Antitrust Issues Involving Mergers, Acquisitions &

Exclusive Licensing in Pharma and Biotech

Michael S. McFallsJones Day

Washington, D.C.May 7, 2007

BIO 2007

*These views are those of Michael McFalls only, and do not represent the views of Jones Day or any of its clients.

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Items on Our Agenda

• Process• Avoiding Common Pitfalls• Substantive Issues

• Market Definition• Horizontal• Vertical• Defenses

• IP and Merger Review

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M&A: The U.S. Antitrust Process

• HSR Filing Usually Begins Process• Reportability of Exclusive Licenses

• DOJ/FTC Clearance• FTC Merger Process Reform and DOJ Merger

Review Process Initiative• Second Request• Remedies• International Coordination• Nonreportable Transactions

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Procedural Advice for the Unwary• Staff review of these transactions is sophisticated, permitting

expeditious narrowing and resolution of issues.• Generally, one should provide from the outset full access to

documents, data, information and personnel first to outside counsel and then to agency staff to narrow the range of issues.• This includes information about pipelines and IP of both

merging and third parties.• Physicians, health plans and rivals are primary sources. • Consider pulling and refiling HSR if facing a close call and

believing that agency staff can be persuaded.• Settle in for a longer haul if there is a significant issue on which

you are not ready to fold.• If you are willing to fold, begin the remedies process sooner

rather than later.

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Avoid Common Misconceptions

• Merger reviews do not necessarily proceed from same assumptions about pharma and biotech markets reflected in other enforcement actions.

• No deal is too small to investigate where overlap is significant.

• No deal is too large to investigate even if overlap is a small part of the deal.

• Absence of current overlaps does not preclude investigations of potential competition or potential foreclosure in related markets as a result of the transaction.

• Absence of enforcement action in superficially similar case provides neither precedent nor comfort for your deal.

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Substantive Issues

• Market Definition• Identifying Overlaps, Actual and Potential

Competitors• Competitive Effects Analysis

• Horizontal Theories• Vertical Theories

• Entry, Expansion and Repositioning• Efficiencies• Failing Firm/IP Defenses

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Central Analytical Framework

• Merger analysis is necessarily a predictive exercise: determining whether a transaction reduces competition in a relevant market below levels that would have existed in its absence.

• Just as high current shares may overstate potential anticompetitive effects, low current shares may understate potential anticompetitive effects

• Though analysis is predictive, current and some historical information is necessary for the agencies and private firms to conduct the analysis.

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Quick Overview of Market Definition in Pharma/Biotech

• Number of different approaches:• Mechanism of action• Medical condition/indication• Administration method• Dosage form, duration of action

• Often consistent with internal documents and corroborated by physicians and health plans.

• Example of additional data that can be useful: actual usage/switch patterns over significant period of time in patient outcome studies. This can broaden the market in appropriate cases and also show how closely products compete. Useful where available in almost any case.

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Potential Anticompetitive Effects of Horizontal Mergers

• Coordination• Almost never relevant to these markets.

• Unilateral Effects• More appropriate for differentiated product markets

like pharma, biotech, diagnostics, and devices.• Potential Competition

• Frequent in cases involving highly concentrated segments where one of the parties has product relatively close to market (i.e., Phase III+).

• Pure Innovation Markets• Very rare.

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Potential Anticompetitive Effects of Vertical Mergers

• Combination will enhance ability and/or incentive of merged firm to exclude or impair actual or potential competitors in one market in which one of the merger partners competes.• E.g., essential input or complement used by one or more rivals

becomes controlled by a competitor. (Digene/Cytyc)• E.g., combination of IP results in broader potential exclusion than

either merging party would have or could have pursued absent transaction. (Ciba/Sandoz and the “killer patent portfolio”)

• Also vertical theories involving coordination or misuse via information.

• Generally requires significantly greater market power at one market level than threshold for concern in horizontal merger cases.

• Increasingly significant issue in biotech/device markets where there is and often must be cooperation among a number of parties.

• Generally a lower enforcement priority in Bush II v. Clinton I.

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Entry

• Generally but not always treated under the same standard used to analyze whether merging parties are potential competitors.

• Regulatory approval process (FDA, EPA and/or others) usually a significant, transparent and predictable barrier here.

• IP can also be a significant barrier to entry.• But . . . .

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Horizon Issue: IP Defenses

• Agencies have been generally reluctant to permit an “IP Defense” to what would otherwise be problematic transaction when it is one of the merging parties, not potential entrants, facing potential exclusion from IP.• Commissioner Rosch speech.• Atypical asymmetric treatment.

• Could be characterized multiple ways, with implications for burden of proof:• Not horizontal competitors?• Efficiency?• Failing firm?

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Where IP Defenses Are Likely to Head in this Context

• Agency will continue to either reject the defense or impose burden of proof on parties.

• When the issue gets litigated in a merger case, agency will have to face law created under Baker Hughes re: evidentiary standards and burden of proof and under Tamoxifen and Schering Plough on antitrust/IP if Tamoxifen is not reversed.

• If IP defense is part of competitive effects analysis, agency likely to argue that parties would have licensed each other in absence of merger, just as it has pressed “less restrictive settlement” option in Schering and Tamoxifen amicus.