Murray Deakin, K&L Gates - Examining the Competitive Landscape in the Australian Pharmaceutical Industry: Mergers and Acquisitions

© Copyright 2013 by K&L Gates. All rights reserved.

Murray Deakin

Partner

Antitrust, Competition & Trade Regulation

Examining the Competitive

Landscape in the Pharmaceutical

Industry: Mergers & Acquisitions

AGENDA

Competitive landscape of Australian

pharmaceutical industry

ACCC’s approach to market definition in the

pharmaceutical space

ACCC informal merger clearance regime

What can we expect in the future?

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THE COMPETITIVE LANDSCAPE

GLOBAL PHARMACEUTICAL INDUSTRY

Big pharma M&A activity on the rise

4 of the world’s top 10 drugs due to come off

patent

To maintain forward growth, big pharmas may

need to consider significant acquisitions

Attractive assets are currently priced high

High value acquisitions may necessitate

divestments of non-core assets

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AUSTRALIAN PHARMACEUTICAL

INDUSTRY

Global players dominate locally

Small number manufacture active

pharmaceutical ingredients

Large number only import and distribute

Ageing population driving growth

PBS expenditure growth may be unsustainable

Retail pharmacies facing challenges

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COMPETITIVE LANDSCAPE

Pharma industry at mature stage

Generic competition intensifying

Global players rationalising operations

Growing trend for strategic alliances

Medium industry concentration

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BASIS OF COMPETITION

Patented versus out of patent versus generic

Innovation

Prescription, pharmacist only, OTC or

therapeutic product

PBS cover and Chemist List Price

Global players

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BARRIERS TO ENTRY

Patent protection

High R&D costs

Government regulation

Manufacturing compliance

TGA approvals

Product safety

PBS

Medicines Australia

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ACCC’s APPROACH TO MARKET DEFINITION

MARKET

“a market in Australia and, when used in relation to

any goods or services, includes a market for those

goods or services and other goods or services that

are substitutable for, or otherwise competitive with,

the first-mentioned goods or services”

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THE RELEVANT MARKET

Suitability of the hypothetical monopolist test

Reference to the supply of the relevant active

ingredient or molecule nationally

Vertical integration is impacting functional level

Market in Australia or a State, Territory or region

of Australia

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PREVIOUS ACCC MERGER REVIEWS

M&A ACCC’s market definition

Aspen Global acquisition of

product portfolio from

GlaxoSmithKline (2012)

• Active ingredient of the relevant drug for every drug except 2

(injectable Amoxil and Imigran), which were defined more broadly

Aspen Global acquisition of

Zantac from

GlaxoSmithKline (2012)

• No conclusive view reached as to whether the OTC products which

used a different active ingredient or combination of active

ingredients were substitutable for OTC ranitidine

Aspen Pharmacare

acquisition of Sigma

Pharmaceuticals (2010)

• Active ingredient or molecule in the drugs

Pfizer acquisition of Wyeth

Corp (2009)

• Broad definition – various categories of drug, with different active

ingredients

Schering-Plough acquisition

of Merck & Co

• No conclusive view, but considered the acquisition in the context of

broad markets and by reference to the condition treated

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ACCC INFORMAL MERGER CLEARANCE REGIME

INFORMAL MERGER CLEARANCE REGIME

Key prohibition

Remedies for breach

Merger options

Merger assessment criteria

Informal clearance

Vital statistics

Take home points

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KEY STATUTORY PROHIBITION

Section 50

Prohibits any direct or indirect acquisitions of

shares or assets which would have the effect, or

be likely to have the effect of substantially

lessening competition in any market.

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REMEDIES FOR BREACH

Pecuniary penalties – the greater of:

A$10 million

three times the value of the benefit derived

10% of annual turnover

Injunctions

Divestiture

Forfeiture

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MERGER OPTIONS

Proceed

ACCC informal clearance

ACCC formal clearance

Australian Competition Tribunal authorisation

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MERGER ASSESSMENT CRITERIA

import competition

barriers to entry

level of market concentration

degree of countervailing market power

ability of merged entity to sustainably raise

prices

dynamics of growth, innovation and product

differentiation

removal of effective competitors

nature and extent of vertical integration

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WHAT IS INFORMAL CLEARANCE?

Apply to ACCC to ascertain its view of a

proposed merger

ACCC undertakes a competition assessment

ACCC decides whether merger is anti-

competitive

Apply before completion - earlier applications

desirable

Most widely used option

Best outcome: “no action” letter

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INFORMAL CLEARANCE PROCESS

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Typical duration: 6-12 weeks after pre-

assessment stage concludes

Pre-assessment and confidential review

Typical duration: around 2 weeks for pre-

assessment and 2-4 weeks for confidential review (if applicable)

Public review Typical duration: 6-12

weeks after pre-assessment stage

concludes

Post-SOI Typical duration: 6-12

weeks after SOI is published

INFORMAL MERGER REVIEWS 2009 - 2013

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YEAR APPLICATIONS NOT OPPOSED OPPOSED

2009-2010 321 306 15

2010-2011 377 370 7

2011-2012 340 333 7

2012-2013 289 278 11

TOTAL 1327 1287 40

INFORMAL PUBLIC AND CONFIDENTIAL

MERGER REVIEWS ASSESSED IN 2012-13

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71%

8%

8%

3% 5% 5%

Not opposed

opposed

confidential concerns

87B undertakings

withdrawn/no decision

87B variations

ACCC INFORMATION GATHERING POWERS

Can request information on a voluntary basis

Statutory information gathering powers: s 115

Can compel merger parties to:

provide documents and information

appear to provide evidence under oath.

Resorted to when:

it is most efficient to acquire critical information this way;

information unlikely to be provided voluntarily; and

third parties would prefer to be compelled.

From 2011 to 2013 the ACCC have used these powers

18 times

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WHAT CAN WE EXPECT IN THE FUTURE?

THE FUTURE

More M&A activity in pharma sector

Increased ACCC regulatory activity in the

pharmaceutical industry

Pay for delay litigation

Root and branch review of competition law

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Murray Deakin Partner (02) 9513 2335 [email protected]

Sylvia Ng Senior Associate (02) 9513 2303 [email protected]