By Asheesh Agarwal
The Federal Trade Commission’s (FTC) speculative merger challenges are hampering innovation across the U.S. economy, including sectors critical to our global competitiveness. Tech, aerospace, microchips, the metaverse, and cloud gaming all have seen the FTC challenge vertical mergers grounded in hypothetical theories of “potential competition” rather than actual evidence of competitive harm. Even worse, the FTC has been refusing to work with the merging companies to address any genuine competitive concerns.
Now, the FTC is turning its attention to the healthcare sector, with results that could hamstring the effort to bring life-saving care to millions of people. In two cases, Illumina-Grail and Amgen-Horizon Therapeutics, the FTC has intervened to block mergers that would allow the combined companies to develop new medical products and gain regulatory approval more quickly. By itself, the fact that the FTC is challenging vertical mergers should raise an eyebrow. Until recently, the FTC itself, along with most courts, scholars, and economists, recognized that most vertical mergers enhance competition by allowing the merged company to reduce costs, integrate their operations, and generally achieve economies of scale.
Beyond that, in both cases, there is little or no risk that the mergers would reduce competition anytime in the foreseeable future. The merging companies have no existing competitors in the relevant markets. The FTC’s theory is that the merged company might, someday, potentially block a prospective competitor from accessing the acquired company’s technology. Moreover, in each case, the companies are offering behavioral remedies that appear manageable and able to address any genuine competitive concerns. As with mergers in many other sectors, the FTC is refusing to work with the companies to find solutions short of blocking the deals. For the FTC’s current leadership, it’s all or nothing.
As their practical impact, the FTC’s actions could prevent tens of millions from receiving life-saving medical treatment. In 2016, Illumina formed Grail to develop a blood test to detect early cancers. After spinning off Grail, Illumina sought to reacquire the company in a classic vertical merger; Illumina produces the genetic sequencing platforms to process Grail’s early detection tests. The companies believe that the acquisition will allow them to develop and produce these blood tests much more quickly.
The FTC, however, blocked the merger on the theory that Illumina might one day charge Grail’s future competitors more for processing their multi-cancer early detection tests or refuse to process competing tests entirely. There currently is no market for multi-cancer early detection tests, and even if one develops, Illumina has committed to supplying its products to GRAIL’s alleged competitors at current prices, or less, for the next 12 years. For these and other reasons, the FTC’s own administrative law judge rejected the agency’s challenge, but the FTC’s commissioners overrode him.
In a brief filed last week in the United States Court of Appeals for the Fifth Circuit, Illumina explained that the FTC’s analysis ignored the efficiency benefits of vertical mergers and they offered to address any genuine concerns by agreeing to supply its products to GRAIL’s alleged competitors for 12 years at current prices, or less. Illumina also raised several constitutional challenges to the FTC, which in many respects, has been skating on thin constitutional ice. The court’s decision could dramatically impact the analysis of vertical mergers, the FTC’s authority and processes, and of course, the millions of patients who could benefit from the merged company’s tests.
In many respects, Amgen presents a similar scenario. Amgen purchased Horizon Therapeutics, a smaller company that manufactures so-called “orphan drugs.” As with Illumina, there is little or no risk to competition as Amgen and Horizon do not compete against each other and have committed to avoid bundling the orphan drugs with other products, the practice that the FTC believes could, in theory, extend the combined company’s market power. On the other hand, the companies assert that the merger would allow the combined company to increase production and develop and gain regulatory approval for new drugs more quickly. Yet again, the FTC is ignoring these potential efficiencies and the companies’ business judgment.
Although both mergers have a very strong chance, and perhaps a probability, of succeeding in the courts, policymakers should ask the broader question of whether the FTC’s speculative merger enforcement efforts are promoting or inhibiting innovation in health care and across the economy. By adhering to the four-decade consensus on the benefit of vertical mergers, and by agreeing to work with merging companies to address any genuine competitive concerns, the FTC could continue to protect consumers while also allowing the health care sector to innovate and to save lives.
Agarwal is an adviser to the American Edge Project. He has also served in senior roles both in government and the private sector, including at the Federal Trade Commission (FTC) and the Department of Justice (DOJ).