FTC’s Watchdog Role in Pharma Mergers: Road Bumps and The Way Forward

By:Rajiv Khanna (Norton Rose Fulbright)

The Federal Trade Commission’s (FTC) revised merger guidelines, introduced in 2023, mark a significant shift in antitrust enforcement, with a particular focus on industries like pharmaceuticals, where consolidation is common.

The new guidelines introduce stricter thresholds for evaluating the potential anticompetitive effects of mergers, particularly by lowering the Herfindahl-Hirschman Index (HHI) and market share requirements. One major change is that mergers resulting in a company holding more than 30% market share may now violate Section 7 of the Clayton Act, even with limited direct competition between the merging firms. The guidelines also move away from using a 30% market share as a definitive indicator of market dominance, instead prioritizing direct evidence of sustained market power as a key factor.

These revisions aim to prevent mergers that allow a dominant player in one market to extend its influence into other markets, even if the firm has little or no existing activity in those sectors. Such deals could be seen as violations of both Section 2 of the Sherman Act and Section 7 of the Clayton Act. Additionally, the guidelines address concerns about companies using a strategy of making numerous smaller acquisitions to achieve anticompetitive outcomes, even if no single acquisition would independently breach antitrust laws.

Another significant change is the broader scope of evidence now considered in assessing anticompetitive risks. This includes examining the acquiring firm’s past merger and acquisition (M&A) strategies across different markets, as well as its future acquisition plans. The initial draft’s general “catchall” guideline was replaced with more specific scenarios, providing clearer guidance for businesses. For instance, the guidelines now explicitly identify mergers designed to evade regulations, those benefiting from unique procurement conditions, or transactions in highly concentrated markets that reduce competitive pressure as areas of concern. This modification was made after public comments and aims to improve the clarity and practical application of the guidelines.

The FTC has also expanded its competitive analysis to consider not only the direct impact of mergers on competition but also their effect on access to essential resources and customers. A noteworthy addition is the “ecosystem theory,” which allows regulators to challenge mergers if a company’s broader ecosystem of products and services could stifle competition. This concept, which originated in the UK and has been applied in the EU, is now being used in the U.S. to address cases where a dominant firm’s bundled offerings may limit competitive options.

The guidelines also introduce the concept of a “nascent threat,” referring to companies that, while not yet major competitors, have the potential to disrupt an incumbent’s dominance or support the growth of other rivals. The guidelines place particular emphasis on preserving incentives for innovation, especially in pharmaceutical research and development, cautioning against mergers that could reduce these incentives or create significant barriers to entry for new competitors.

While these revised guidelines reflect an increased focus on regulatory oversight, they do not carry the force of law. Agencies will still need to persuade federal courts to enforce them…

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