Changes to HSR Premerger Rules Would Add Unnecessary Financial and Operational Barriers to Pro-Innovation M&A

Jan 30, 2024 | Blog Post

The Hart-Scott-Rodino (HSR) Act requires companies to report information to the Federal Trade Commission (FTC) and Department of Justice (DOJ) before a planned merger or acquisition (M&A). Under the HSR Act, the agencies enforce premerger reporting requirements that merging parties must meet before a transaction can proceed. The HSR rules are intended to give the agencies sufficient information to assess an M&A transaction for its effects on competition.

For nearly fifty years, a balanced approach to premerger reporting requirements has allowed regulators to conduct comprehensive assessments of mergers and acquisitions without undue burden for the merging parties. Now, in a complete overhaul of this well-established and reliable process, the agencies are imposing sweeping changes to the premerger requirements that could have an overwhelming and disproportionate impact on life sciences innovation.

The proposed HSR changes fundamentally alter and expand the requirements for information merging parties must provide to regulators. According to experts at Latham & Watkins, “Under the new process, parties to transactions that exceed the HSR thresholds must submit a broader range of substantive documents; more detailed information about corporate structure, capitalization, and management of the parties; and narrative advocacy about the deal and competition itself.”

These proposed changes would dramatically increase review periods, operational burdens and costs for companies seeking to engage in mergers and acquisitions. This would have a multitude of adverse consequences for the thousands of life sciences companies across the U.S.

1. HSR changes would create additional financial and operational burdens in an industry that is already immensely risky, costly and time intensive.

Many life sciences companies cannot afford to singlehandedly take on the 10-15 year, $2.6 billion odyssey to shepherd a new medicine from discovery to delivery to patients. To successfully navigate these immense costs and risks, many life sciences companies of all sizes engage in M&A as a mutually beneficial pathway.

The HSR rule overhaul would pile additional costs and time onto an immensely expensive and lengthy process. The changes could tip the scales against hundreds or even thousands of breakthrough treatments and cures in the pipeline. In a recent survey, experts asserted that the authorities’ proposed changes to the premerger requirements would force merging parties to spend over 241 hours on additional work and more than $234,000 in fees from outside counsel just to comply with the new rules.

2. HSR changes would stifle a vital funding mechanism for life science innovators.

By substantially spiking the cost and time required for M&A transactions practically overnight, the HSR overhaul could dissuade companies of all sizes from seeking out otherwise pro-competitive deals. Notably, this impact would be felt most heavily by the 80% of life science companies that operate without a profit.

For these companies, the HSR rule changes would amount to a one-two punch. First, the proposed requirements would overload companies with additional financial and operational hurdles even as they race to advance their pipelines despite their limited financial resources. Secondly, the upstream incentives for those very same financial resources could dry up. Early-stage, external life sciences investors such as venture capitalists would begin to reevaluate whether many life sciences companies will be able to engage in M&A in the first place.

3. HSR changes would dampen investment in life sciences R&D.

Mergers, acquisitions and other types of partnerships bring together the resources, investment and expertise needed to develop and deliver new treatments and cures for patients – from funding and conducting costly clinical trials to undergoing the extensive regulatory approval process. M&A often represents a light at the end of the tunnel that incentivizes investment against the risk and costs associated with life sciences R&D.

The proposed HSR rule changes throw a significant wrench into the investment incentives driving life sciences R&D. By adding another set of risks and costs for investors to consider, the agencies risk pushing investment away from American companies, and towards growing life sciences industries in other regions of the world – or towards other industries altogether.

Looking Ahead

As the FTC and DOJ finalize their proposed changes to the premerger requirements, the agencies should take a balanced and bipartisan view of M&A to preserve pro-innovation M&A, sustain life sciences R&D investment, and avoid causing outsized negative impacts on the U.S. life sciences ecosystem.