From Competition to Conspiracy : Assessing the Federal Trade Commission's Merger Policy in the Pharmaceutical Sector

Prescription drugs safeguard Americans from numerous life-threatening maladies. Competition in pharmaceutical R&D, and for generic entry, produces essential drugs and ensures that medications are accessible and affordable. That promise is fading. There is mounting evidence that connects high market concentration and high drug prices. Price gouging for important drugs, conspiracies to fix generic drug prices, and ever more innovative schemes by branded drug manufacturers to keep generic rivals out of the market put merger control at center stage.The AAI White Paper “From Competition to Conspiracy: Accessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector” examines a major root of this problem—the Federal Trade Commission’s (FTC’s) policy of settling virtually all challenged horizontal pharmaceutical mergers with consent orders requiring divestitures. This stands in contrast to agency decisions to seek injunctions to stop highly concentrative, harmful mergers—arguably the most effective remedy for fully restoring competition. AAI’s macro-analysis of pharmaceutical mergers challenged by the FTC between 1994-2020 (to date) reveals that many drug makers engaged in serial mergers and/or repeatedly went to the till to purchase divestiture assets in other challenged mergers. Many of these firms were subsequently acquired by other pharmaceutical manufacturers, sometimes shortly after purchasing divestiture assets.The effect of the FTC’s policy has been the swapping of assets within a relatively small group of large and increasingly powerful firms. Just under 20% of all unique branded and generic firms that engaged in repeated mergers and acquisitions (M&A) and/or purchases of divestiture assets account for almost 45% of pharmaceutical assets “changing hands” from 1994-2020. Many of the very firms that were the most active in M&A, and as purchasers of divestiture assets, appear as defendants in private, state, and federal non-merger antitrust litigations and in federal criminal indictments. These accumulating lawsuits serve as powerful evidence that something has gone awry with merger policy in the pharmaceutical sector, leading to the exercise of market power by dominant firms and oligopolies.The FTC’s role in managing the allocation and ownership of important pharmaceutical assets through its extraordinary approach toward merger control has unduly involved it in shaping the industry. This resembles a form of “industrial planning” rather than antitrust law enforcement, which is designed to deter future anticompetitive conduct and relies on market forces to determine market structures. The FTC’s policy has also deprived the antitrust community and public of important transparency. Because no challenged merger between 1994-2020 was litigated in federal court, there is no judicial record detailing how highly concentrative mergers were likely to have survived a presumption of illegality. There is thus no way to evaluate claims that pharmaceutical mergers were likely to have delivered lower prices through claimed cost savings or consumer benefits due to improved quality and innovation.This White Paper begins with background on drug pricing and competition in the pharmaceutical supply chain. It then turns to the drug mergers themselves and the asset divestitures required in FTC consent orders. Next is an assessment of private, state, and federal antitrust cases against the companies involved in M&A and as buyers of divestiture assets. It concludes with policy recommendations on reframing competition policy in the pharmaceutical sector. The FTC, which has devoted considerable resources and expertise to understanding the pharmaceutical sector, should take the lead in reforming its own policy on merger control.Competition problems in pharmaceuticals now rise to the level a public policy concern, addressable only through a coordinated policy response, of which stronger antitrust enforcement and legislative reform should be central components. The imperative for wholesale change in the FTC’s merger policy in the pharmaceutical sector is more pressing than ever. Only robust competition among drug makers will result in the availability and affordability of drugs more generally, but also essential drug therapies and vaccines relating to the COVID-19 pandemic