Nascent competition – can regulators predict the future?

Caitlin Cronin, Junior Analyst, Alternatives

Facebook was once the most dominant social media platform. In recent years, however, Instagram has claimed the coveted spot atop the social media landscape. Luckily for Facebook, it owns Instagram, which has become the crown jewel in its social media empire. Facebook purchased Instagram in 2012, back when the company had a relatively small user base. Since then, Instagram has grown to more than 1 billion monthly active users worldwide.

Now, as concerns increase over Facebook’s collective, unchecked power, specifically as it relates to data privacy, critics question whether the company should have ever been allowed to purchase Instagram. Should regulators have foreseen Instagram’s growth potential? Should they have predicted Facebook’s ability to shape Instagram into the behemoth it is today? Should they have prevented these companies from merging?

This phenomenon is called nascent competition. It occurs when the potential growth of an acquired company creates future monopolistic power for the combined entity. For example, in pharma, particularly in the U.S., monopolistic prices have driven up the cost of many life-sustaining drugs. While regulators have always focused on preventing a monopolistic market, this recent uptick of unchecked power has driven them to intensify merger scrutiny.

In the U.S., the Federal Trade Commission (FTC), along with the Department of Justice, approves mergers and acquisitions. Recently, it has been seeking to address nascent competition in a host of healthcare deals. Bristol-Myers Squibb Co.’s (“Bristol-Myers”) acquisition of Celgene Corp hit a roadblock when the FTC flagged the companies’ overlap in psoriasis treatment. While Bristol-Myers does not yet have a psoriasis drug on the market, it has a psoriasis treatment undergoing phase III trials. In order to ensure deal progression, Bristol-Myers chose to divest of Celgene Corp’s psoriasis drug Otezla, which is already on the market.

Roche Holdings’ acquisition of Spark Therapeutics Inc. has also come under the watchful eye of the FTC. The FTC’s issue with this merger centers on treatments for Hemophilia A. While Roche Holdings is a leader in this area, Spark Therapeutics Inc. has a potential revolutionary treatment that is in the early stages of development. These companies postponed refiling to give the FTC more time to make its decision.

In the U.K., the Competition and Markets Authority (CMA) has questioned Illumina Inc.’s purchase of Pacific Biosciences of California Inc. (“Pacific Bio”). The CMA is concerned with implications the merger could have on the gene-sequencing market in the U.K.

Blocking mergers on grounds of nascent competition could solve unchecked power, but not without consequences.

Blocking mergers on grounds of nascent competition could solve unchecked power, but not without consequences. What if competitive issues never materialize? Then one potential cost could be stifling innovation. Smaller companies with groundbreaking ideas often rely on larger corporations’ resources to help take these ideas from concept to market. If a deal is blocked, cutting-edge treatments, which could otherwise get to market faster, will take longer to launch.

Regulators will set a precedent when they opine on these pending deals. We have yet to see how companies in industries prone to nascent-competition concerns will react to increased regulatory scrutiny. The future relevance, or irrelevance, of nascent competition is in their hands.

Does the unpredictability of potential monopolistic control outweigh the more tangible, immediate synergies of a merger? We think not. And we expect the future stance regulators will take on nascent competition will lead to deals being modified rather than blocked.

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