Consumer Group Concerns Regarding Rebate Walls and the Proposed Divestiture

The letter expresses concerns that the proposed divestiture to AstraZeneca of Allergan’s brazikumab, a drug in development, is inadequate to address the clear anticompetitive effects of the AbbVie/Allergan merger.  The letter makes the following points:

First, the divestiture of Allergan’s IL-23 inhibitor, brazikumab, a drug in the pipeline, to AstraZeneca is unlikely to fully restore competition.  The divestiture is being proposed to resolve the horizontal overlap between AbbVie’s IL-23 inhibitor, Skyrizi, and Allergan’s brazikumab for potential biologic treatments for Crohns diseas and ulcer colitis.  The group argues that the divestiture raises a number of serious concerns because it goes against the Commission’s policy of requiring divestitures of on market drugs instead of pipeline drugs.  Indeed, the FTC has required divestitures of on market drugs in Bristol Meyers/Celgene and Amneal/Impax because the Commission generally believes that consumers should not bear the risk that a divestiture may fail.

Second, the consumer groups contend that AstraZeneca is a questionable buyer for brazikumab.  AstraZeneca is not committed to the assets because it gave up on them just three years ago and according to the parties’ press releases announcing the deal, won’t be investing in the development costs to obtain FDA approval.  In fact, Allergan is expected to pay for the development costs.  Without having a significant financial stake in the development of brazikumab, it becomes less likely that AstraZeneca will ever launch the products and compete with AbbVie’s Skyrizi in the markets for Crohn’s disease and ulcerative colitis.

Third, for any divestiture to be effective, it is crucial to impose restrictions on AbbVie’s use of rebate walls (contracts that foreclose rival drugs from getting on drug formularies) that could inhibit any buyer of the pipeline assets from being an effective competitor in the future.  AbbVie’s use of rebate walls creates substantial barriers to AstraZeneca’s commercial success in bringing brazikumab to the market and the success of competing products in these therapeutic categories. AbbVie has and is currently engaged in restrictive contracting practices that have enabled the creation of so called “rebate walls” to protect its blockbuster drugs, Humira and Skyrizi, that not only lead to higher prescription drug prices, but foreclose rival drugs from obtaining access to payors’ formularies, resulting in reduced consumer choice.

Rebate Walls Raise Serious Antitrust Concerns

Pharmaceutical manufacturers have implemented a new strategy to block and delay entry of biosimilars and other drugs from the market through a contracting practice that creates what is known as a “rebate wall” or “rebate trap”.   A rebate wall occurs when a manufacturer leverages its market-dominant position to secure preferred formulary access for its products by offering lucrative incentives to pharmacy benefit managers (“PBMs”) and health insurers in the form of volume-based rebates.  These rebates are often offered across multiple products, indications, and therapeutic specialties, the breadth of which cannot be matched by new and innovative therapies.  The Trump Administration earlier this year sought to eliminate rebates from the Medicare prescription drug program because pharmaceutical rebates raise more profound competitive problems than discounts in other industries.  In fact, the coalition notes that there is increasing evidence that rebates actually inflate prices (as opposed to decreasing them) and that these rebates, unlike typical discounts, do not ultimately benefit consumers.

FTC is Currently Investigating Rebate Walls

On July 29, 2019, Johnson & Johnson (“J&J”) disclosed that the FTC issued a civil investigative demand regarding its investigation of whether J&J’s contracting practices related to its rebates for Remicade (infliximab) amount to exclusionary conduct illegal under the antitrust laws.

In 2017, Pfizer Inc. (“Pfizer”) filed a lawsuit against J&J for its contracting practices that protect Remicade’s position in the market and deny patients access to Pfizer’s infliximab biosimilar, Inflectra.  The lawsuit is still in the discovery phase.

Biosimilar developers have been urging the FTC to weigh in on whether exclusionary contracts for brands based on aggressive rebating strategies are legal and the agency has chosen a high-profile example to investigate.

Pfizer applauded the FTC’s investigation in a statement: “We believe the [FTC’s] decision to open an investigation into the competitiveness of the biosimilar is an important step, which we hope will lead to a robust, competitive marketplace for patients and physicians to access biosimilar medicines.”

Rebate Wall Concerns Were Raised By Nine Senators in the FTC’s Investigation of Bristol-Myers/Celgene and AbbVie/Allergan

On September 19, 2019, nine senators (Klobuchar, Booker, Baldwin, Smith, Hirono, Sanders, Harris, and Warren) wrote a letter to the FTC expressing their concerns that “[p]ost-merger, the combined firm would have greater ability to condition buyers’ access to these multi-billion dollar drugs on purchases of less popular drugs in their portfolios. They could also use their increased leverage to secure favorable positions on buyers’ drug formularies by offering volume-based rebates that competitors with rival products cannot match; these “rebate traps” or “rebate walls” can have the effect of preventing alternative drugs, including more affordable biosimilars and generics, from competing.”

Thoughts

The AbbVie/Allergan merger gives the FTC an opportunity to investigate the questionable contracting practice in the pharmaceutical drug industry known as a “rebate trap”.  Payors such as PBMs and health insurers obtain rebates on prescription drugs from pharmaceutical manufacturers that have actually inflated the price of drugs and stifled the ability of rival drug manufacturers to effectively compete.  This practice is recognized by both the administration and industry players as anticompetitive.  Moreover, major drug manufacturers such as Pfizer, Shire, and Sanofi have filed antitrust suits challenging rebate walls as antitrust violations.  In theory, rebates could have a positive impact on the prescription drug market if they led to lower prices and benefitted consumers.  But, in practice, this is simply not the case. Rebate walls distort the workings of the free market, result in higher drug prices, and reduce patients’ access to affordable branded drugs.

While rebates and discounts can be procompetitive if they lead to lower prices for consumers, some drug manufacturers are structuring discounts to limit competition from rivals in an effort to protect their monopolies.  When a rebate wall is successfully erected by a market-dominant manufacturer, a payor faces strong financial disincentives to grant access to new and innovative therapies, as doing so would result in the loss of hundreds of millions in guaranteed rebate dollars for the payor.  This condition creates a “trap” for payers who would otherwise be inclined to grant formulary access to therapies that are newer and more innovative, yet lack established volume and subsequent potential for rebate revenue.  In many cases, these actions prevent patients and physicians from seriously considering new medications at competitive prices.

Given the competitive risks that rebate walls pose, the coalition has asked the FTC to investigate how the rebate wall may undermine the proposed divestiture.  Competition works when new rival drugs  are allowed open and fair access to the market and consumers have access to cost saving treatments.  And while the FTC has not publicly acknowledged examining rebate walls, the issue is now in front of the staff.

Background

In a letter to Makan Delrahim, the head of the DOJ’s Antitrust Division, Senators Richard Blumenthal (D-CT) and Amy Klobuchar (D-MN) described the ticket industry as “broken” and they lamented the “exorbitant fees and inadequate disclosures” in the ticket buying process.

According to their letter, Live Nation’s acquisition of Ticketmaster in 2010 has resulted in the merged firm obtaining too much control over the concert business.  “The Ticketmaster-Live Nation merger has contributed to consumers’ difficulties in the ticketing market,” the two senators wrote in the letter.  In approving the Live Nation/Ticketmaster merger, the DOJ entered into a 10-year consent decree with Live Nation prohibiting the firm from certain behaviors like using its power over concerts to force venues to use Ticketmaster.  Over the years, a number of competitors have complained that Live Nation has been violating the terms of the consent decree or at the very least the spirit of the decree.

Senators Blumenthal and Klobuchar are asking the DOJ to conduct a “retrospective study on the effects of past consolidation” and to consider extending the decree past its expiration next year.  Though the DOJ has previously investigated claims that Live Nation had violated its consent decree, the DOJ has never taken action.  In an August 28 statement, Live Nation said the senators’ letter is “based on a fundamental misunderstanding of our consent decree and general ticketing industry dynamics.”  Further, “…Live Nation and Ticketmaster have always complied with their obligations under the consent decree.  We do not force anyone into ticketing agreements by leveraging content, and we do not retaliate against venues that choose other ticketing providers.”  Thus, according to the statement, “[t]here is no cause for further investigations or studies.”

The Antitrust Division has been investigating whether Live Nation has engaged in anti-competitive exclusionary behavior and is adhering to its 2010 consent decree.

Thoughts

The Obama administration was very lenient in its review of Live Nation’s acquisition of Ticketmaster.  The deal raised serious horizontal and vertical concerns and should have been blocked.  Yet, the DOJ opted to accept a weak settlement that included behavioral conditions prohibiting Live Nation from engaging in certain conduct.  The DOJ put itself in the position having to police Live Nation’s corporate behavior and third parties in the position of having to report bad behavior to the DOJ.  These types of behavioral conditions that cannot be effectively enforced are not useful.  In reality, there was probably no behavioral or structural remedies that could solve the anticompetitive concerns raised by the merger.  Behavioral remedies require ongoing monitoring of Live Nation’s and Ticketmaster’s conduct.  The settlement agreement was a quick win, but a settlement agreement that requires ongoing monitoring is not very effective unless it is enforced.  Clearly, Live Nation/Ticketmaster is a monopolist in the primary ticketing service market. The high market share is indicative of it having market power. However, there is nothing illegal about having a monopoly.  The question is whether Live Nation/Ticketmaster is engaging in any activity to maintain its monopoly such as exclusionary conduct or violating the express conditions in the 2010 decree.

The DOJ’s most recent investigation into Live Nation’s conduct without any enforcement action to date highlights the limitations of behavioral conditions in past consent decrees. DOJ Antitrust Division Assistant Attorney General Makan Delrahim is not in favor of behavioral decrees because they are regulatory and require monitoring and supervision.  The DOJ under his leadership has strengthened the terms of consent decrees making them easier to enforce.  For the DOJ to bring a case on an older consent decree violation or to force modifications of the Live Nation decree, it must meet a very high clear and convincing standard.  Unfortunately, there is so much wiggle room in past settlement agreements that contain behavioral restrictions that merging parties can devise strategies that may be within the letter of the settlement agreement but violate the spirit of the decree.  In short, the DOJ would need to uncover evidence that Live Nation has actually violated the decree before it can bring an enforcement action or force an extension of the decree.  Delrahim has expressed the view that Congress did not intend for the Antitrust Division or the courts to be overseers of corporate behavior.  He has argued that “antitrust is law enforcement, not regulation,” and that antitrust enforcers should seek to block anticompetitive transactions, rather than allow them to proceed subject to behavioral conditions.  The Live Nation/Tickemaster is a prime example of why the DOJ must sometimes decide to block a merger rather than negotiate a settlement with ambiguous behavioral conditions.

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

On Friday, February 1, Senator Amy Klobuchar re-introduced two bills aimed at strengthening antitrust enforcement.

The co-sponsors include Senators Ed Markey (Dem-Massachusetts), Richard Blumenthal (Dem-Connecticut), Dick Durbin (Dem-Illinois) and Corey Booker (Dem-New Jersey).

The Consolidation Prevention and Competition Promotion Act of 2019 would, among many other things, include revising the Clayton Act to eliminate the well-established standard against mergers that would “substantially” lessen competition with a lower “materially likely” standard.  It intends to “clarify that the Clayton Act prohibits mergers that, as a result of consolidation, may materially lower quality, reduce choice, reduce innovation, exclude competitors, increase entry barriers, or increase price.”  This change would dramatically change current antitrust law by proposing new legal standards for approval of larger corporate mergers.  The legislation makes clear that consolidation itself is harmful because, among other things, it threatens democracy by concentrating political power and creates hurdles for fresh competition from small businesses.  A conclusion that a transaction “may cause more than a de minimis amount of harm to competition” is sufficient to make it illegal. Among the factors to be considered are the transaction’s impact on market concentration, the value of the transaction ($5 billion, to be adjusted annually), the market capitalization, the value of assets held or the amount of sales made by any party ($100 billion, to be adjusted annually), regardless of horizontal competition between the merging parties.  This bill also proposes to establish a “new competition advocate,” which would have broad authority to monitor a range of potential market distortions and formally recommend competition investigations to the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”). In addition, the legislation would require post settlement data to be submitted annually for five years after approval of a merger on the competitive impact of the acquisition, including information on pricing, availability and quality of any impacted product or service, as well as data on cost savings, consumer benefits and effectiveness of any merger conditions.

The Merger Enforcement Improvement Act would, likewise among many other things, require merged parties that settled with the antitrust agencies to submit to the FTC or DOJ, whichever vetted the deal, data that would allow them to assess the impact of the merger, including pricing of service, the cost-saving benefits claimed in the merger, and the effectiveness of any divestitures.  In addition, the bill would direct the FTC to conduct a study, using any compulsory process necessary, to examine the competitive impacts of institutional investor ownership in competitors in moderately concentrated or concentrated markets, including assessing whether, and to what extent, mechanisms exist by which an institutional investor could affect competition.  If the results of the study—which must be published within two years of enactment—find that there is undue influence, subsequent remedial action could profoundly impact the form and shape of institutional investor holdings.

Democrats Favors Aggressive Antitrust Reviews

Democrats in the House are aiming to ramp up oversight of the antitrust agencies.  Congressman David Cicilline (D-R.I.) the new chairman of the House Judiciary Committee’s Antitrust, Commercial and Administrative Law Subcommittee wants the antitrust agencies “to drive down the cost of prescription drugs and health care” and “hold big tech companies accountable”.

The House Democrats plan to hold hearings related to a number of industries, including technology, healthcare and pharmaceuticals, food and several consumer products.  Potentially joined by a few Republicans who have been critical of U.S. antitrust enforcement policy, the House Democrats also intend aggressive oversight of the FTC and the DOJ.   Among other things, House Democrats propose creating a “consumer competition advocate” that will “proactively recommend competition investigations” to the DOJ and FTC.  Under the House Democrats’ proposal, the DOJ and FTC would be required to publicly justify any decision not to pursue an investigation recommended by the consumer competition advocate.  The office would also be responsible for maintaining and publishing data regarding market concentration and conditions.

The House Democrats are expected to work with their Senate colleagues to attempt to rewrite key provisions of the antitrust laws, because they believe the current antitrust laws do not appropriately address the “the full range of potentially anticompetitive behavior.”

Concluding Thoughts:

The Democrats and Republicans have been critical of the lack of U.S. antitrust enforcement that has resulted in consolidation and increasingly concentrated industries.  It is unclear how far these measures will advance but it has a better chance to do so in this Congress than it did in the last one.  What is clear, however, is that these proposals are part of a broad agenda to enlarge the scope of antitrust enforcement.  The initiatives and legislative proposals serve as a condemnation of the antitrust record of the Trump, Obama, and Bush administrations for being too lax, particularly in merger enforcement as well as in the remedies that were accepted by the FTC and DOJ that allowed both horizontal and vertical mergers to go forward.  Regardless of whether any new legislation is actually passed, we would expect antitrust enforcement to continue to be a hot topic in the political arena as well as more congressional hearings and investigations of consolidated industries in the next two years.

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