To kick things off, we’re publishing three updates, covering what you may have missed this summer in mergers, antitrust and other developments. Below you will find the merger developments in healthcare that caught our eye this summer.
Green light for AstraZeneca’s Alexion deal
The UK and EU reviews of the merger came after the announcement, in March, of a multilateral working group to exchange best practices in pharmaceutical mergers between the EU, UK, US and Canadian authorities. The group was set up because of “the need to scrutinise closely to detect those [mergers] that could lead to higher drug prices, lower innovation or anticompetitive conduct”.
The deal allows AstraZeneca to enter the field of rare diseases. It also means that the company acquires Alexion’s complement-biology platform technology, which it can use across areas of AstraZeneca’s broader early-stage pipeline. The complement system plays an important role in our bodies’ innate defence against common pathogens. However, it can also play a role in a variety of conditions including autoimmune diseases, sepsis, transplantation, ischemia-reperfusion injuries, traumatic brain injury, infections and bone biology. It was only recently identified that targeting the complement system by blocking its activation pathways and developing complement inhibitors may be an important part of the treatment of some of those conditions. Alexion is the first drug company to have actually marketed products targeting the complement system.
AstraZeneca identified in its merger notification that Alexion’s complement system technology platform “has implications for the treatment of a wide variety of other diseases”, beyond Alexion’s rare disease focus and it announced that it planned to “[apply] Alexion’s complement-biology platform across areas of AstraZeneca’s broader early stage pipeline”. In very simple terms: AstraZeneca saw possibilities in using Alexion’s innovative technology across AstraZeneca’s early-stage pipeline.
A killer acquisition therefore? Not quite, but still a good opportunity for the CMA to wheel out its new Merger Assessment Guidelines, adopted in March 2021, which clarify how the CMA approaches the assessment of the potential loss of “dynamic competition”. Rule number 1 of public competition enforcement: if the agency adopts new guidance, it will use it at its earliest opportunity.
Concretely, the CMA considered whether the merger may have an impact on competition on a wider basis in respect of the development of products targeting the complement system, encompassing more than a single indication. In other words: would the acquisition of Alexion’s technology reduce AstraZeneca’s incentive to develop its own competing technology targeting the complement system and, if so, would that lead to a substantial loss of competition?
According to the CMA’s decision, at least 25 firms were engaged in complement therapeutics and although Alexion has a strong position in the market, those competitors would provide a competitive constraint on AstraZeneca after the merger. The CMA also noted that most competitors did not raise any concerns with the merger in relation to the complement system.
The Commission’s press statement does not refer to the complement system and its decision has not yet been published, so it is not yet clear if the two authorities followed the same approach in this case or indeed if best practices were shared in the multilateral working group on this merger.
Given all the criticism authorities have been receiving about having allowed markets to become too concentrated and allowing too many “killer acquisitions” to be cleared, the CMA was right to update its guidance to ensure it focussed more on the potential loss of dynamic competition. It was also right to include this analysis in its phase I assessment as AstraZeneca had been clear that the rationale for the transaction was at least in part about acquiring Alexion’s complement system technology and applying it more widely across AstraZeneca’s pipeline. Having found there were plenty of credible players developing treatments based on the complement system, the CMA was also right to clear this merger.
Illumina’s quest for GRAIL continues
In July, the European Commission referred Illumina’s acquisition of GRAIL to an in-depth Phase II investigation. Illumina/GRAIL is the first case in which the Commission has applied its new guidance in respect of Article 22 of the EU Merger Regulation (EUMR) adopted on 26 March 2021, under which the Commission made clear that it is no longer looking to discourage EU Member States from referring a merger that does not meet the notification thresholds of those Member States to the Commission for investigation. It should be noted, however, that the Commission asked Member States to make such a request in relation to Illumina/Grail in February 2021 and the French competition authority issued it on 9 March 2021, both therefore occurred before the Commission’s adoption of its new guidance.
The Commission said in April that it had accepted the referral because the deal threatened “to significantly affect competition within the territory of the Member States that made the referral request” and because “GRAIL’s competitive significance is not reflected in its turnover”. Illumina was unsuccessful in challenging the decisions by the French authority to refer the matter and by the Dutch authority to join that referral (see here and here). It subsequently challenged the referral in the EU’s General Court, which will hear the case this autumn.
The summer got even hotter around this deal when Illumina and GRAIL decided to complete the merger in August despite the Commission having opened a Phase II investigation. In the EU, merging parties are required to hold off on completing the deal until the Commission clears it (the so-called ‘standstill’ obligation), failure of which amounts to ‘gun jumping’ which can lead to significant penalties.
And indeed, the Commission opened a gun jumping inquiry just two days later. The Commission appears to have good grounds for doing so, provided Illumina’s challenge against the Article 22 referral is dismissed by the General Court: Article 22(4) of the EU Merger Regulation (EUMR) is clear that the standstill obligation in Article 7 of the EUMR applies to merger inquiries opened after an Article 22 referral, provided the transaction is not yet completed on the date the Commission informs the merging parties that a referral request has been made. Of course, if Illumina’s appeal in the General Court succeeds, the gun jumping investigation would have to be closed.
Meanwhile, earlier this week the Commission sent a Statement of Objections to Illumina and GRAIL, informing them of its intention to adopt interim measures under Article 8(5)(a) of the EUMR with a view to preventing the potentially detrimental impact of the transaction on competition. This is the first time the Commission intends to make use of interim measures following an early implementation of a transaction while its review is still pending.
The policy reasons for why the Commission changed its approach to Article 22 referrals are well-established: the merger notification rules in the EU and many Member States are based on turnover, but turnover is not always a good indicator of the competitive importance of a company, as the acquisition of Instagram (which reported no turnover at the time) by Facebook demonstrated. The criticism of the approach is also clear: legal certainty is undermined if a merger that does not meet the threshold for mandatory notification in any Member State can nonetheless be scrutinised by the Commission.
The General Court will decide whether Illumina’s appeal is admissible and, if so, whether it has merit. However, provided the Commission stayed within what Article 22 allows and acts proportionately, its policy approach is sound. It would be wrong to claim that mergers that do not meet national thresholds can never cause harm to consumers. Within the boundaries of the law, the Commission and national authorities have a duty to prevent that harm from occurring. The merging parties can explain why their merger does not cause a significant impediment to effective competition but if it does, and this is a high threshold for the Commission to meet, it is important that an anti-competitive merger is blocked rather than relying on Article 102 to prevent harmful behaviour.
Things were not looking much better stateside, where the FTC’s case against the merger kicked off in court in August. The FTC maintained that it is seeking to unwind the merger, arguing that it would give Illumina the ability and incentive to foreclose downstream rivals.
This is the second transaction Illumina has been involved in recently that has faced a rocky ride through competition clearances: Illumina abandoned its acquisition of PacBio in January 2020 after the CMA had provisionally found that the merger would lead to a significant loss of competition.
The recent boom in private equity investments is also visible in healthcare, with the European Commission having been particularly busy over the summer approving Hellman & Friedman’s acquisition of Cordis, Triton’s investment in Bergman Clinics, EQT’s Cerba deal, EQT’s joint venture with Investinustrial into the ‘development and commercialisation of a non-invasive embryo culture medical device to be used by in vitro fertilisation laboratories’, the acquisition of joint control by CVC Capital and The Carlyle Group over MedRisk and Nordic Capital’s buy-out of Leo Pharma. Nordic’s investment in Leo Pharma, a UK contract manufacturing organisation, came after it had just completed its acquisition of Advanz Pharma, a UK generic supplier. The Commission is currently reviewing FountainVest’s joint acquisition with CPP Investments of Langdi Pharmaceutical.
The FTC on 15 September voted to withdraw its approval of the Vertical Merger Guidelines, issued jointly with the Department of Justice (DOJ), and the FTC’s Vertical Merger Commentary. It noted that the Guidelines “adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality”. The FTC will work with the DOJ to update merger guidance “to better-reflect market realities”.
In the field of medical devices, the CMA announced in August that it had opened a merger investigation into the anticipated acquisition by EssilorLuxottica of Lenstec. The deadline for its Phase I decision is 12 October 2021.
The CMA is also reviewing the undertakings in lieu of a reference offered in relation to the completed acquisition by Circle Health Holdings Limited of CHC Healthcare Holdings Limited, the indirect parent company of BMI Healthcare Limited. The review will consider whether there has been any change of circumstances such that the current undertakings are no longer appropriate and should be varied or superseded. The CMA said that it will soon issue a statement explaining the move. It will consult on its provisional decisions in October and aims to issue a final decision in November of this year.