M&A Scrutiny May Constrain Large Companies

By Christopher M. Oshewolo

The FTC’s recent push against some large M&A deals may ultimately limit the ability of major companies to take advantage of business development opportunities.

In December 2022, the Federal Trade Commission (FTC) filed a lawsuit to block Microsoft’s (MSFT) $69 billion deal to acquire Activision (ATVI). The agency expressed concern that Microsoft could suppress the availability of gaming content on consoles that compete with its Xbox. However, the FTC recently lost both its initial case and subsequent appeal.

While that was playing out, in May, the FTC filed another suit to block Amgen’s (AMGN) $28 billion deal to acquire Horizon Therapeutics (HZNP).

Citing Amgen’s history of cross-market bundling and related litigation, the agency expressed concern that the company could leverage rebates on its existing blockbuster products and the dominant market positions of Horizon’s drugs to aggressively negotiate with pharmacy benefit managers (PBMs) for favorable formulary placements, thus limiting competition. A trial hearing is scheduled for September.

These two episodes appear to highlight stricter scrutiny of large business combinations. Fundamentally, the FTC appears interested in broadening the traditional definitions of harm that could result from consolidation and sharpening its focus on externalities that go beyond the more obvious implications of industry concentration.

In this vein, the FTC recently held a workshop to explore new approaches to enforcing antitrust laws in the pharmaceutical industry ahead of potential updates to its merger guidelines. The workshop highlighted the risk economies of scale pose to competition, citing potential incentives for larger companies to focus R&D resources away from existing products to avoid cannibalizing them.

(Pharma management teams have long insisted that potential cannibalization is not a material consideration in allocating R&D investment). The workshop also highlighted the role of federal legislation (through breakthrough therapy designation, orphan designation, etc.) in encouraging smaller companies to push the innovation envelope.

Recommendations included requiring companies to provide evidence of merger-specific efficiencies that outweigh potential competitive harms, and taking into account the extent to which merging or acquiring companies have engaged in cross-portfolio contracting (or potentially anti-competitive practices) in prior business dealings.

Depending on how emerging policy proposals are shaped by legal outcomes and inputs from business and consumer groups, a new antitrust regulatory framework may constrain large acquisitions, reducing event risk and downside risk to credit fundamentals in the short term while limiting opportunities for large companies to support growth and narrowing options for value realization for smaller companies longer term.

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