At what point does a pharma deal become a notifiable concentration under the EU merger regime?

Case M.7872: Novartis/GlaxoSmithKline (ofatumumab autoimmune indications)

In brief

A recent merger decision on Novartis’ acquisition from GSK of its auto-immune indications business of the pharmaceutical substance ofatumumab (the Target), has important wider implications for future mergers in the pharmaceutical sector. Despite the transaction involving the acquisition of rights for development and pipeline indications whose commercial success was prospective and inherently uncertain, the Commission considered that the transaction could fall within the EU Merger Regulation (EUMR). The Commission had already established that the transaction had an EU dimension, as it had occurred within two years of a prior transaction between the parties and should therefore be treated as part of the same transaction for calculating turnover thresholds. This outcome meant that a merger filing was required and suggests that transactions including exclusive licences for only a single therapeutic use of a compound may constitute a "concentration" as defined under the EUMR or under the many national merger control regimes in Europe which apply the same approach; this result undoubtedly expands the scope of both EU and national merger control with regard to pharmaceutical transactions.

In detail

As part of the Oncology Transaction, GSK had sold the oncology indications of ofatumumab but retained the auto-immune indications business of the Target. The Target consisted of the rights to develop, manufacture, promote and market ofatumumab for auto-immune indications and a number of tangible assets and supply contracts. As consideration, Novartis agreed to pay $300m at closing, $200m when Novartis commenced Phase III study for the use of ofatumumab for multiple sclerosis, significant additional payments if certain milestones are reached and up to 12% on any future net sales of the drug for auto-immune indications.

Novartis asserted that the transaction did not need to be notified to the European Commission because the Target’s business could not be considered an undertaking or part of an undertaking for the purposes of the EUMR. In particular, it argued that the development of the rights purchased was uncertain, market entry was remote and turnover could not be attributed to the intangible assets being acquired; the acquisition did not, therefore, constitute a concentration under the EUMR.

The Commission, however, noted that for one of the auto-immune indications, the acquired ofatumumab assets had completed Phase II clinical trials and for another auto-immune indication, pemphigus vulgaris, the assets were already in Phase III. Further, it noted that Novartis’ internal documents indicated the probability of a successful launch for this latter auto-immune indication and GSK’s royalty structure also indicated that a successful launch was probable with turnover generation expected within a reasonable period of time. The Commission concluded that in the pharmaceutical industry, the acquisition of assets already in Phase III clinical trials can be reasonably assumed to be capable of generating turnover in the foreseeable future. Further, since the acquisition of the Target took place within two years of Novartis’ and GSK’s previous wider transaction, the two transactions should be considered one and the same for the purposes of calculating the turnover thresholds under the EUMR.

Commentary

The Commission ultimately did not oppose the transaction, as the Target complemented rather than competed with Novartis’ existing portfolio. However, the inclusion of this transaction within the Commission’s purview appears to expand the scope of potentially notifiable concentrations.

Under the EUMR, a transaction is notifiable if it has an "EU dimension" and it constitutes a "concentration". In this context, a "concentration" arises where there is a "change of control" on a lasting basis, either through a merger or by the "acquisition…of direct or indirect control of the whole or parts of one or more other undertakings". Further, the Commission’s guidance on transactions involving intangible assets such as patents, and, specifically, licences for these assets sets out three requirements to be considered a concentration. First, the assets must constitute a business with a market turnover, second, the licence must be exclusive at least in a certain territory, and third the transfer of such licences must transfer the turnover-generating activity on a lasting basis.

However, this transaction has demonstrated that the Commission considers that an exclusive licence for a substantial duration which relates only to one therapeutic use of a compound, for which turnover generation is still remote, constitutes a change of "control" and hence (subject to there being an EU dimension as in this case) may also constitute a concentration. Where there is no EU dimension filings to National Competition Authorities may be required - many have systems modelled on the EUMR regime.

The Commission’s competitive assessment of the Target, despite Novartis’ assertions that it was developmental and market entry was still remote, is also indicative of a trend in recent pharmaceutical mergers of close scrutiny of pipeline products. In Covidien’s acquisition of Medtronic in 2014 (Case M.7326) the decision was contingent on the divestment of Covidien’s Phase III drug Stellarex which was perceived as a promising potential future competitor to Medtronic’s drug In.Pact. The Commission’s assessment of the so-called "pipeline to market" competitive dynamic and in particular its perception of Stellarex’s potential future efficacy following review of the clinical trial data, led it to reach this conclusion. A similar approach was followed in the Oncology Transaction in relation to concerns for the proposed closure of one of the parties’ development programmes of B-Raf and MEK inhibitors for the treatment of skin cancer (in stage III of clinical trials) post-closing. Roche was the only company with a product on the market and following completion it would only compete with the merged entity’s sole product under development. Finally, in Pfizer’s acquisition of Hospira (Case M.7559), both companies were obliged to divest "pipeline products" because of Commission fears that post-acquisition Pfizer would stop developing the pipelines when it controlled successful products already on the market (Hospira was already marketing the highly successful Infliximab and Pfizer marketed a range of sterile injectables).

Of particular significance to these transactions, however, was the Commission’s wider analysis of the Oncology Transaction. Beyond assessment of the "pipeline to market" competition, the Commission also analysed the effect of the transaction on the parties’ "innovation competition"/"pipeline to pipeline competition" - this is the competitive dynamic between the companies’ broader innovation programmes and in relation to drugs at an earlier stage of development. Novartis was obliged to make additional divestments because of Commission fears that following the acquisition, Novartis would discontinue its wider research and development programme for certain treatments. Assessment by the Commission of "innovation competition" in this manner appears to broaden the scope of transactions which may face scrutiny in a merger scenario. For both the Oncology Transaction and the acquisition of the Target, the parties argued that the prevailing uncertainty of the treatments still in clinical trials meant that parts of the transaction should not fall under the Commission’s assessment of the competitive dynamic in the respective markets. The Commission’s willingness to analyse these types of transactions suggests that the scope of regulatory scrutiny over pharmaceutical deals is likely to be wider and concern treatments and programmes at earlier stages in their development than historically were considered. It is now apparent that transactions under the Commission’s scrutiny may include, for example, licensing agreements which relate only to one therapeutic use of a compound.