Washington Editor

WASHINGTON - Mergers and acquisitions are a fact of life in the biotech industry, driving growth and expansion, and even fostering innovation. But the transactions aren't easy to complete, and not simply because financial terms can be hard to agree upon.

In some circumstances, government regulations around M&A activity can prove particularly burdensome. That was the case for Cephalon Inc.'s buyout of CIMA Labs Inc., a transaction that took months to close because of an exhaustive antitrust review by the federal government.

As a result, that deal served as an anecdotal backdrop at a recent hearing held by the Antitrust Modernization Commission, a special committee convened by Congress last year to review current antitrust analysis that is largely carried out these days by the Federal Trade Commission and the Department of Justice. The bipartisan, independent commission includes 12 members who are charged with issuing a final report in the spring of 2007.

"The main question is whether the antitrust laws, some of which are now over 100 years old, are fully capable of addressing these [new economy] industries, which may have somewhat different economic underpinnings than the types of industries in existence when the antitrust laws were first passed," explained Andrew Heimert, the commission's executive director and general counsel. Traditional antitrust analysis includes a measure of skepticism over mergers, given that economic theory says combinations might diminish competition.

The hearing, one of several incorporated into the commission's schedule, included Frazer, Pa.-based Cephalon's senior vice president and general counsel, John Osborn, who emphasized that mergers are an integral part of the life sciences. He asked the commission to consider "whether mergers among some segment of the life sciences industry can have a positive impact on ultimate consumer value by enabling mid-cap or larger-cap firms to bring things to market."

That's assuming, of course, that the buying company already has clinical, medical, regulatory, marketing and distribution resources that the smaller firm lacks, so a merger would allow a smaller company's product to advance more efficiently. In its merger, Cephalon wanted CIMA's then-investigational OraVescent fentanyl product as an add-on to its own already-marketed fentanyl product known as Actiq, acquired by Cephalon a few years earlier. With a pathway already forged by Actiq, Cephalon thought it could progress OraVescent fentanyl more capably than Eden Prairie, Minn.-based CIMA's resources alone would allow.

"Companies the size of Cephalon, or maybe a little smaller or bigger, are looking at these opportunities not to try to monopolize a market but to try to adequately commercialize products and bring them to consumers," Osborn said. "It is one of the underlying premises on which the industry is built."

But the antitrust review process established under the Hart-Scott-Rodino Act "almost by definition creates a burden on the companies that are proposing a merger to demonstrate that there is no anticompetitive impact," Osborn added, and antitrust regulators viewed the acquisition more conservatively, only allowing the deal to move forward after Cephalon out-licensed Actiq's rights to Barr Laboratories Inc., of Woodcliff Lake, N.J.

Osborn, who acknowledged that while "our experience didn't seem to be a particularly good one," stressed that his testimony was not meant to rehash those happenings but rather to lend perspective on behalf of the industry. "I can't believe that we're the only firm that has had this sort of review issue," he said, adding that while divestiture compromises might sometimes be appropriate (such as in large-cap mergers), in other circumstances (such as those involving one-product companies) divestitures undermine the purpose of the merger. Osborn also noted that antitrust reviewers' tendencies to broadly exercise caution on approving prospective mergers has led to "risk-avoidance behavior" and an accompanying failure "to examine whether there might be pro-consumer benefits" by defining product markets too narrowly.

"And if this continues over time," he said, "I think you will start to see firms question whether or not it's really worth doing these things."

At the hearing, several commissioners talked about the possibility of issuing more explicit guidelines to the government's antitrust review agencies, which Osborn said "could include some recognition of the value in certain cases of mergers."

Such advice is one possible outcome of the commission's work, said Heimert, who added that final recommendations could call for explicit legal changes, suggestions or no changes at all. The final report will go to Congress and the president and will contain the commission's findings and conclusions, along with recommendations for legislative or administrative action. Heimert said both the House and Senate seem hopeful for a report to provide a basis for antitrust law updates, and the commission could advocate legislative change by way of specific statutory language or recommendations on ideas with which to amend existing laws. The commission also might recommend ways for the two primary antitrust review agencies to improve their work, including guidance that would either be specific or more broadly suggestive.

Osborn said he hoped that in the end, the commission's recommendations lead to "a slightly more balanced review when the agencies are considering issues like product market definition and the likelihood and impact of product entry by other third parties.

"We're not gobbling up potential competitors," he concluded. "We're trying to acquire products that we believe have great potential, but might not otherwise reach that potential if they remain in the hands of the smaller, less-developed firm."