Background

Eldorado agreed to acquire Caesars for $17.3 billion on June 24, 2019. Eldorado is a provider of casino entertainment and hospitality services, operating 23 casino gaming properties. Caesars is a similar provider, operating 53 casino gaming properties in 14 states and in 5 countries outside the United States.

The FTC determined that Eldorado’s proposed acquisition of Caesars would likely cause substantial competitive harm to the casino services markets in South Lake Tahoe, Bossier City-Shreveport, and Kansas City.

In the South Lake Tahoe area market, Eldorado currently operates the MontBleu Casino and Spa (“MontBleu”), while Caesars operates Harrah’s Lake Tahoe Hotel and Casino and Harveys Lake Tahoe Hotel and Casino. All three casinos are located in Stateline, Nevada.  In the Bossier City-Shreveport market, Eldorado operates the Eldorado Shreveport Casino (“Eldorado Shreveport”). In the same market, Caesars offers casino services at two properties, Horseshoe Bossier City Hotel and Casino and Harrah’s Louisiana Downs. In Kansas City, Missouri, Eldorado operates the Isle of Capri casino and Caesars operates Harrah’s Kansas City Hotel and Casino.

The FTC found that Eldorado and Caesars are close competitors in the three markets and that the acquisition would substantially lessen this competition and incentivize Eldorado to raise prices while also diminishing its incentive to improve the quality of its services and amenities. These effects would be detrimental to casino customers in these markets.

The FTC also concluded that significant entry barriers exist, so entry is unlikely to be timely. Regulations limit the number of available casino licenses and inhibit the expansion of gaming operations. Obtaining regulatory approval is a lengthy and costly process. Additionally, Louisiana and Missouri have issued all available casino licenses. For this reason, entry in those markets is currently restricted.

Consent Agreement

The proposed consent agreement sets forth that Eldorado must divest its MontBleu casino and its Eldorado Shreveport casino to Twin River Worldwide Holdings, Inc. (“Twin River”). Further, the divestitures must conclude by the earlier of 12 months from the closing of the acquisition; or 30 days from the date Twin River receives all regulatory approvals.

Independently from its acquisition of Caesars, Eldorado is selling its Isle of Capri casino in Kansas City, Missouri. According to the consent agreement, Eldorado must consummate the sale of Isle of Capri within 60 days of the closure of the acquisition. If this condition is not met, the FTC has the option to require Eldorado to divest Isle of Capri to an approved buyer within 12 months.

Additionally, Eldorado and Caesars are required to abide by the Order to Separate and Maintain Assets until the divestitures are completed. Eldorado and Caesars are thus required to maintain the viability, marketability, and competitiveness of their assets while the divestitures are in progress. A monitor will ensure the parties comply with the Order to Hold Separate and Maintain Assets, the consent agreement, and the divestiture agreements. After the divestiture, the parties are required to provide transitional services to the acquirer of the assets for up to 12 months.

According to the FTC, complying with the consent agreement would result in no changes to market concentration in the three areas and prevent competitive harm.

Commissioner Chopra’s Dissent

In his dissent, Commissioner Chopra expressed that he views the acquisition as risky and having no benefit to competition, casino customers, and those working in the casino services market. While Commissioner Chopra agrees that the acquisition is unlawful, he believes the FTC should not enter into agreements with prolonged divestitures.

According to Commissioner Chopra, an agreed upon divestiture must fully restore competition and the new competitor must be ready and able to compete on day one. He notes this is not possible under the proposed consent agreement. The prolonged divestitures of Eldorado’s two casinos to Twin River can be completed at the earliest of 12 months after acquiring Caesars, or 30 days after Twin River receives regulatory approval. Commissioner Chopra expressed that prolonging the divestiture necessitates adding other risky provisions to the consent agreement. Additionally, he disapproves with the FTC’s proposal to have Commission-appointed property managers operate the casinos until the buyer is ready to take over. Chopra believes this appointment is outside of the FTC’s role. Potential anticompetitive harms are also evident to Chopra with the FTC appointing a monitor, as the appointed managers will be compensated by the prior owner and there is no clear procedure for the manager’s removal or discipline at the hands of the appointed monitor and the FTC.

Moreover, Commissioner Chopra believes the FTC failed to adequately analyze Twin River before approving it as the divestiture buyer. Recently, two hedge funds have accumulated major ownership stakes in Twin River. Commissioner Chopra is concerned that the FTC did not consider the plans of these hedge funds and that ultimately Twin River is not a long-term competitor.  He also argues that Twin River will not restore competition on day one given.

Thoughts

The FTC majority decision is in line with the FTC’s past decisions to allow mergers of casino companies on the condition that the buyer divests overlapping casinos that raise competition concerns.  In the past, the FTC approved mergers with settlement agreements that did not identify an upfront buyer.  In this case, the FTC has actually done more than it has in the past as it identified the divestiture buyer, had an opportunity to vet the buyer, and required a comprehensive remedy to make sure that the divested assets are protected while the divestiture buyer obtains necessary licenses.  That being said, Commissioner Chopra raises significant concerns about the FTC’s process and review of divestiture buyers.  He is right that in the FTC should always strive to require divestiture remedies that restore competition on day one.  Whenever there is a delay in the sale of the divested asset, there is an increased risk that the divestiture buyer may fail may in effectively maintaining competition.  Also, given past failed divestiture remedies, he is right to question a divestiture buyer’s motives and incentive, and divestiture buyers must be thoroughly vetted before allowing an anticompetitive merger to be consummated.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

And

Alexandra Taylor

The FTC has a long history of scrutinizing transactions in the pharmaceutical industry, but Commissioners’ statements demonstrate that they are not on the same page with regards to the analytical approach of analyzing pharmaceutical mergers and how to remedy the competitive problems that are identified.

The three Republican Commissioners in the majority adhere to the traditional framework, which examines actual competition between existing treatments and potential competition between existing and pipeline treatments, and then tailors very narrow remedies to address those competitive overlaps.

Background

AbbVie and Allergan compete in the manufacture and sale of pancreatic enzyme therapies for exocrine pancreatic insufficiency (“EPI”).  AbbVie’s Creon is a pancreatic enzyme therapy for EPI, a condition that results in the inability to digest food properly.  Creon is the market leader.  Meanwhile, Allergan’s Zenpep (pancrelipase) was a strong competitor in a concentrated market where the other two players have only one or two percent share.  Indeed, AbbVie and Allergan together control 95 percent of the market for these drugs.  As a result, the FTC concluded that the merger lessened competition in the market for treatment of EPI.

AbbVie and Allergan have investigative biologic drugs working their way through the U.S. Food and Drug Administration (“FDA”) approval process that are indicated to treat moderate to severe Crohn’s disease and ulcerative colitis.  AbbVie’s Skyrizi, an IL-23 inhibitor, is already on the market to treat moderate-to-severe psoriasis, but Skyrizi and Allergan’s IL-23 inhibitor, brazikumab, will potentially compete in the future.  The FTC alleges that the acquisition would eliminate future direct competition between AbbVie and Allergan in the development and sales in the United States of IL-23 inhibitor drugs for treatment of moderate-to-severe Crohn’s disease and moderate-to-severe ulcerative colitis.

Consent Agreement

Under the proposed consent agreement, AbbVie and Allergan are required to divest to Nestlé, S.A. (“Nestlé”) Allergan’s assets related to EPI drugs Zenpep and Viokace.  AbbVie and Allergan also are required to transfer to AstraZeneca plc (“AstraZeneca”) Allergan’s rights and assets related to brazikumab — its IL-23 inhibitor that is in development to treat moderate-to-severe Crohn’s disease and ulcerative colitis.

Commissioner Chopra and Slaughter‘s Dissents

Commissioners Rohit Chopra and Rebecca Slaughter, the two Democrats, continue to call for a fundamentally different approach to analyzing pharma mergers especially when the merger combines two firms that have engaged in a laundry list of egregious anticompetitive practices that have resulted in higher prices and less consumer choice.  Commissioner Chopra remains skeptical that the FTC’s traditional framework identifies the complete set of harms to patients and favors taking a more expansive approach to analyzing the full range of competitive consequences of pharmaceutical mergers.  Commissioner Slaughter agrees with Chopra’s dissent but also expresses concern about the lessening of innovation that occurs from a massive pharmaceutical merger.

Commissioner Chopra criticizes the FTC’s myopic approach to analyzing pharmaceutical mergers as he points out that “he agency’s default strategy of requiring merging parties to divest overlapping drugs is narrow, flawed, and ineffective”.  He added that “it misses the big picture, allowing pharmaceutical companies to further exploit their dominance, block new entrants, and harm patients in need of life-saving drugs.”

However, the main focus of his dissent is on the FTC’s willingness to accept “risky or questionable buyers”.  He questions whether Nestlé, the maker of candies such as KitKat is a suitable buyer for a prescription drug and whether the divestiture of a pipeline drug to AstraZeneca would actually restore competition.

His main complaint about Nestlé is that the company is not a pharmaceutical manufacturer so it lacks the experience necessary to succeed.  And, while the divestiture of brazikumab rids the overlap, AstraZeneca is getting the asset for nothing and Allergan will continue to pay for the development costs of the drug so AstraZeneca gets a “windfall”, has no financial stake in the development of brazikumab, and will have little to no financial incentive to market the product aggressively when and if it is ever approved.

Commissioner Chopra also notes that the FTC failed to account for the hurdles that AstraZeneca will face if brazikumab is ever approved.  AstraZeneca would have to contend with AbbVie’s rebate wall.  Chopra specifically states: “the Commission could have also taken steps to reduce a key barrier to entry and expansion for AstraZeneca by restricting AbbVie and Allergan’s contracting and rebating practices.  This would make it more likely that AstraZeneca would exercise its option to develop and bring brazikumab to market.  Importantly, in the immunology space, a key feature of competition is the ability for a market player to engage in ‘portfolio contracting’ and ‘bundled rebates’ across its portfolio of drugs.  The evidence in the investigation suggests that AbbVie currently uses its bargaining leverage from its blockbuster drug Humira to preference its other immunology drugs.  AbbVie’s rebating practices are suspicious in their own right, and certain aspects of these practices might be unlawful.”

Majority Statement

On the flip side, the majority took on Commissioner Chopra’s dissent with a very aggressive tone.  The majority said Chopra’s dissent “makes misleading claims about the staff’s investigation, the state of competition in the pharmaceutical industry, and the commission’s enforcement record in this industry,” and that it “relies on false assertions, misapplication of law, and specious logic.  It appears to have fully embraced the adage to “never let the truth get in the way of a good story”.  The majority points out that while Nestlé is the world’s largest food and beverage company, it has “tremendous financial resources”, a substantial U.S. sales infrastructure, and “contrary to Commissioner Chopra’s assertions — Nestlé is no stranger to the healthcare space.”  Additionally, the majority took on the part of Commissioner Chopra’s dissent, which raised concerns regarding the potential that the merged firm could use rebating practices to disadvantage AstraZeneca in bringing brazikumab to the market.  To that end, the majority stated that “in the context of a merger investigation, the role of a divestiture is to restore competition to the state that it would have been absent the merger, not to provide the divestiture buyer with advantages that Allergan would not have had.” Basically, the majority is saying that behavioral remedies are inappropriate because Allergan would have had similar hurdles to overcome.

Truth be told, the FTC has an enormous amount of flexibility in crafting remedies to ensure that competition is fully restored.  Here the majority takes a very narrow approach of simply transferring pipeline assets to a divestiture buyer without regard to whether the product will ever be marketed.  The decision is curious given that former Director of Bureau of Competition Bruce Hoffman publicly stated in a speech in 2018 that pipeline drug divestitures face a “startlingly high” rate of failure and as Chopra points out in his dissent, the FTC has a history of using behavioral conditions to support divestiture buyers.

That said, the majority believes that the consent fully resolves competitive harm from the merger because the divestitures handle the overlaps, both firms are strong in different areas, and there is no evidence the deal will result in higher prices and lost innovation.

Concluding Thoughts

The philosophical divide between the Republican and Democrat Commissioners is not a surprise given some of their past votes on merger approvals.  The fundamental conflict goes to the very heart of how the FTC should evaluate pharmaceutical mergers.  The majority – as well as the FTC staff – continues to use the standard traditional analytical framework.  They are making an evidentiary-based analysis as to whether the specific merger before them is likely to substantially lessen competition in a line of business.  The majority is concluding that the transaction should be allowed with narrowly tailored divestiture remedies that resolve the specific competitive concerns and shies away from using a broader and more comprehensive approach.

The Democratic Commissioners, on the other hand, believe that the FTC’s analytical approach is myopic and fails to address wide-ranging issues of competitive harm.  They believe that the healthcare markets are not competitive and that the FTC’s approach has led to increased consolidation and higher prescription drug prices so a change in approach may be necessary.  And to the extent that the FTC is going to accept divestiture remedies of specific products, the Democratic Commissioners believe the FTC should require divestiture buyers that will fully restore competition.

Here, Commissioner Chopra raises serious issues about both buyers.  There is certainly always a concern when the divestiture buyer does not replace the competitive intensity that is lost from the merger, and here, Nestlé’ is no Allergan.  The evidence also very clearly suggests that AstraZeneca is not financially committed to the pipeline drug that it is acquiring for “no money” and that certain conduct in the industry may prevent AstraZeneca from effectively marketing brazikumab.  Specifically, Commissioner Chopra shines a light on how AbbVie’s rebating and bundling practices may actually be monopolistic conduct that is anticompetitive, and he rightly questions whether the conduct should have been prohibited in the consent order.  While the Commissioners disagree on a lot, they certainly all should be in agreement that consumers should not have to bear the risk of a failed remedy.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com