'Killer acquisitions' in Europe's pharmaceutical sector: is more regulation needed?

The European Commission has recently carried out an in-depth study to assess and provide more detail about the existence and characteristics of "killer acquisitions" in the pharmaceutical sector. 

The published results may significantly affect future regulatory initiatives. In essence, companies, particularly in the life sciences and healthcare sector, may be subject to even more intense scrutiny of merger control and foreign direct investment (FDI) proceedings and face additional regulatory burdens and investigation in the coming years. 

Is M&A stifling innovation competition?

The “killer acquisition” theory of harm emerged a number of years ago and has gained increasing attention recently. Competition authorities across the globe put an emphasis on assessing whether mergers and acquisitions (M&A) have detrimental effects on competition, particularly on innovation, due to the discontinuation and elimination of overlapping research and development (R&D) projects or prospective products. 

As the level of R&D projects and spendings in the pharmaceutical sector stands out compared to other industries, it is particularly sensitive to any efforts to reduce or eliminate innovation competition.

The study aimed at assessing the pervasiveness and characteristics of killer acquisitions in the pharmaceutical sector by analysing a large number of transactions in the period between 2014 and 2018.

'Transactions' broadly interpreted

The concept of killer acquisitions has only been addressed so far in the context of M&A deals, However, the Commission’s study was not limited to M&A deals and analysed other types of transactions, such as licensing deals and R&D agreements. The Commission’s reasoning for its broad interpretation of killer acquisitions is the assumption that any market consolidation can lead to a reduction in research expenditure and patent output.

Therefore, the study defined killer acquisitions in the pharmaceutical sector as “transactions that are likely to have as their object or effect the discontinuation of overlapping drug research and development projects ('drug R&D projects') to the detriment of future competition and ultimately of consumers”, whereby the study claims to cover all types of “transactions”, including but not limited to M&A, asset purchases, licensing agreements and R&D agreements.

Limitations and insights

The study is subject to a number of limitations; for example, it does not take data on pre-clinical projects into account and only relies on publicly available information. However, it nevertheless provides valuable insights: 

• Out of 240 transactions with potentially substitutable drug R&D projects, based on a narrow definition of competitive overlap (i.e., with overlapping therapeutic indications and mechanisms of action) at least one narrowly overlapping drug was discontinued in the vast majority of the transactions – in 183, or approximately 76%, of transactions.
• As the discontinuation could not be explained based on publicly available technical or safety reasons, further scrutiny would be warranted for 89 transactions, which were followed by the discontinuation of at least one of the overlapping drug R&D projects.
• The study found, prima facie, that it cannot be ruled out that these transactions – which account for nearly 50% of the transactions with a narrow overlap of drug R&D projects – are consistent with the killer acquisition theory of harm; that is, they have the object or effect of discontinuing an overlapping R&D project to the detriment of future competition.
• Also killer acquisitions may not only arise in the context of M&A deals, as 70% of the transactions that, prima facie, led to concerns would be R&D and licensing agreements.

Commission's conclusions on M&A deals

Due to the above-mentioned limitations, the Commission found it could not reach a conclusive assessment as the available data did not provide a sufficiently solid basis to determine whether the identified transactions actually qualify as killer acquisitions and how to deal with transactions that have raised concerns. However, the study underscores that killer acquisitions – regardless of the actual type of transaction – should continue to be a concern for antitrust authorities and require further scrutiny:

As regards M&A deals, the Commission should maintain its proactive approach to monitor proposed concentrations in the pharmaceutical sector based on its powers according to the European Merger Control Regulation (EUMR). Despite the ruling of the Court of Justice of the EU (CJEU) on referrals pursuant to Article 22 of the EUMR, in the Commission’s view the merger control regime would still be an effective tool to tackle and mitigate competitive concerns in the context of M&A deals. 

Registry or notification system 

While Article 101 and 102 of the Treaty on the Functioning of the European Union are generally seen as valuable antitrust tools to address killer acquisitions outside of merger control and FDI scrutiny, the study recommends introducing a registry or notification system for other types of transactions (for example, license or R&D agreements) involving a planned discontinuation of an R&D activity: 

The introduction of such system could bring more potentially harmful transactions to the antitrust authorities’ and the Commission’s attention, and effectively close the current gap between the detection and review of killer acquisitions.

The study considered whether this system should only concern companies with turnover above a certain threshold and with an interest in a pharmaceutical pipeline that gives rise to market-to-pipeline or pipeline-to-pipeline overlaps. Additionally, it proposed that companies are requested to provide periodic updates on the development and commercialisation of the overlap drugs for a limited period. 

In order to keep the administrative burden low, the study considered whether this system should only serve as an information library rather than as the basis for a full competitive assessment. Therefore, notifiable information would only be high level; for example, basic information about the parties, type and value of the transaction, the therapeutic indications and the mechanisms of action. 

The Commission would then be granted a limited period of time – for example, three or six months – to decide whether to initiate investigations, also implying that the project would potentially be subject to a standstill or "hold separate" obligation. 

However, this system would only likely win support if it is easy to use for both the Commission and companies. Moreover, it remains to be seen whether the Commission has the appetite to introduce another system that would further increase its own administrative burden.

Osborne Clarke comment

The CJEU’s Illumina-Grail decision (Joined Cases C-611/22P and C625/22P) in September ruled that the Commission did not have the power to assess the merger of the two companies. However, the study now provides the Commission with new arguments that it requires investigative powers to review transactions and agreements which fall outside the scope of its current tools, such as the merger control and FDI regime.

While the study does not result in or have any immediate effects on any regulatory initiatives, it should be expected that future legislative developments may particularly aim to extend the authorities’ toolkit to be able to identify and review additional potentially harmful M&A deals but also certain types of agreements. With regard to the latter category, for R&D as well as licensing situations, a deal with “killer acquisition” characteristics would likely require a very specific underlying contractual setup that allows for an actual discontinuation – that is, the respective license agreement. For example, this must not include an obligation to exercise the in-licensed intellectual property, which in many scenarios will rather be the exception than the default position.

Further, it is likely that competition authorities across Europe will focus even further on potential negative impacts on innovation competition when assessing prospective concentrations. Companies particularly in the life sciences and healthcare sector but also in the IT sector should, therefore, prepare for an intensified scrutiny in case of horizontal overlaps of current and future products and put particular emphasis on an in-depth preparation of merger control and FDI filings.