On February 2, 2018, Bruce Hoffman, the Federal Trade Commission’s (“FTC”) acting Director of the Bureau of Competition, announced at the Global Competition Review Seventh Annual Antitrust Law Leaders Forum that the FTC will no longer accept divestitures of inhalant and injectable pipeline drugs in pharmaceutical mergers. Historically, the FTC had accepted divestiture of pipeline asset to remedy potential competition concerns. Hoffman said that the FTC is making changes to how it resolves anticompetitive pharmaceutical mergers because past divestitures of assets in the research and development pipeline had a high failure rate for inhalants and injectables, which are known to be difficult and complex to manufacture.
The past history of problems with divestitures in this area indicated to the FTC that divesting ongoing manufacturing assets rather than pipeline assets that have not come to market places greater risk of failure on the merging firms rather than consumers. Accordingly, in situations in which the parties to the transaction own both an established inhalant or injectable that is currently being manufactured and an overlapping pipeline inhalant or injectable, the FTC will seek a divestiture of the manufactured product that is already on the market. The FTC, for example, may require the divestiture of contract manufacturing capabilities rather than other assets, such as research and development assets.
The FTC is taking the stance because of an internal study that revealed that the rate of failure for divestitures of complex pipeline products was “startlingly high”. Apparently, divestiture buyers have had difficulty in actually getting the complex pipeline assets to market. Not surprisingly, a divestiture buyer could struggle to reliably manufacture a complex pharmaceutical product, which harms its ability to ultimately bring the product to market. Indeed, all kinds of things can go wrong when trying to launch a complex pharmaceutical product. For instance, the divestiture buyer of pipeline assets could have difficulty obtaining final FDA approvals including the OK to actually manufacture the product.
A new administration is entitled to change its merger enforcement priorities and how it remedies problematic mergers. Here, the FTC is making a change to how it resolves anticompetitive pharmaceutical mergers. In pharmaceutical mergers in which one party manufactures a pharmaceutical product that is difficult and complex to manufacture and the other party has a similar product in the research and development pipeline, there is a strong presumption that the FTC will require a divestiture of the product already being manufactured rather than the one in development. The FTC believes that the risk of failure is dramatically less for a divestiture buyer if it is acquiring a product that is already on the market as opposed to acquiring a product under development, which is subject to risks that it might not obtain approval to manufacture the newly competitive product. The new policy on complex pipeline pharmaceutical products makes sense as it should improve the success rate of divestiture remedies. The goal is to minimize the potential that a remedy fails. Given the high failure rate for pipeline divestitures, the FTC’s requirement of divesting the manufactured product shifts the risk of failure to the merging parties. Indeed, why should consumers take all the risk when crafting merger remedies? While Hoffman’s speech focused on inhalants and injectables as products that are complex to manufacture, other products that are difficult and complex to manufacture could be added to the FTC’s list. Moreover, these same principles could be applied in other situations where merging parties may be forced to divest actual products instead of pipeline assets.