Published on Aug 14, 2019
The UK Competition and Markets Authority’s (CMA) June move to start an inquiry into Roche’s (SWX: ROG) $4.3 billion acquisition of Spark (ONCE) not only creates a new competition hurdle to the deal’s close, but could also bolster the U.S. FTC’s ability to take a tough line on the biotech tie-up, Capitol Forum analysis indicates.
The CMA’s initial inquiry involves the threshold question of its jurisdiction over the merger. But British law provides the CMA very broad latitude on this front, and the authority will very likely assert jurisdiction if it concludes that the deal raises substantive antitrust concerns, UK competition lawyers said. And although Spark has said it believes the deal won’t require UK clearance, the companies lack a viable path to appeal in the event the CMA asserts jurisdiction over the merger, the lawyers said.
An in-depth CMA investigation would complicate the deal’s prospects in not only the UK, but also the U.S., by providing the FTC the option to sue to block the merger in its in-house administrative tribunal—a venue in which the commission benefits from meaningful timing and procedural advantages. This option could prove especially attractive to the commission here, given the controversial product market definition and potential competition issues the deal raises.
In fact, the companies may be steeling themselves for exactly this possibility. A little-noticed inclusion in Roche and Spark’s July amendment to their merger agreement expands the scenarios in which either company can extend the agreement’s end date, in language that appears to specifically contemplate an instance in which the FTC challenges the deal in its in-house administrative tribunal.
Spokespeople for the CMA, FTC, Roche, and Spark declined to comment on the merger review.
Rocky path. Roche’s agreement to acquire Spark, a Philadelphia-based gene therapy firm with just a single marketed product, has already faced an unexpectedly difficult FTC path.
The companies announced their deal on February 22, and initially said they expected to close in 2019’s first half. But after the companies pulled and re-filed their HSR notification three times, the merger ultimately attracted an FTC second request on June 7.
The deal has generated FTC staff questions over potential effects in the market for hemophilia A therapies, where Roche markets Hemlibra, a potential blockbuster, and Spark is pursuing a gene therapy pipeline project—SPK-8011—that could effectively eliminate the need for the ongoing infusions Hemlibra patients require.
But the FTC isn’t the only antitrust enforcer now evaluating the deal. Roughly concurrently with the FTC’s second request, the CMA on June 10 issued an initial enforcement order, essentially opening an inquiry to determine whether it has jurisdiction over the merger and, if so, whether it will refer the deal to an in-depth Phase II investigation.
The CMA generally cooperates closely with other international competition authorities, including the FTC, in cases where the agencies have parallel jurisdiction, a CMA spokesperson told The Capitol Forum.
The CMA’s initial enforcement order requires Roche to hold separate Spark’s business if the companies close their deal during the British enforcer’s initial inquiry. However, if the CMA does ultimately refer the deal to Phase II, Roche would be statutorily prohibited from acquiring shares in Spark, and therefore closing the transaction.
CMA jurisdiction. The CMA order appeared to have caught the companies by surprise, and Spark said in a securities filing announcing the move that it believes the merger isn’t subject to the British enforcer’s jurisdiction.
The CMA can assert jurisdiction when a deal meets either the turnover test, in which the target’s annual UK revenue exceeds £70 million, or the share of supply test, where the merging companies will together supply at least 25 percent of particular goods or services in the UK (or a substantial part of it). Where a company already supplies 25 percent of a particular good or service, the test is satisfied so long as the merger increases its share by any amount.
The deal almost certainly won’t trigger the turnover test, as Spark reported just $64.7 million in global revenues in 2018. Not only that, but a spokesperson for the NHS, the UK’s health system, confirmed that the NHS doesn’t distribute the company’s sole marketed product, Luxturna, meaning that Spark may not generate any UK revenue whatsoever.
The companies, then, may have good reason to believe the CMA lacks jurisdiction over their deal—after all, if Spark has de minimis or no sales in the UK, it’s not clear how Roche’s acquisition of the company would increase its post-merger share of share of supply in any good or service.
However, share of supply is a fluid concept that provides the CMA significant flexibility in asserting jurisdiction over mergers that don’t meet the turnover test, UK competition lawyers said.
And although the test’s requirement that the transaction increase share broadly contemplates a scenario in which the merging parties have some overlap, the CMA has wide discretion in describing the relevant goods or services that meet the test, and needn’t articulate a market as
defined for the economic analysis in doing so, Sarah Long, a partner at Euclid Law told The Capitol Forum.
“The CMA makes clear in their guidance that they may have regard to reasonable description of a set of goods or services to determine whether the share of supply test is met, including the value, cost, price, quantity, capacity, number of workers employed or any other criterion” in assessing whether a merger exceeds the 25 percent threshold, she said.
“Ultimately, if there is likely to be a substantive competition issue, the CMA will find a way to ensure the share of supply test is met,” Long added.
And the CMA could conclude, for example, that the tie-up may increase Roche’s share of supply above 25 percent for R&D or innovation in a particular class of hemophilia therapies. Spark’s Luxturna also shares an anatomical therapeutic level 2 code with Roche’s Lucentis, and although the two therapies may not compete in any meaningful sense, the ostensible overlap could also—at least in theory—trigger the share of supply test.
Importantly, not only does the CMA have considerable flexibility to assert jurisdiction, but merging parties have very limited ability to push back against such a move.
Challenges on this front have been rare, said Long, with the UK Supreme Court’s 2015 decision upholding the CMA’s jurisdiction over Eurotunnel’s proposed acquisition of SeaFrance the most prominent example.
“Post Eurotunnel, it is clear that the CMA has significant discretion in asserting jurisdiction in merger control cases. As a result, any challenges to the CMA’s jurisdiction should be approached with caution—in most cases such challenges are likely to result in an expensive and ultimately futile legal process,” she said.
To be sure, merging parties do have the right to appeal a CMA decision to assert jurisdiction and open a Phase II merger investigation directly to the Competition Appeal Tribunal. But presumably in recognition of such a move’s long odds, no merging party has ever appealed a Phase I referral decision on either merits or jurisdictional grounds.
FTC effects. Although the CMA issued its initial enforcement order on June 10, it hasn’t yet opened a Phase I investigation into the deal, which would trigger a statutory 40 working day deadline. If the CMA does refer the deal to Phase II, it would start a 24 week process that could push a final decision on the Roche/Spark tie-up well into 2020.
Such a development would significantly complicate the deal’s UK prospects. But perhaps just as importantly, a referral decision would have key follow-on effects on the FTC’s review, and open up new venue possibilities for a potential commission challenge to the merger.
FTC merger challenges typically occur first in federal court, where the commission petitions a district court for a preliminary injunction to prevent the deal’s close, and, if necessary, a temporary restraining order to prevent that same outcome. The timing from an FTC lawsuit to a federal court decision on a preliminary injunction motion is typically four to five months.
But when the commission doesn’t need a federal court to impose an order or injunction preventing a deal’s close, it has a less traditional option to challenge a merger—eschewing a district court challenge, and instead pursuing a lawsuit in its in-house administrative tribunal only.
In fact, the commission took this approach in its December 5, 2017 lawsuit to block Tronox’s acquisition of Cristal’s titanium dioxide business, as the European Commission’s (EC) ongoing review of the merger independently prevented the parties from closing their transaction.
Only after the EC cleared the merger on July 4, 2018 did the FTC ask a district court for a preliminary injunction preventing the deal’s close. And because the administrative trial was nearly finished, and the FTC was merely seeking an injunction to preserve the status quo pending the administrative law judge’s (ALJ) decision, the defendants faced an uphill climb in convincing the court to deny the injunction, which U.S. District Judge Trevor McFadden ultimately granted after an abbreviated, three-day evidentiary hearing.
An FTC move to sue in-house would provide the commission numerous advantages, including on timing. D. Michael Chappell, the FTC ALJ tasked with hearing the Tronox/Cristal litigation, issued his initial decision that the deal violated the antitrust laws on December 7, 2018—over a year after the FTC filed its initial complaint. Holding together a deal during a twelve-month administrative timeline—rather than the four to five-month period typical of district court litigation—is a difficult task for merging parties.
And from an outcome perspective, the FTC loses so infrequently in-house that critics have dubbed the administrative process a “kangaroo court.” This is especially the case given that a defendant’s appeal from the ALJ’s decision is directly to the commission itself, which means that the same commission that initially voted out the complaint ultimately decides its merits—effectively playing both prosecutor and judge.
Litigation challenges. In short, the administrative process gives the FTC important timing and outcome advantages, and could prove particularly attractive if the commission seeks to take a hard line on a deal that would, on its facts, present significant litigation challenges.
Most notably, Spark’s SPK-8011 pipeline product has yet to win FDA approval, meaning that a commission’s complaint would need allege that the deal lessens potential competition—a difficult theory on which to win. In fact, the FTC’s most recent potential competition court challenge, 2015’s Steris/Synergy Health, is also its most recent litigated merger loss not overturned on appeal.
Likewise, market definition—oftentimes the dispositive issue in merger litigation—could prove challenging here, given that Roche’s Hemlibra and SPK-8011 differ on key dimensions including mechanism of action, frequency of administration, and potential price points.
In fact, the FTC lost its most recent litigated pharma merger case—Lundbeck—on market definition grounds, even though the products the deal combined were the only two FDA-approved therapies indicated for a specific heart defect.
Merger agreement. Although an FTC move to pursue the case in administrative court only would be unusual, the companies appear to be steeling themselves for exactly that possibility.
On July 5, the companies announced that they would extend their merger agreement’s outside date from January 31, 2020 to April 30, 2020. The announcement’s timing—nearly seven months in advance of the existing end date—raised eyebrows among many observers. But lost amongst that headline was a more subtle change to the agreement’s language.
Section 8.1(b) of the companies’ February 22 merger agreement provided either Roche or Spark the option to extend the agreement’s end date from December 31, 2019 to January 31, 2020 “if the condition set forth in…clause 2(b) of Annex I (if the injunction or other Order relates to Antitrust Laws)” hadn’t yet been satisfied. [Emphasis added.]
Clause 2(b) of Annex I provides that Roche needn’t complete the tender offer if a governmental entity had enacted a law or legal proceeding prohibiting consummation of the merger.
But the July 5 amendment to section 8.1(b) provides either Roche or Spark the option to extend the end date to April 30, 2020 “if the condition set forth in…clause 2(b) of Annex I (if the injunction or other Law or Legal Proceeding relates to Antitrust Laws) shall not have been satisfied” by December 31, 2019. [Emphasis added.]
In short, the amendment retains an “injunction” as a circumstance in which either party can extend the end date but replaces “Order” with the phrase “Law or Legal Proceeding.”
The merger agreement defines “Order” as “any writ, judgment, injunction, consent, order, decree, stipulation, award or executive order of or by any Governmental Entity,” a definition that wouldn’t apply to ongoing FTC administrative litigation.
But “Legal Proceeding,” which the agreement defines as “any action, lawsuit, claim, arbitration, court action or other legal or court proceeding brought by or pending before any Governmental Entity, arbitrator or other tribunal,” very likely would.
Put differently, then, the initial merger agreement gave either party the right to extend the end date only if an antitrust-related injunction or order prohibited the deal’s close. But the addition of “Legal Proceeding” brings in a new class of actions and appears to directly contemplate an FTC move to pursue a case in its administrative tribunal backed by a CMA Phase II review, rather than a federal court injunction.
To be sure, the parties’ decision to contract for that possibility doesn’t necessarily mean that this outcome is certain, or even likely, to occur. Nonetheless the companies’ amendment to their merger agreement indicates that the CMA review—and follow-on effects on the FTC’s ability to challenge the merger—may now loom as a real threat to the deal’s prospects.