Key lessons for deals in innovation-heavy sectors
Following its unconditional Phase 1 clearance of Roche’s $4.3 billion acquisition of Spark Therapeutics Inc (Spark) in December 2019, the UK Competition and Markets Authority (CMA) has now published its decision. The decision sets out the CMA’s most recent analytical framework for assessing dynamic mergers; in this case, the acquisition of a biotech pipeline treatment portfolio with no marketed products in the UK.
The decision’s substantive assessment sets out a useful roadmap for the way the CMA analyses competitive interactions between marketed and pipeline products. The decision also shows how the CMA makes judgements about the state of competition within the pipeline – including disruptive new treatments and improvements on already marketed treatments.
However, the most striking aspect of the Roche / Spark decision is what it reveals about the CMA’s evolving approach to the UK’s jurisdictional ‘share of supply’ test. The CMA’s ever-expanding interpretation of the test reflects the CMA’s determination to review non-UK acquisitions of non-UK R&D-centric businesses - particularly in the life sciences and tech industries - even where the non-UK target has only some tangential and/or prospective connection to the UK. The CMA’s approach to jurisdiction in Roche/Spark is arguably even more expansive than that currently being considered by the CMA’s Phase 2 Inquiry Group in relation to Sabre’s acquisition of Farelogix.
Until tested in the courts (which was not necessary in Roche / Spark as the CMA cleared the deal unconditionally at Phase 1), the Roche / Spark decision’s consequences for businesses planning M&A activity are as follows:
- Non-UK targets not engaged in the supply of any goods or services in the UK can be caught by the UK merger control regime: as a US-based biotech company engaged in the development of potential gene therapy (GT) treatment, including in relation to Haemophilia A (Hem A), Spark is not engaged in the commercial supply of any goods or services in the UK (nor will it be for at least some years to come). It also does not generate any other turnover in the UK. Nonetheless, the CMA held that the transaction met the UK ‘share of supply’ test on the basis of Spark engaging in global R&D activities relating to the potential treatment of Hem A in the UK. The CMA found that such R&D activities “contribute to the supply of goods or services in the UK”, but without any explanation as to how, as a commercial or legal matter, pure R&D activity of itself gives rise to any commercial “supply” of goods or services.
- Be prepared to engage with the CMA on a wide range of metrics for calculating the 25% share of supply threshold: following extensive back and forth with the parties, the CMA found that the 25% threshold applicable to the share of supply test was satisfied on the basis of: (i) the number of UK-based employees engaged in “activities” relating to the treatment of Hem A; and/or (ii) the number of UK patents procured from an administrative patent authority in relation to the treatment of Hem A. For Spark, such “activities” relate only to R&D relevant to the development of a potential treatment which might one day come to market. Businesses should therefore be prepared to engage with the CMA on:
- a wide range of jurisdictional metrics, including some where there is no single objective way as to how they should be counted and where they present a number of methodological challenges. In Roche/Spark for example, in relation to time spent by an employee on global R&D and/or patent counting in the context of R&D development, such challenges included whether each single unit:
- should relate only to the treatment of Hem A and/or particular pipeline compounds or also to other diseases and/or other pipeline compounds;
- provided any actual and objective indication of the extent of any meaningful nexus between the transaction and the UK; and/or
- should be counted on a one-for-one basis, particularly in the case of patents where it is well known that disagreements relating to an individual patent’s contributing value, validity, necessity and strength form the subject of multi-million-pound patent licensing disputes and years of expert analysis and opinion.
The decision notes that these “potential methodological flaws… do not, in practice, affect the CMA’s calculation of the share of supply”, but does not go on to explain why that is the case. The decision also does not explain why the CMA considers the grant of a patent is a “supply” to the parties, despite the fact that patent-granting authorities exercise a purely administrative function, whereas a “supply” in the current scheme of UK merger legislation pre-supposes commercial and/or transactional dealings in goods or services in the UK; and
- a narrower competitive frame of reference for any jurisdictional assessment versus a broader competitive frame of reference for any substantive assessment: For the purposes of calculating the 25% threshold applicable to the share of supply test in this case, the CMA counted the employees and patents of only those entities engaged in the supply or development of treatments it deemed to be both “novel” and at a “Phase 2 (or more advanced) stage of clinical development”. However, in its substantive competition assessment, the CMA acknowledged the competitive constraint from a wide range of other entities engaged in the supply or development of treatments, whether or not it deemed them to be “novel” or at an earlier stage of clinical development. The CMA’s differential approach to assessing jurisdiction and substance in Roche/Spark is not novel or incorrect. But the case is a reminder that businesses should be prepared for the CMA to calculate the 25% share of supply threshold in a way that does not accord with the commercial reality of the market in which they compete.
- Think carefully upfront about whether your deal valuation materials reflect your transaction rationale: Consistent with the trend of the CMA focusing closely on deal valuation materials to test any pro-competitive transaction rationale, the CMA paid close attention to whether Roche’s valuation of Spark supported Roche’s interest in acquiring and developing Spark’s broader GT platform (i.e. beyond Spark’s development of a pipeline treatment for Hem A, in relation to which Roche was also active with its own marketed product, Hemlibra). Consistent with the CMA’s approach in PayPal / iZettle - in which the CMA considered whether PayPal’s $2.2 billion valuation of iZettle was driven by a desire to eliminate an emerging rival - the CMA focused closely on analysing a number of materials relating to Roche’s valuation of Spark, as well as a significant number of the parties’ internal documents. Businesses would therefore be well advised to think carefully upfront about the extent to which their deal valuation materials support any transaction rationale.
So, where does this leave the future of the UK’s voluntary and non-suspensory merger regime, particularly following Brexit?
Earlier this month, the CMA’s chief executive Andrea Coscelli also told the Financial Times that post-Brexit, the CMA would be taking back control of merger control decisions, with the CMA positioning itself as a strong regulator to lead competition policy on the global stage, noting that the CMA would adopt a “reasonably pro-business approach”.
A number of proposals to amend the UK’s merger control regime have already been put forward: (a) in February 2019, the CMA’s Chair Lord Tyrie proposed a mandatory notification regime for transactions above a certain threshold (in order to catch mergers typically reviewed by multiple international competition authorities), as well as the introduction of a standstill obligation for such deals; and (b) in March 2019, the UK Furman Report on “Unlocking Digital Competition” suggested that it may be appropriate to introduce an additional transaction value threshold (similar to that introduced by Austria and Germany in 2017) if difficulties arise in applying the share of supply test.
The CMA is also imposing burdensome “Interim Enforcement Orders” (IEOs) which prevent further post-closing business integration or unwind integration that has taken place (see Roche / Spark but also Amazon / Deliveroo, Google / Looker Data Sciences and Viagogo/StubHub, in which the IEOs imposed by the CMA took effect prior to closing).
As we wait for the Government’s formal response to Lord Tyrie’s and Professor Furman’s proposals in the form of a “competition green paper”, it remains to be seen whether businesses may welcome the introduction of one, some or all of the suggested reforms in place of the current “voluntary” and “non-suspensory” regime.
If and until that is the case, the CMA’s approach to determining jurisdiction in Roche / Spark further reinforces the need for businesses to think carefully upfront about how best to manage the risk of a potential UK merger review and to factor in the time for detailed pre-notification engagement. This remains the case even when a transaction involving global R&D efforts has no more of a nexus to the UK than it does to anywhere else in the EU or beyond.
For more information on antitrust risk in strategic deals in an era of heightened global antitrust intervention, see Global antitrust in 2020 - strategic acquisitions, part of the 10th edition of our annual antitrust report of ten key themes for the year ahead; as well as the second episode in our Essential Antitrust podcast series, about Brexit implications for cross-border merger control, antitrust investigations and competition litigation.