December 10, 2020

Antitrust: Key Issues in U.S. Tech & Pharma Deals

The lawsuits filed yesterday by the FTC & a coalition of state AGs seeking to breakup Facebook have further heightened the profile of antitrust issues in the tech sector. This Cooley memo provides an overview of the key U.S. antitrust issues facing deals involving technology & pharma companies. Here’s an excerpt discussing regulatory concerns about “killer acquisitions” involving nascent competitors:

Nascent competition and killer acquisitions of early-stage technologies in both the pharmaceutical and technology sectors are at the center of the antitrust spotlight. Potential competition theories have long been used to challenge acquisitions by incumbent firms of potential competitors alleged to have constrained the incumbent’s market power with the threat of disruptive new entry. But evidentiary requirements on the agencies to advance ‘clear proof ’ rather than mere speculation regarding future competitive effects has historically limited enforcement action to negotiated divestitures in large pharmaceutical matters and led to few successful courtroom challenges based on potential competition theories of harm.

With Covid-19, the world is evolving, and so are the US antitrust enforcement theories when it comes to nascent competitors. Advancing the debate, a 2018 paper published by Yale School of Management and London Business School professors, entitled ‘Killer Acquisitions’, made waves in the antitrust world with a number of startling – and hotly debated – conclusions, including that up to 7.5 per cent of acquisitions in the pharma sector, based on an analysis of over 10 years of  pharmaceutical industry data, are killer acquisitions (ie, acquisitions where ‘incumbent firms . . . acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition’).

The authors of that paper concluded that ‘[k]iller acquisitions appear to routinely avoid regulatory scrutiny by acquiring entrepreneurial ventures at transaction values below the [Hart-Scott-Rodino Act (HSR)] review thresholds.’ This concern was echoed in a 2019 article by a University of Chicago economist, arguing that an increase in HSR reporting thresholds from US$15 million to US$50 million in 2001 corresponded with a concomitant rise in horizontal mergers between direct competitors.

Concerns about killer acquisitions featured prominently in the House Judiciary Committee’s recent report on its investigation into Big Tech’s impact on competition in digital markets The memo says that U.S. antitrust regulators are responding to the issues raised by these transactions with enforcement actions and exploration of new approaches to potential competition cases. But don’t take their word for it – just ask Facebook.

John Jenkins