Commission study on Killer Acquisitions in Pharma

In recent years, "killer acquisitions" have attracted increased interest from competition enforcers. These are transactions where larger companies acquire smaller firms with significant growth potential, with the primary assumed intent of eliminating future competition. Competition authorities have pointed to some studies and theories that raise concerns that “killer acquisitions” can reduce research and development (R&D) efforts and innovation. This is especially true in the pharma sector, where there are findings that market consolidation can result in significant reductions in research spending and patent output of the merged firms.

To assess these concerns, the European Commission (Commission) launched an in-depth and unprecedented study to evaluate the prevalence and characteristics of killer acquisitions in the pharmaceutical sector. The results of this study were published in late November 2024.

The study focuses on transactions that took place between 2014 and 2018, analysing a large sample of both mergers and acquisitions (M&As) and non-M&A deals (such as licensing and R&D agreements). As explained below, the Commission’s findings have been the following:

• A high number of agreements, not only in M&A but also in licensing and R&D, concern a close overlap between drug projects and are followed by a product or project discontinuation, warranting further scrutiny.
• Extensive access to information and data, including confidential information on the parties to deals potentially qualifying as “killer acquisitions”, is needed to assess their intent and the deals’ potential effects.
• The Commission and national competition authorities will exercise more scrutiny in future deals, and may assess other options to screen agreements such as the introduction of a registry or notification system of relevant deals and planned discontinuations.
• Enforcement of Articles 101 and 102 TFEU, as well as the extension of the call-in powers of the national authorities to review deals, may be bolstered in order to act against small M&A deals and R&D and licensing agreements with a “killer acquisition” objective or effect.

1. Fact-finding regarding “killer acquisitions”

To prepare the study, the Commission reviewed a total of 6,315 pharmaceutical agreements that occurred between 2014 and 2018. Of these, public information on the scope of the deal was available for 3,193 transactions. After further analysis, 240 deals were identified that involved potentially substitutable drug R&D projects, based on a narrow definition of competitive overlap. These deals were scrutinised to assess whether any overlapping projects were discontinued after the transaction.

In 183 out of the abovementioned 240 cases, the deal involved or led to the discontinuation of at least one overlapping drug post-transaction. The study found that 92 of these 183 deals with a narrow overlap concerned a discontinuation of a project, which would make the discontinuation prima facie relevant for a killer acquisition assessment.

Using a statistical regression analysis method and a manual review, the Commission found 89 cases that could point to a potentially harmful “killer acquisition”. However, the public information available could not conclusively demonstrate whether the discontinuations were due to technical or safety reasons, or whether they were the result of strategic decisions to prevent future competition.

In the eyes of the Commission, although inconclusive to a certain extent, the study has shown the following:

• The phenomenon of “killer acquisitions” is not limited to M&A deals. Licensing agreements and R&D agreements analysed in the study accounted for a significant share of deals that exhibited signs of potentially harmful discontinuations. The Commission and national competition authorities are therefore expected to increase their scrutiny for these types of agreements.
• To fully assess the intent and/or potential effects of a presumed “killer acquisition” agreement on competition, enforcers need wider access to non-public company documents and information.

2. Evaluating the Commission’s past efforts and legal framework to abort “killer acquisitions”

The second part of the study evaluates the effectiveness of the Commission’s merger control activity in handling pharmaceutical deals with intersecting R&D issues, and identifies the limitations of the current EU Merger Regulation (EUMR) framework.

a. Retrospective review of the Commission’s evaluation

The first part of the analysis retrospectively analyses the Commission’s review of five notified and approved pharmaceutical acquisitions, some of which were subject to remedies.

The analysis examines whether these acquisitions led to the discontinuation of overlapping R&D projects that could harm competition and the effectiveness of the remedies implemented in some cases. In all five cases, at least one overlapping molecule was discontinued after the deal. This discontinuation does not necessarily imply that the Commission’s actions were insufficient. Rather, the study finds that it reflects the inherent uncertainty of R&D outcomes. In most cases, the remedies introduced were deemed appropriate, except in the J&J/Actelion deal (Case COMP/M.8401), where the study suggests that stronger remedies could have prevented the discontinuation of a pipeline drug.

b. Below-thresholds transactions

"Killer acquisitions" that fall below merger thresholds create a dilemma for legislators and competition authorities, who must strike a balance between maintaining an effective enforcement regime while avoiding an overly burdensome notification process for smaller deals. This challenge is particularly acute in the pharma industry, where breakthrough innovations often come from smaller players with limited market share.

The study notes that Article 22 EUMR provides a tool to address these killer acquisitions. This provision allows Member States to refer mergers and acquisitions to the European Commission for review. The Commission’s application of Article 22 EUMR in certain cases shows that it can play a role to address the enforcement gap that has been identified in highly innovative sectors with small but competitively significant operators.

However, the scope of Article 22 is not without limits, as the European Court of Justice (ECJ) has clarified in the recent Illumina/Grail landmark case. The ECJ clarified that a referral can only be made by Member States which have competence to review the transaction under their own national merger control rules, or by Member States that do not have such rules in place. The Commission cannot therefore request or accept referrals from Member States that are not themselves competent, under their existing merger control rules, to review a deal.

In that respect, the Commission is now actively encouraging EU Members States to adopt call-in powers for transactions that do not even meet the national merger control thresholds. Mr. Olivier Guersent, Director-General of the Directorate General for Competition, recently said in a conference that a further eight EU Member States could gain powers to review below-threshold transactions by the end of next year.

c. Enforcement under Articles 101 and 102 TFEU

The study further highlights that Articles 101 and 102 TFEU could be equally important to address “killer acquisitions”, demonstrating through two hypothetical cases how these provisions can be used to scrutinise transactions not structured as concentrations or that escape ex ante review under the EUMR. The Commission suggests that an Article 101 TFEU review (applicable to anti-competitive agreements) could focus on whether licensing agreements envisage the discontinuation of an overlapping molecule, and what evidence could be raised to prove this. With regard to Article 102 TFEU (on abuse of dominance), in turn, the Commission proposes examining how a dominant company's acquisition of a competitor's technology might eliminate future competition, with serial acquisitions of emerging rivals and market definition being key aspects in that assessment.

3. Conclusion & Takeaways

The EU’s study on “killer acquisitions” comes at a critical moment, with the Commission still licking its wounds after the Illumina/GRAIL setback. Some of the findings made will surely be used by the Commission to reinvigorate its strategy to address this kind of deals, particularly against the backdrop of the new competition commissioner Ms. Teresa Ribera taking office.

Among all data and findings contained in the study, we highlight the following:

• The Commission may feel vindicated: A high number of agreements, not only in M&A but also in licensing and R&D, concern a close overlap between drug projects and are followed by a discontinuation that could warrant further scrutiny. The study suggests that the risk that companies enter into agreements with potential competitors to halt the development of competitive (future) products is real.
• Authorities and enforcers will sharpen their tools: The study’s unsuccessful aim to analyse the effects of certain past agreements, as well as the assessment of merger control reviews of past deals (which points to certain insufficiencies), may be perceived by the Commission and competition authorities as proof of incidental underenforcement. In the future, we can expect to see more precise monitoring and information requests addressed to companies and deals in this area. For example, the study recommends considering the introduction of a registry or notification system of relevant deals and planned discontinuations to close such a perceived gap.
• Expanding the regulators’ toolbox: The study confirms the Commission's view that certain transactions below the thresholds might raise competition concerns, and require the use of appropriate enforcement measures under Articles 101 and 102 TFEU and/or an extension of the powers of the national authorities. Companies and investors should therefore expect the competition law landscape to evolve in this direction over the coming months and years.
• A blueprint for competition enforcement in other sectors: Although this study focuses exclusively on the pharmaceutical sector, there are lessons to be learned for other sectors which are marked by innovation and comparable R&D processes. Investors and companies in the tech sector in particular should keep a close eye on future developments.