By any measure, the steps Teva Pharmaceuticals (TEVA) had to take to win antitrust approval for its $40.5 billion acquisition of Allergan's (AGN) U.S. generics business are attention grabbing. Securing approval from the Federal Trade Commission took 12 months and required the company to divest nearly 80 drugs and line up nearly a dozen buyers for them.
In fact, the spinoffs comprised the largest drug divestiture ever ordered in an FTC pharmaceutical merger case.
According to an analysis by law firm Dechert, those stats separate Teva's latest deal from the bulk of the 14 other generic drug mergers that have occurred since the beginning of 2014. By comparison, those deals averaged just under six months for antitrust review and required the divestiture of 3.4 products to 1.4 buyers.
The products Teva divested run the gamut, from anesthetics, antibiotics, weight loss drugs and oral contraceptives to treatments for all manner of diseases and conditions, including ADHD, allergies, arthritis, cancers, diabetes, high blood pressure, high cholesterol, mental illnesses, opioid dependence, pain, Parkinson's disease, and respiratory, skin and sleep disorders.
The Teva deal's eye-popping stats might not be much of a surprise given that the $40.5 billion transaction married the United States' largest generic drugs maker with the third biggest. But more than the deal's sheer size drove the extended length of the FTC review.
Deal makers in the generics space should take note the FTC went beyond the traditional focus on head-to-head competition between drugs on the market and potential competitors in the research and development pipeline.
The commission also considered three new theories of competitive harm, including whether buyers will gain pricing power by bundling drug portfolios, whether generic drug makers will have less incentive to challenge brand drug patents and whether the merger will reduce the number of players in hard-to-make complex generics.
Absent the divestitures, the deal would have given the combined firm a 22% share of the generics business. The FTC acknowledged in its July 27 statement explaining its settlement with Teva that the sector enjoys relatively low concentration -- more than 200 companies sell generics in the U.S. and the top five companies account for only about half of generic sales -- and that this time the new areas of scrutiny did not warrant additional divestitures beyond what the traditional analysis required.
Nevertheless, future deals could face trouble if the new lines of inquiry lead to more alarming conclusions. "Another set of facts presented by a different transaction might lead us to find that there are competitive concerns that extend beyond markets for individual pharmaceutical products," the FTC said.
The FTC laid out what factors it will consider when examining the additional concerns. For example, when investigating whether bundling large portfolios of generic drugs under one roof will hurt consumers, the FTC said it examine whether the breadth of the merging companies' portfolios are large enough to give them an advantage in winning business in individual drug product markets.
That's not happening yet, the FTC found, noting that Teva's overall share of the U.S. generics' market declined from 2010 to 2015 and purchasers still have the ability to diversify their supplier base by sourcing from smaller companies.
Regarding patents, the FTC said it will look at whether a deal discourages the merged company from filing patent challenges against branded drugmakers as allowed under the Hatch-Watchman Act, a law enacted to speed the delivery of generics to the market by granting the first generic firm to file a successful patent challenge a 180-day exclusivity period in which other generics are barred from the market. In the Teva deal, the FTC found that for now, size was not an indicator of a generic firm's willingness to file patent challenges or in their success in doing so.
Another consideration the FTC said it will take into account is whether a pharma deal might dampen incentives to develop new generic products, particularly those that are complex. In the case of the Teva deal the FTC said it wasn't worried because the two companies' in-house expertise in complex generics generally do not overlap and to the extent there is overlap, there are a number of other firms engaged in similar development, so there would be no lessening of competition in those areas.
The FTC asserted that extra scrutiny of major generics deals is warranted because of the role generics play in keeping the cost of prescription drugs lower. "The price quality and availability of generics pharmaceutical products have a significant impact on American consumers' daily lives and on healthcare costs nationwide," the commission said.