ANTITRUST MERGER ENFORCEMENT

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1 A R T I C L E S A N D D E V E L O P M E N T S 4 American Bar Association. All rights reserved. Reprinted from Antitrust magazine, Fall 4, a publication of the ABA Section of Antitrust Law. Antitrust Treatment of Mergers Involving Future Goods BY ILENE KNABLE GOTTS AND RICHARD T. RAPP ANTITRUST MERGER ENFORCEMENT is all about the future competitive performance of markets. Competition can occur in terms of price, quality, and innovation. Given its forward-looking perspective, antitrust analysis requires predictive judgments. Predicting the future performance of producers of existing goods has potential for mistakes, but evidence such as data on past performance, company documents and statements, and customer views can help to inform a prediction, particularly if a reasonably brief time horizon is used to assess the likely competitive effects. More difficult is trying to predict the impact that one party to a merger may be exerting on competition as a potential entrant into an existing goods market and the likely effects that such entry would have on future competition. Yet there is merit in raising competition concerns under the potential competition doctrine when one of the merger parties is on the brink of entering a market and when a reasonably brief time horizon is used to assess the likelihood and competitive effects of the firm s entry. Far harder to predict, however, is the performance of a market for goods that neither exist in the present nor are anticipated within a foreseeable time horizon. The Federal Trade Commission and, to a lesser degree, the U.S. Department of Justice have nevertheless challenged a number of mergers partly on grounds that the combination of the parties research and development projects will reduce competition in markets for products that do not yet exist, by reducing innovation competition in the present and therefore Ilene Knable Gotts is a partner in the New York law firm of Wachtell, Lipton, Rosen & Katz. Richard T. Rapp is president of NERA Economic Consulting. The authors thank Amanda Straub and Naa Akofio-Sowah for their contributions to this article. The views expressed in this article are attributable to the authors alone and not to their respective firms or clients. reducing consumer choice in the future. The majority of these cases have involved the pharmaceutical industry. In this article we describe how the review of pharmaceutical mergers has evolved to include potential competition in existing and future goods markets. We present the results of our ex post review of ten product categories from pharmaceutical mergers in which the FTC required relief premised on innovation market concerns. The results, although anecdotal, illustrate the difficulty of predicting the successful emergence of future goods from current R&D efforts, and thus the pitfalls of basing enforcement decisions on these predictions. We propose modifications to enforcement policy that would hew to the traditional market analysis in the 199 Merger Enforcement Guidelines, under which entry and potential competitors can be considered in goods (or, where applicable, service) markets that are reasonably likely to exist within a foreseeable time frame. Historical Treatment of Mergers Affecting Potential Competition in Future Goods Markets Under the analytical framework of the Merger Guidelines, there must be the delineation of a relevant market, identification of market participants, and an analysis of whether the merger creates or enhances market power, either by the merging firm acting unilaterally or on a coordinated basis. The 199 Guidelines include as participants in a relevant market those firms that currently produce or sell in the relevant market as well as those firms that could participate through a supply response within one year. 1 The Guidelines generally consider relevant for purposes of evaluating the impact of entry of nonparties those entry alternatives that can be achieved at significant market impact levels within two years. In its reviews of pharmaceutical mergers beginning in the 199s, the FTC began to depart from the terms of the Merger Guidelines by expanding the time horizon for what constituted participation by one of the merger parties in an existing goods market beyond the one-year supply response time frame and two-year entry time frame specified in the Guidelines. The point of departure appears to have occurred in 199 in connection with the Roche/Genentech merger, 3 where the FTC challenged a merger on potential competition grounds despite the fact that one of the merging parties was not expected to have a product in the relevant enforcement market within two years. 4 The complaints accompanying the FTC consent orders in Wright Medical, 5 Boston Scientific, 6 AHP, 7 Zeneca, 8 Glaxo- SmithKline, 9 Hoechst/Rhone-Poulenc, 1 Amgen, 11 and Baxter- Wyeth, 1 similarly contained allegations that potential competition from new products would be threatened, without explicitly describing the time horizon within which the newproduct competition was expected to emerge. Recent precedent also asserts a more expansive time frame than found in the Merger Guidelines. In, in Cytyc/Digene, 13 the FTC based its challenge, in part, on potential competition concerns arising from the elimination of Digene as a competitor 1 A N T I T R U S T

2 to Cytyc with a stand-alone primary test for cervical cancer expected to be launched approximately four to five years in the future. Cytyc reportedly had 93 percent of the market for pap tests. 14 The FTC s 199 Genentech consent order was remarkable for another reason: it included relief on potential competition grounds for CD-4 therapies for treatment of AIDS and HIV for which no competitor offered an existing product i.e., future goods. 15 Genentech was the most advanced of a limited number of potential competitors, with Roche also engaged in R&D and having patent applications pending. 16 Despite the lack of any commercialized products, the low likelihood of success, and the absence of any apparent reason to believe that Genentech and Roche had unique incentives to compete against each other before the combination, the FTC required relief on potential competition grounds. 17 Commissioner Owen dissented in Genentech on the basis that the decision departed from prior precedent and the Merger Guidelines. She expressed substantial doubt that the prospective entrant was willing to enter or that entry was imminent. 18 Moreover, Commissioner Owen indicated that, without any firms or products in the market, drawing conclusions about the competitive performance in that market in the relatively distant future was speculative at best, and characterized statements about competition in excess of two or three years in the future as a mere hypothesis. 19 From 1995 to the present, the FTC has consistently reviewed pharmaceutical mergers to determine whether or not the drugs in the development pipeline overlapped and thus would result in the elimination of competition in innovation. In addition to naming lost potential competition as the rationale for regulating the combination of R&D projects, the FTC has frequently employed the innovation market approach. We do not address here either the rationale for or the criticism of the innovation market concept, which appears extensively elsewhere. 1 Suffice it to say that the Commission s acceptance of the innovation market approach from the time of its first use to the present has reinforced its willingness to challenge mergers to prevent a lessening of competition in markets in which not-yet-invented products may someday compete. Defining the Foreseeable Future in the Pharmaceutical Industry One might expect, given the FDA s heavy involvement in the clinical trial and drug approval process, that there would be a reasonably reliable basis for predicting the outcome of research efforts and thus products and participants in future drug markets certainly more so than, for instance, in software markets. However, although the FTC has ready access to data arising out of the FDA approval process, considerable uncertainty remains. As one commentator observed about pharmaceutical industry R&D, only one in five drugs that enter clinical trials ever reach the market, [so] predictions about when a loss of innovation competition will actually harm consumers are likely to be wrong at least occasionally. 3 The European Commission similarly noted in its Glaxo/ SmithKline decision: [R]esearch and development projects undergo three different phases of clinical testing: Phase I marks the start of clinical testing on humans, currently some eight to ten years before a product is marketed. Statistically, projects in phase I generally have no more than a 1% chance of being successful. Phase II, some four to five years before the product is marketed, involves working out the proper dose for the patient and defining the areas of application. The success of phase II is generally acknowledged to be approximately 3%. Phase III, starting three years before the product is marketed, involves establishing the product s effectiveness on large groups of patients. The risk of failure in phase III is reported to be over 5%. 4 Ironically, the FTC often cites the lengthy period of time it takes to develop and test a new drug as a justification for applying potential competition or innovation market theories to pharmaceutical mergers... Recent data indicate that a new drug s probability of success in Phase I clinical trials is 81%, a percentage that declines to 57% in Phase II trials and remains 57% in Phase III trials, producing an overall success rate of approximately 6%. The average time a successful drug spends in Phases I through III is 97 months (i.e., over 8 years) with Phase III alone taking on average 3.5 years. 5 Ironically, the FTC often cites the lengthy period of time it takes to develop and test a new drug as a justification for applying potential competition or innovation market theories to pharmaceutical mergers: because barriers to entry are formidable, the agency often sweeps even early-stage drugs of the merger parties (but typically not third parties) into its analysis. 6 As the statistics cited above suggest, however, a drug s progression to even late-stage trials is no indication that it will achieve commercial success. Indeed, the recent decision by Merck to withdraw best-selling Vioxx from the marketplace illustrates that even successful launch of the product does not guarantee continued success or the safety and effectiveness of the drug. 7 The significance of this uncertainty for enforcement actions is revealed by an examination of the outcomes of the research programs that the enforcers stepped in to protect. One way to judge whether an enforcement action might have produced a good result is by observing the number of actual products in the market some years after the enforcement event. If years after a divestiture or other remedy no F A L L 4 1 1

3 A R T I C L E S A N D D E V E L O P M E N T S product emerged from any party (including the merged firm and the acquirer of a divested project), then the enforcement action may be scored a failure. We do not pretend that this is a definitive judgment for we cannot know that, but for the enforcement intervention, a product would have emerged from the combined firm. We can only say that that the enforcement action did not in fact lead to the development of any (much less competing) products; and that there is at least the possibility that a product might have come from the massed R&D resources of the merged firms a possibility that was foreclosed by the enforcement action. By the same token, the presence of two or more products arising from the R&D programs that were held separate by enforcement may be scored a success. It may be that, hypothetically, two products would have emerged from the combined firm in the absence of enforcement action, but a no less likely outcome is that the merged firm would have brought only one product to market. Enforcement actions that lead to one-product outcomes have ambiguous effects. Although we know that the enforcement action did not result in competition between two actual products, there is at least a possibility that competition In our view, the quality of agency decision making could be improved by limiting enforcement to foreseeable goods markets (apart from rare -player R&D races). may have forced the development of the single product. On the other hand, there are easily imaginable settings in which a single firm s ownership of both pre-merger R&D projects would concentrate incentives for that firm to ensure that some drug gets to market. Competing firms, by contrast, may conclude that even if they are successful in the development, the presence of a second product may reduce profitability, making each firm s separate project less attractive to pursue. The accompanying table summarizes the outcomes of ten enforcement actions against pharmaceutical mergers involving future goods that occurred from 1995 to 1. The results do not foster enthusiasm for antitrust intervention as a means of making future goods markets more competitive. Of the ten pharmaceutical merger enforcement episodes we examined, only four cases resulted in two or more products arising from transactions that had either been stopped or permitted only on condition of divestiture or compulsory licensing. Moreover, in three of these cases, non-merger parties have been more successful than the merger parties; 8 and in three others, several firms besides the merger parties have entered or are today just as likely to enter as the merged entity. 9 It is thus questionable whether the successful divestiture remedies were necessary to ensure that competition exists. The only clear wins were in oral migraine drugs and fibrin sealants, where more than two products emerged from the development projects that were the subject of enforcement action. 3 In six cases, either no new product (four cases) or only one new product (two cases) emerged, indicating that the preservation of two separate projects left the market no better off and possibly worse off as a result of the enforcement action. In the cases where none of the projects bore fruit, we cannot know, of course, whether a product might have emerged had the projects been merged together, but the possibility of success must be reckoned against the actual unhappy outcome that no new product emerged. Also, the fact that the merger parties sometimes picked the wrong project to retain further demonstrates the difficulty in predicting the success of future goods. 31 Implications for Merger Policy We recognize the shortcomings in our method of counting product introductions as wins and losses. A more rigorous examination of the implications of our proposal along with a closer scrutiny of what passes for future goods analysis would be welcome. Nevertheless, the outcomes of enforcement actions analyzed in this article suggest the need for restraint in enforcement policy concerning future goods except in limited circumstances. In our view, the quality of agency decision making could be improved by limiting enforcement to foreseeable goods markets (apart from rare -player R&D races). 3 Proper enforcement involving future goods can only happen when the good is far enough along in the development process to allow it to be identified as a source of potential competition, along with its close substitutes, in a forecast relevant goods markets. We recommend that the agencies adopt a simple, practical rule: a lessening of competition under Section 7 of the Clayton Act should be alleged only by reference to a forecast goods market in which, at a minimum, the identities of the sellers are predicted and their capacities approximated. Such an analysis need not necessarily require SSNIP-type market definition or sales share and concentration measurement, as found in the full Merger Guidelines analysis for present goods. This approach would rule out enforcement actions concerning future goods that are justified only by reference to the intentions of the parties or to their R&D facilities or expenditures, rather than by reference to forecasts of goods markets. If the future products are so unpredictable that a rough forecast of the structure of the ultimate goods market cannot be made, then there is no reason to be confident that antitrust intervention into combinations of R&D capabilities will have desirable outcomes. The time horizon for entry that the agencies employ in other industries should be the starting proposition when considering whether a technology-intensive merger s competitive effects on future goods are sufficiently foreseeable to warrant enforcement action. We acknowledge that there may 1 A N T I T R U S T

4 FTC Enforcement Actions Involving Future Goods Eventual No. Date of Goods Market Claim in of Firm Prods. Decision Drug Parties the Same Market? What Relief or Resolution? to Market /14/95 Rotavirus vaccines American Home Products/ American Cyanamid (now Wyeth) Glaxo/Wellcome No. At the time of the merger there were no rotavirus vaccines available. FTC required the merged entity to license Cyanamid s rotavirus vaccine research to a Commission- approved licensee. 6/14/95 Oral Migraine Drugs (triptans, a.k.a. 5HT1D inhibitors) Upjohn/Pharmacia No. No oral triptans ("non-injectable 5HT1D antagonists) on the market at the time of the merger. Injectable options available. The FTC order required Wellcome to divest 311C9 assets (or, alternatively, if the merged entity was unsuccessful in finding a buyer, to divest sumatriptan (Glaxo s product) assets). Ultimately, 311C9 was sold to Zeneca. /8/96 Topoisomerase I Inhibitors Baxter/Immuno No. There were no drugs on the U.S. market in 1996 and "a very small number of companies" were in advanced stages of developing such agents. Pharmacia was required to divest 9-AC assets within a year (they returned the rights to the National Cancer Institute, to this day still lone developer of the drug). 1 3/4/97 Fibrin Sealants Hoechst/ Rhone-Poulenc (now Aventis) No. Hospitals made their own sealants before. Many companies were seeking approval for sealants on the U.S. market, no products commercialized in U.S. at the time. Merged entity was to grant a permanent non-exclusive, royalty-free license for Immuno s fibrin sealant s assets to a Commission-approved licensee (Haemacure, in 1997). 1/18/ Direct Thrombin Inhibitors (DTIs) Pfizer/Warner- Lambert Yes. Refludan (lepirudin) by Hoechst was approved in 1998 for heparininduced thrombocytopenia (HIT). Rhone- Poulenc licensed Revasc (desirudin, marketed also as Iprivask) from Novartis in 1998, expected at the time of merger to be Refludan s competitor, although not yet approved for U.S. market. Merged entity was to divest assets related to Revasc (desirudin) to Novartis or a third party (or, as alternative, divest Refludan). 7/7/ Epidermal growth factor tyrosine kinase inhibitors (EFGr-TK inhibitors) No. At the time of the merger there were no FDA-approved EFGr-TK inhibitors on the market for cancer treatments. Pfizer was required to divest its EFGr-TK inhibitor, Tarceva (CP-358,774), to the company s partner in developing the drug OSI Pharmaceuticals. The merged entity was to develop Warner-Lambert s effort, CI-133 (canertinib). 1/6/1 Herpes Vaccines No. No vaccine available on the market. Required Glaxo to divest prophylactic herpes vaccine assets to Cantab, drug development company from which it had licensed its vaccine. 1/6/1 Topoisomerase I Inhibitors Yes. Two topoisomerase inhibitors on the market, administered intravenously as second-line cancer treatments. Camptosar (irinotecan, May 1996, Pharmacia, primarily for colorectal cancer); Hycamptin (topotecan, June 1996, SmithKline, ovarian and small-cell lung cancer). Glaxo s liposomal lurtotecan was divested to Gilead Sciences. 1/6/1 Irritable Bowel Syndrome (IBS) treatments No. No IBS drugs available at the time of the merger. Glaxo had Lotrorex, released in 1999, voluntarily taken off the market just prior to the merger because of side effects (including deaths). SmithKline had rights to Renzapride discovered by and developed by Alizyme (GBR). One more drug being developed. Merged entity had to divest all assets related to Renzapride to Alizyme. 1 1/6/1 Oral Migraine Drugs (triptans, a.k.a. 5HT1D inhibitors) Yes, There were several triptan drugs on the market, produced by Glaxo Wellcome (65% market), AstraZeneca, Merck. SmithKline has Frova (frovatriptan) in Phase III clinical trials. Merged entity was required to transfer Frova (SKB s triptan research) to Vernalis. F A L L 4 1 3

5 A R T I C L E S A N D D E V E L O P M E N T S be circumstances in which it is appropriate to take a somewhat longer perspective than the conventional entry-withintwo years. A small number of R&D competitors and long planning horizons sometimes make the identities and capacities of market participants foreseeable farther out into the future. For example, future goods markets for next-generation commercial aircraft should be foreseeable farther than two years out. So rather than trying to find a one-size fits all time horizon, it would be better to address foreseeability directly by requiring examination of the future goods market itself. Very little is lost by ruling out investigations that hypothesize anticompetitive effects based largely on speculation about the competitive effects of concentrating R&D capabilities without reference to specific projects having foreseeable outcomes. The proposed approach would not prevent the antitrust authorities from acting against merger-induced lessening of innovation competition. It would, however, tie those inquiries to solid antitrust analysis rather than guesswork about the impact of concentrating R&D budgets. 1 U.S. Dep t of Justice and Federal Trade Comm n Horizontal Merger Guidelines 1.3 (199, revised 1997), 4 Trade Reg. Rep. (CCH) 13,14, available at Id. Although the Merger Guidelines use two years from initial planning to significant market impact as the definition of timely entry, we know of no empirical basis for drawing such a line. We surmise that two years may have originated as a pragmatic way to try to define foreseeability. 3 Roche Holding Ltd., 113 F.T.C. 186 (199) (consent order) (Genentech). 4 In Genentech the FTC entered into a consent agreement that required relief in two markets on potential competition grounds: Vitamin C; and human growth hormone-releasing factor. Roche was the market leader in Vitamin C, with reportedly a dominant market share; Genentech had developed a new patented process for producing Vitamin C using recombinant DNA technology. In the human growth hormone-releasing factor market, Genentech had a near monopoly, which was protected by the exclusivity provisions of the Orphan Drug Act (ODA) and the patents under which Genentech had sued its only extant competitor (not Roche) for patent infringement. Roche had conducted advance clinical trials, which would presumably have fallen outside of the ODA scope that ensures exclusivity for the first approved drug, for Roche to even have been a potential competitor. 5 Wright Med. Tech. Inc., FTC File No (1994). Orthonet had an exclusive arrangement with Mayo for clinical trials of the next generation of finger implants, while Wright had a 95% share of finger implant sales. The Commission alleged in its complaint that the acquisition would prevent entry of Orthonet as a competitor and reduce competition in R&D of next generation implants. The consent freed Mayo to find another licensee in addition to Wright to develop such implants. 6 Boston Scientific Corp., FTC File No (Feb. 4, 1995). Boston Scientific had a 4% share of IVUS catheters and proposed to acquire one firm that actually was competing with a 5% share and another firm that had conducted R&D for the same product and was therefore deemed as the most likely potential competitor. The settlement required the grant of a broad royalty-free nonexclusive license to the relevant technology to Hewlett-Packard. 7 Am. Home Prods. Corp., 119 F.T.C. 17 (1995). American Cyanamid was one of two firms marketing cytokines for white blood cells and platelets, with three other companies having products pending, including AHP through its joint project with Sandoz, Ltd. Before clearing AHP s acquisition of American Cyanamid, the FTC required adjustment of the reporting provisions of the supply and license agreements to aggregate all such information on a worldwide basis. 8 Zeneca Group, plc, 17 F.T.C. 874 (1999), available at os/1999/6/zeneca.do.htm. Zeneca had an agreement with Chiroscience Group plc to market and assist in the development of a long-acting local anesthetic; Astra was one of two companies approved by the FDA for the manufacture and sale of long-acting local anesthetics. The consent required Zeneca to transfer its rights in the production and development of the drug to Chiroscience, and for a transitional period, to assist in the marketing of any resulting product. 9 Glaxo Wellcome plc, FTC Docket No. C-399 (Jan. 6, 1), available at Two of the eight markets in which the FTC required relief involved situations in which one of the firms had a product in the market and the other firm had a product in development. SmithKline had the leading topoisonerase I inhibitor therapy (which is used to treat certain types of cancer), and Glaxo was developing one of the few R&D efforts in the area. The FTC concluded that, as a result of the merger, the combined entity could unilaterally delay, terminate, or otherwise fail to develop the Glaxo product, resulting in less product innovation, fewer choices, and higher prices for consumers. Similarly, Glaxo was the leading seller of tripan drugs for migraines, and SmithKline had a reversionary interest in a similar drug under development, which was supposed to launch soon after the merger. Although two other approved drugs were on the market, the FTC found that the merger would eliminate one of the few R&D efforts. 1 Hoechst A.G., FTC Docket No. C-3919 (), available at os//3/aventisormo.pdf. Hoechst sold the only direct thrombin inhibitor in the United States, and Rhone-Poulenc was in the final stages of developing a direct thrombin inhibitor that it had licensed from Novartis. The complaint alleged that the merger reduced potential competition and innovation competition among researchers and developers of direct thrombin inhibitors. The order required Hoechst to transfer all of Rhone-Poulenc s rights in its direct thrombin inhibitor to Novartis or some other third party, and to enter into a short term service agreement with the acquirer. 11 Amgen Inc., FTC Docket No. C-456 (), available at os/caselist/c456.htm. Amgen and Immunex were the only competitors developing and marketing soluble TNF receptor products. The FTC required the parties to divest one of the two initiatives. 1 Baxter Int l Inc., FTC Docket No. C-468 (Feb. 7, 3), available at Baxter marketed the only generic version of Diprivan, an injectable anesthetic, and Wyeth was in the process of seeking FDA approval and was one of two companies most likely to enter the market with its own generic version. The FTC asserted that to preserve future competition and the lower prices in the market that probably would have resulted from the entry of a generic product, divestiture of Wyeth s proposal business to Faulding would be required. Similarly, Baxter jointly marketed Fentecut, one of only two new injectable iron replacement therapies for sale in the United States, and Wyeth was the best positioned to enter the market. The FTC required Baxter to terminate its co-marketing agreement with Watson and provided incentives for Baxter to proceed with development of Wyeth s iron gluconate product. 13 Cytyc Corp., FTC File No (June 4, ), available at Perhaps another significant basis for the FTC s concerns was Cytyc s potential use of Digene s DNA-based test of HPV virus in conjunction with the pap test it offered, thereby creating entry barriers and harm to Cytyc s competitors who might be denied access to Digene s product. Digene had applied for FDA approval to use the test and final approval was expected before the end of (i.e., within six months). 1 4 A N T I T R U S T

6 14 See also Federal Trade Comm n, Press Release, With Conditions, FTC Allows Cephalon s Purchase of CIMA, Protecting Competition for Breakthrough Cancer Pain Drugs (Aug. 9, 4), available at 8/cimacephalon.htm. (Cephalon currently produces Actiq, the only product indicated for the treatment of breakthrough cancer pain (BTCP) in the United States; Cima is in Phase III of clinical development of a new BTCP product, for which, absent the merger, it would seek FDA approval by the end of 4 or in the first quarter of 5, and would possibly enter the U.S. market in 6 or 7.) 15 Roche Holding, Ltd., FTC Docket C-3315, complaint 13 ( Nov. 8, 199). 16 Id Id Roche Holding Ltd., 113 F.T.C. 186, 117 (199) (Dissenting Statement of Commissioner Deborah K. Owen). 19 Id. Innovation markets are described in the U.S. Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, available at ipguide.htm. 1 See Richard J. Gilbert & Steven Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 ANTITRUST L.J. 569 (1995); Richard T. Rapp, The Misapplication of the Innovation Market Approach to Merger Analysis, 64 ANTITRUST. L.J. 19 (1995).; Ronald W. Davis, Innovation Markets and Merger Enforcement: Current Practice in Perspective, 71 ANTITRUST L.J. 677 (3). For a useful discussion of the history of the innovation market approach, see Statement of Chairman Timothy J. Muris in the Matter of Genzyme Corporation/Novazyme Pharmaceuticals Inc. 6 (Jan. 13, 4)., available at Jonathan I. Gleklen, Editor s Note, Symposium: Antitrust Issues in the Pharmaceutical Industry, 71 ANTITRUST L.J. 577, 583 (3). 4 Glaxo Wellcome/SmithKline, Case No. IV/M. 1846, O.J. (C 17) 1 (June 6, ). 5 Rosa M. Abrantes-Metz et al., Pharmaceutical Development Phases: A Duration Analysis (FTC Working Paper 74, Oct. 4), Table B (citing data from Pharmaprojects dataset constructed by PJB publication, Ltd.), available at 6 The initiatives of third parties, including in response to the merger, should not be ignored. As Howard Morse points out in a non-pharmaceutical example: In Halliburton, DOJ does not suggest that the remaining firms are likely to collude in R&D. DOJ does not suggest even that the other firms have distinct approaches to R&D or that neither would be likely to reposition their approach to replace that eliminated by the merging firms. DOJ simply ignores the reaction of the other firms, instead suggesting that the merging firms decision to eliminate one approach is a unilateral anticompetitive effect. The complaint s allegation that the rate of innovation would slow seems particularly unfounded in these circumstances. M. Howard Morse, The Limits of Innovation Markets, ANTITRUST & INTELL. PROP. (ABA SECTION OF ANTITRUST LAW NEWSL.), 9 (1). 7 See Gina Kolata, A Widely Used Arthritis Drug Is Withdrawn, N.Y. TIMES, Oct. 1, 4, at A.1 (Merck withdrew a drug taken by close to two million people and accounting for $.5 billion in sales in 3 because studies found it doubled the risk of heart attack and strokes). 8 AHP/Cyanamid (GlaxoSmithKline has a rotavirus vaccine in Phase III trials and Merck is working on a vaccine); (Avant Immunotherapeutics has a prophylactic herpes vaccine in clinical development; Novartis has beat both the merger parties and the divestiture buyer to market with the only nonrestricted irritable bowel syndrome drug on the market). 9 For topoisomerase inhibitors, for example, SuperGen, Novartis and Enzon are at least as advanced in their development efforts as the merger parties. Similarly, for epidermal growth factor receptors for solid tumor cancers, OSI, ImClone, and Bristol-Myers-Squibb are still developing products, as is Pfizer, Wyeth, and GlaxoSmithKline. Similarly, for irritable bowel syndrome, in addition to Novartis, Solvay Pharmaceuticals and Merck have products in development. 3 For migraine decisions, see the Glaxo/Wellcome and mergers; for fibrin sealants, see the Baxter/Immuno merger. 31 For example, GlaxoSmithKline kept Lotronex, which is now limited to a restricted marketing program, while Alizyme s Renzapride (the divested project) has shown more promising results). 3 There is at least one setting in which we believe enforcement action might be warranted even though there is no prospect for conventional goods market analysis. That is an R&D race between two firms with little possibility of later entry into the race. In this situation we would expect a merger to produce a reduction in R&D inputs. Former FTC Chairman Timothy Muris s public statement in the Genzyme-Novazyme matter presented a helpful analysis: [O]ne must examine whether the merged firm was likely to have a reduced incentive to invest in R&D, and also whether it was likely to have the ability to conduct R&D more successfully. See Statement of Chairman Timothy J. Muris, supra note, at 6. The types of potential anticompetitive harms identified by Chairman Muris were: (1) the elimination of a race to market absent the merger; and () the reduction of R&D spending for one or other of the programs, particularly if one of the programs succeeds. See also David A. Balto & Scott A. Sher, Refining the Innovation Focus: The FTC s Genzyme Decision,ANTITRUST,Spring 4, at 8. where to go for answers... the source (of course) When you want the latest, greatest thinking in antitrust, read The Antitrust Source. The ABA Antitrust Section s newest premier publication features up-to-the-minute interviews, analysis, book reviews, and more all at the click of a mouse. Join thousands of readers who don t miss an issue. See you at the Source. To see an index of articles that have appeared in Antitrust Source, go to F A L L 4 1 5