Commissioner Chopra also notes that the FTC failed to account for the hurdles that AstraZeneca will face if brazikumab is ever approved. AstraZeneca would have to contend with AbbVie’s rebate wall. Chopra specifically states: “the Commission could have also taken steps to reduce a key barrier to entry and expansion for AstraZeneca by restricting AbbVie and Allergan’s contracting and rebating practices. This would make it more likely that AstraZeneca would exercise its option to develop and bring brazikumab to market. Importantly, in the immunology space, a key feature of competition is the ability for a market player to engage in ‘portfolio contracting’ and ‘bundled rebates’ across its portfolio of drugs. The evidence in the investigation suggests that AbbVie currently uses its bargaining leverage from its blockbuster drug Humira to preference its other immunology drugs. AbbVie’s rebating practices are suspicious in their own right, and certain aspects of these practices might be unlawful.”
On the flip side, the majority took on Commissioner Chopra’s dissent with a very aggressive tone. The majority said Chopra’s dissent “makes misleading claims about the staff’s investigation, the state of competition in the pharmaceutical industry, and the commission’s enforcement record in this industry,” and that it “relies on false assertions, misapplication of law, and specious logic. It appears to have fully embraced the adage to “never let the truth get in the way of a good story”. The majority points out that while Nestlé is the world’s largest food and beverage company, it has “tremendous financial resources”, a substantial U.S. sales infrastructure, and “contrary to Commissioner Chopra’s assertions — Nestlé is no stranger to the healthcare space.” Additionally, the majority took on the part of Commissioner Chopra’s dissent, which raised concerns regarding the potential that the merged firm could use rebating practices to disadvantage AstraZeneca in bringing brazikumab to the market. To that end, the majority stated that “in the context of a merger investigation, the role of a divestiture is to restore competition to the state that it would have been absent the merger, not to provide the divestiture buyer with advantages that Allergan would not have had.” Basically, the majority is saying that behavioral remedies are inappropriate because Allergan would have had similar hurdles to overcome.
Truth be told, the FTC has an enormous amount of flexibility in crafting remedies to ensure that competition is fully restored. Here the majority takes a very narrow approach of simply transferring pipeline assets to a divestiture buyer without regard to whether the product will ever be marketed. The decision is curious given that former Director of Bureau of Competition Bruce Hoffman publicly stated in a speech in 2018 that pipeline drug divestitures face a “startlingly high” rate of failure and as Chopra points out in his dissent, the FTC has a history of using behavioral conditions to support divestiture buyers.
That said, the majority believes that the consent fully resolves competitive harm from the merger because the divestitures handle the overlaps, both firms are strong in different areas, and there is no evidence the deal will result in higher prices and lost innovation.
The philosophical divide between the Republican and Democrat Commissioners is not a surprise given some of their past votes on merger approvals. The fundamental conflict goes to the very heart of how the FTC should evaluate pharmaceutical mergers. The majority – as well as the FTC staff – continues to use the standard traditional analytical framework. They are making an evidentiary-based analysis as to whether the specific merger before them is likely to substantially lessen competition in a line of business. The majority is concluding that the transaction should be allowed with narrowly tailored divestiture remedies that resolve the specific competitive concerns and shies away from using a broader and more comprehensive approach.
The Democratic Commissioners, on the other hand, believe that the FTC’s analytical approach is myopic and fails to address wide-ranging issues of competitive harm. They believe that the healthcare markets are not competitive and that the FTC’s approach has led to increased consolidation and higher prescription drug prices so a change in approach may be necessary. And to the extent that the FTC is going to accept divestiture remedies of specific products, the Democratic Commissioners believe the FTC should require divestiture buyers that will fully restore competition.
Here, Commissioner Chopra raises serious issues about both buyers. There is certainly always a concern when the divestiture buyer does not replace the competitive intensity that is lost from the merger, and here, Nestlé’ is no Allergan. The evidence also very clearly suggests that AstraZeneca is not financially committed to the pipeline drug that it is acquiring for “no money” and that certain conduct in the industry may prevent AstraZeneca from effectively marketing brazikumab. Specifically, Commissioner Chopra shines a light on how AbbVie’s rebating and bundling practices may actually be monopolistic conduct that is anticompetitive, and he rightly questions whether the conduct should have been prohibited in the consent order. While the Commissioners disagree on a lot, they certainly all should be in agreement that consumers should not have to bear the risk of a failed remedy.