Antitrust Royalty Divestments in Pharma M&A

Pharmaceutical mergers and acquisitions face unprecedented antitrust scrutiny in the United States and European Union. Regulators no longer focus solely on obvious horizontal overlaps where merging firms sell competing drugs but also examine vertical foreclosure risks and pipeline competition—overlaps between marketed drugs and another company's pipeline candidates, or between two pipeline programs. Traditionally, antitrust agencies required structural remedies, typically divesting an overlapping product line to a competitor, to preserve competition.

However, recent cases reveal novel remedy structures emerging: royalty divestitures, IP licensing arrangements, behavioral firewalls, and shareholding caps. This report provides a comprehensive analysis of royalty divestments and financial interest concessions as antitrust remedies in pharma M&A, centering on Pfizer's 2023 acquisition of Seagen and the unique Bavencio royalty donation to the American Association for Cancer Research. We examine comparable historical cases spanning three decades, analyze the regulatory policy frameworks governing these remedies, and assess academic evidence on remedy effectiveness.

A New Class of Antitrust Remedies: Royalties and IP Concessions

In the pharmaceutical industry, antitrust remedies historically meant divesting a product—selling off an overlapping drug or pipeline asset to a third party capable of independently continuing its development or sale. This structural approach ensures a lost competitor gets replaced. However, high-profile deals since the 1990s demonstrate regulators' willingness to consider—or companies proactively offering—more creative remedies short of full divestitures, especially when overlaps involve intellectual property or financial interests rather than entire product lines.

These include:

Royalty Divestments: The acquiring firm relinquishes financial rights connected to a product, effectively removing its incentive to influence that product's competitive fate. The Pfizer–Seagen/AACR remedy exemplifies this approach, where Pfizer gave up royalty income from Bavencio sales. This can be viewed as a partial structural remedy—it does not transfer product ownership but severs the merging firm's economic tie to it.

IP Licensing and Pipeline Asset Sales: To address pipeline overlaps, firms may license out or sell development programs that would have competed post-merger. This occurred in the AbbVie/Allergan deal (divesting brazikumab, an IL-23 inhibitor in development, to AstraZeneca). Such remedies keep pipeline research alive under different ownership, avoiding the elimination of nascent competitors.

License Returns: In transactions like Novartis/GSK Oncology, the acquiring firm returns previously licensed rights to the original developer rather than identifying a third-party purchaser. This restores pre-existing competitive conditions without the complexity of divestiture buyer qualification.

Shareholding Caps and Governance Restrictions: The European Commission pioneered this approach in Johnson & Johnson/Actelion, limiting J&J's equity stake in the spun-off Idorsia to 9.9–16% and prohibiting board nomination rights. This addresses innovation concerns at early pipeline stages where traditional divestitures face high failure risks.

Behavioral Firewalls and Conduct Remedies: In vertical or conglomerate mergers where competition concerns arise from foreclosure or portfolio effects, companies offer conduct remedies including rebate and bundling restrictions, open licensing commitments, and information firewalls. Amgen's acquisition of Horizon Therapeutics proceeded with binding commitments not to bundle or cross-condition rebates. In Illumina/Grail, Illumina proposed a 12-year "open offer" providing all sequencing customers the same terms as Grail, though regulators ultimately rejected this proposal.

The Regulatory Framework: Why Agencies Prefer Structural Remedies

FTC Policy on Financial Interest Arrangements

The FTC has articulated clear skepticism toward royalty-based structures in merger remedies. Agency guidance states it "will NOT accept arrangements where subsequent payments are tied to assets' future performance, such as royalty payments or other performance-based payments" due to skewed incentives and required sharing of competitively sensitive information.

This policy reflects two core concerns. First, running royalties require continued relationships that could soften competition between merged firms and divestiture buyers. Second, royalties add to licensee production costs, tending to increase profit-maximizing prices and potentially harming consumers.

DOJ Merger Remedies Manual

The Department of Justice's 2020 Merger Remedies Manual articulates similar skepticism but acknowledges scenarios where royalty arrangements may prove acceptable: when no deal would otherwise be struck due to divergent revenue estimates, when blocking the deal would sacrifice significant merger-specific efficiencies, or when the Division is persuaded royalties will completely cure competitive harm.

Notably, DOJ generally will not require royalty-free licenses since parties ordinarily should receive compensation for the use or sale of their property. This creates tension between eliminating ongoing financial entanglements and respecting intellectual property rights.

European Commission Approach

The EC has proven somewhat more flexible in accepting complex financial arrangements, particularly in innovation-focused remedies. The Johnson & Johnson/Actelion decision accepted shareholding caps and royalty options rather than requiring full pipeline divestiture. However, even European regulators strongly prefer clean structural separation when feasible.

Case Study: Pfizer–Seagen and the Bavencio Royalty Donation

Pfizer's $43 Billion Seagen Acquisition and FTC Scrutiny

Pfizer's acquisition of Seagen Inc. for $43 billion, announced in March 2023 and closed in December 2023, ranked among the largest pharma deals in recent years. Seagen leads in antibody-drug conjugates for cancer, and Pfizer coveted its four marketed oncology products (Adcetris, Padcev, Tivdak, Tukysa) and deep pipeline of ADC candidates.

Notably, no obvious major horizontal overlaps existed between Pfizer's and Seagen's portfolios—Pfizer's oncology franchise centered on checkpoint inhibitors like its co-owned Bavencio and other cancer agents, while Seagen's assets are mostly ADCs targeting different pathways. Nonetheless, the Federal Trade Commission signaled interest in the deal. A second request for information was issued in mid-2023, and Pfizer's CEO noted the FTC was probing broader issues such as whether big pharma mergers reduce R&D innovation. The agency even requested records from Pfizer's 2009 Wyeth and 2003 Pharmacia acquisitions in an attempt to link past mergers to R&D cuts, hinting at a possible innovation competition theory.

Ultimately, the FTC did not sue to block Pfizer–Seagen. Regulators homed in on a more traditional issue: a potential horizontal overlap in bladder cancer treatments between Seagen's portfolio and Pfizer's stake in Bavencio. Bavencio (avelumab) is a PD-L1 checkpoint inhibitor indicated as first-line maintenance therapy in urothelial carcinoma. Seagen markets Padcev (enfortumab vedotin) in partnership with Astellas—an ADC approved for second-line metastatic bladder cancer being tested in combination with immunotherapy for first-line use. While Bavencio and Padcev employ different modalities, both target advanced bladder cancer patients, albeit in different lines of therapy. Regulators saw risk that Pfizer's ownership of Seagen could reduce incentives to support Bavencio or vice versa, lessening competition in that therapeutic area.

Bavencio and the Pfizer–Merck KGaA Partnership Background

Bavencio was originally developed and commercialized under a 2014 alliance between Pfizer and Germany's Merck KGaA (operating as EMD Serono in North America). The partnership combined Pfizer's oncology muscle with Merck's PD-L1 antibody research. Pfizer paid Merck KGaA $850 million upfront and up to $2 billion in milestones for co-development rights.

Since its first approval in 2017, Bavencio achieved several indications: standard-of-care in first-line maintenance for locally advanced or metastatic bladder carcinoma, Merkel cell carcinoma, and in combination with axitinib for first-line advanced renal cell carcinoma.

Under the Pfizer–Merck KGaA alliance, the two companies shared profits and responsibilities. By 2022, Bavencio's worldwide sales had grown to moderate levels—Merck KGaA reported approximately €611 million (roughly $659 million) in 2022 global net sales, reflecting uptake in bladder cancer maintenance therapy. However, the profit-split meant Pfizer did not book most of those sales on its own income statement. Pfizer's share of U.S. Bavencio revenues in 2022 totaled only around $27 million, indicating Merck handled the bulk of commercialization while Pfizer received a portion of profits.

In early 2023, as Pfizer's M&A activity ramped up with Seagen among several biotech acquisitions, Pfizer and Merck KGaA decided to end their Bavencio partnership. In an agreement announced March 2023, Merck KGaA would take full control of global Bavencio commercialization effective June 30, 2023, regaining exclusive rights worldwide. In exchange, Pfizer negotiated a 15% royalty on net sales going forward. This replaced the prior profit-sharing model. Merck was eager to consolidate Bavencio rights—CEO Belén Garijo cited a long-held interest in exclusive ownership—and believed a single-owner strategy would better serve patients. Pfizer could step away from operational efforts while still benefiting financially via royalties.

Crucially, this arrangement set the stage for the antitrust remedy. Once Pfizer agreed to acquire Seagen, regulators scrutinizing the deal recognized Pfizer would have a foot in two camps in bladder cancer: via Seagen/Padcev and via its royalty interest in Bavencio. Even though Pfizer was ceding Bavencio control, the 15% royalty meant Pfizer would still profit from U.S. sales, potentially diminishing incentives to aggressively advance Seagen's bladder cancer therapies in competition with Bavencio. This subtle horizontal conflict—Pfizer having a financial interest in a rival's drug—is what the FTC flagged and sought to remedy.

The Remedy: Donating Bavencio U.S. Royalties to AACR

To preempt FTC concerns, Pfizer took the unprecedented step of irrevocably donating its Bavencio royalty rights on U.S. sales to the American Association for Cancer Research. Pfizer agreed that it will not keep any of the 15% royalty owed on U.S. Bavencio revenues—instead, those payments from Merck KGaA go directly to AACR, a non-profit research institute, as an unrestricted grant funding cancer research. This remedy was formally announced on December 12, 2023, alongside news that all regulatory approvals for the Seagen acquisition had been obtained.

By forgoing the royalty, Pfizer eliminated its financial stake in Bavencio's U.S. performance. This satisfied the FTC that Pfizer/Seagen's incentives are fully aligned with competition—Pfizer would have no reason to undermine Padcev or other bladder cancer innovations for fear of hurting Bavencio royalties, nor any reason to prefer Bavencio's success since it no longer profits from it. The royalty donation effectively represents structural separation of an economic interest: Pfizer's link to a potential competing product was severed, much as a divestiture would sever ownership.

FTC Chair Lina Khan had stated preference for structural remedies over behavioral fixes, and while donating a royalty is unusual, it falls closer to structural relief—a one-time, permanent removal of Pfizer's rights—than to monitored behavioral promises. Goodwin's 2023 antitrust review called it a "minimal (and proactive) structural remedy based on a traditional theory of harm."

Why donate to AACR? Pfizer likely chose a respected independent body to ensure the remedy was beyond reproach. If Pfizer had simply waived the royalty or given it back to Merck KGaA, regulators might worry Pfizer could still benefit indirectly via side arrangements or that Merck might owe Pfizer favors. Donating to a neutral third party—especially a cancer research charity—ensured Pfizer truly relinquished the benefit. AACR was apt: as a leading cancer research nonprofit, channeling over $10 million of Bavencio royalties to AACR's grants turns the remedy into a public good supporting oncology research broadly.

The donation covers royalties on U.S. sales only. Pfizer retained rights to royalties on ex-U.S. sales—a significant detail suggesting the FTC's concern was specific to U.S. market impact. The FTC has jurisdiction over U.S. competition, so the remedy needed only to address U.S. incentives. Pfizer can still collect 15% royalties on Bavencio sales outside the U.S., since those would not affect U.S. patients or Seagen's U.S. products' competition directly. This allows Pfizer to salvage a portion of the asset's value while complying with U.S. antitrust demands.

EU regulators did not publicly require any Bavencio-related remedy, implying they saw less of an issue or were satisfied by the U.S. fix. The European Commission cleared Pfizer/Seagen without a formal remedy, likely because Seagen had minimal EU presence and any overlaps were de minimis.

Nature and Size of the Royalty Stream Forfeited

Bavencio's U.S. sales—and thus the royalty stream donated—are meaningful but relatively modest in Pfizer's financial context. In 2022, Merck KGaA's total Bavencio sales were approximately €611 million globally. A rough estimate suggests the U.S. accounted for 30–40% of that total. Pfizer's disclosures indicate its share of U.S. Bavencio revenue was $27 million in 2022, suggesting U.S. net sales on the order of roughly $180 million. Another report stated Bavencio had "rung up sales of $271 million in 2022," though it's unclear if that referred to U.S. or a subset of markets.

At 15% royalty, Pfizer stood to receive around $15–30 million per year from U.S. Bavencio sales under the new arrangement. Pfizer explicitly described the donated royalties as exceeding $10 million in 2024—implying U.S. Bavencio sales will exceed roughly $66 million in 2024 (since 15% of $66 million equals $9.9 million).

Estimating the NPV: The net present value of the forfeited royalty stream can be approximated with assumptions. Bavencio launched in 2017, so U.S. market exclusivity (12-year regulatory plus patents) could last until approximately 2029 or beyond. Competition from other checkpoint inhibitors is intense, but Bavencio has a unique niche in maintenance therapy. Assuming U.S. sales hold around $100 million in 2024, grow a few percent annually, then taper off post-2028 as new therapies emerge or biosimilars arrive around 2030, using a 10% discount rate, the NPV of the donated U.S. royalty stream falls on the order of $50–75 million.

This represents a minor amount for Pfizer, a company with over $70 billion in annual revenue in 2022 paying $43 billion for Seagen. The royalty donation represents perhaps 0.1–0.2% of transaction value. Pfizer's CEO Albert Bourla acknowledged that integrating Seagen's ADC pipeline—the "goose that is laying the golden eggs"—was crucial for Pfizer's future oncology growth. Sacrificing a sliver of royalties on a partner's product was a trivial price to ensure deal approval.

Analysts noted that FTC clearance with this single concession was a "minimal commitment" and surprisingly pragmatic. Pfizer closed the Seagen acquisition on December 14, 2023, just days after announcing the remedy.

Historical US Regulatory Cases: Licensing and Royalty Precedents

Mallinckrodt/Questcor: The Most Explicit US Licensing Remedy

The Mallinckrodt/Questcor settlement in 2017 stands as the most explicit U.S. licensing remedy in pharmaceutical enforcement. After Questcor monopolized the ACTH drug market—raising Acthar prices from $40 to $34,000 per vial, an 85,000% increase—the FTC required a $100 million payment plus mandatory licensing of Synacthen Depot development rights to Marathon Pharmaceuticals.

The license included the trademark, clinical trial data, and manufacturing intellectual property, creating a structural path for competition where traditional divestiture would have failed. This case established that licensing obligations can serve as antitrust remedies when the competitive concern stems from IP acquisition rather than product overlap.

Ciba-Geigy/Sandoz: The Most Detailed Royalty-Specific Terms in FTC History

The Ciba-Geigy/Sandoz merger forming Novartis in 1996 produced the most detailed royalty-specific terms in FTC history. The consent decree required licensing of gene therapy technologies to Rhône-Poulenc Rorer at 1–3% running royalties plus $10,000 upfront payments per patent. Critically, Novartis retained cross-license options, demonstrating that partial financial interest arrangements—rather than complete separation—can satisfy antitrust requirements.

Commissioner Azcuenaga's dissent notably criticized the FTC for placing itself in "an ongoing regulatory role by requiring approval of royalty rates, royalty terms, and patent licensees." This early skepticism toward royalty-based remedies foreshadowed later policy developments disfavoring ongoing financial relationships.

Biovail: Pioneering Partial Patent Rights Divestiture

The Biovail consent order in 2002 pioneered partial patent rights divestiture. Rather than full IP transfer, Biovail returned only the Tiazac-related exclusive rights to the '463 patent to DOV Pharmaceuticals while retaining exclusive rights for new diltiazem product development and non-exclusive rights for improved Tiazac formulations.

This granular approach—carving specific use-rights from broader patent portfolios—remains unusual but instructive. It demonstrates that antitrust remedies need not be all-or-nothing when the competitive concern is narrower than the full IP asset.

Merck–Schering-Plough: Combined Divestiture and Licensing

The Merck–Schering-Plough consent agreement in 2009 explicitly combined divestiture with product licensing. The order required Schering-Plough to both divest rolapitant-related assets and grant rolapitant product licenses to Opko Health.

The consent agreement also included a 10-year prohibition on Merck acquiring Merial assets (the divested joint venture), addressing identified call option risks that could have allowed the merged firm to recapture competitive assets.

Amgen-Immunex: Multiple Parallel Licensing Arrangements

The Amgen-Immunex transaction in 2002 required IP licensing for both TNF inhibitors (to Serono) and IL-1 inhibitors (to Regeneron), establishing that multiple parallel licensing arrangements can address overlapping innovation concerns.

This case demonstrated that when a merger raises competition issues in multiple therapeutic areas, distinct licensing solutions for each area can preserve the transaction while maintaining competitive conditions across markets.

Pay-for-Delay Litigation: IP Licensing as Antitrust-Relevant Payment

FTC v. Cephalon: Establishing Non-Cash Payment Precedents

The FTC v. Cephalon settlement spanning 2008 to 2015 produced a $1.2 billion disgorgement—then the largest in FTC history—and established critical precedent that IP licensing agreements can constitute anticompetitive reverse payments. The FTC proved Cephalon paid generic manufacturers over $300 million in non-cash forms to delay generic Provigil competition.

These payments included purchase of active pharmaceutical ingredients at above-market prices, intellectual property licensing agreements despite Cephalon having "previously rejected any concerns about possible infringement risk," and co-development rights showing negative net present value in internal projections.

Supreme Court's Actavis Decision: Expanding Reverse Payment Definitions

The Supreme Court's Actavis decision in 2013 confirmed that reverse payments extend beyond cash to include no-authorized-generic agreements, co-promotion deals, distribution agreements, and—critically—below-market royalty rates. Courts found that sharply discounted royalty rates could permit generic companies to keep a portion of profits from delayed competition.

Pay-for-delay settlements filed with the FTC dropped from 40 in fiscal year 2012 to 21 in fiscal year 2014 following this ruling, demonstrating the decision's significant deterrent effect.

European Commission Innovations in Financial Interest Remedies

Johnson & Johnson/Actelion: The Most Sophisticated Financial Interest Remedy

The Johnson & Johnson/Actelion decision in 2017 produced the most sophisticated financial interest remedy in EC pharmaceutical enforcement. Rather than requiring pipeline asset divestiture, the Commission accepted unprecedented behavioral and financial commitments.

J&J was limited to maximum 9.9% shareholding in Idorsia (or 16% if another shareholder reached 20%), with complete waiver of board nomination rights. An information firewall prevented J&J from obtaining any ACT-541468 data from Idorsia. J&J retained a 20–35% royalty option on ACT-132577 (a different compound) if exercised. The remedy also required J&J to divest its minority shareholding in Minerva while continuing to fund development costs for a competing compound.

This case established that shareholding caps, governance restrictions, and funding commitments can address innovation concerns at the Phase II pipeline stage where traditional divestitures face high failure risks. The EC explicitly identified "reorientation risk"—where merged firms redirect pipeline compounds to non-competing indications—as a novel theory of harm.

Novartis/GSK Oncology: License Return Plus Funded Development

The Novartis/GSK Oncology transaction in 2015 required license return plus funded development. Novartis returned MEK162 (binimetinib) rights to Array BioPharma while divesting its wholly-owned LGX818 (encorafenib), assigning or licensing all related IP.

Uniquely, Novartis agreed to conduct and/or substantially fund ongoing clinical studies, including the Phase III COLUMBUS trial. The EC also imposed a "partner approval" requirement—Array had to obtain an experienced partner for European commercialization, creating layered remedy oversight.

Teva/Allergan Generics: Out-Licensing Behavioral Commitments

The Teva/Allergan Generics transaction in 2016 introduced out-licensing behavioral commitments. Medis (Teva's out-licensing subsidiary) was required to maintain existing out-licensing agreements with divestiture purchaser Aurobindo on identical pre-merger terms for four years, ensuring technology transfer completion and competitive entry.

This represented the first EC case to explicitly evaluate vertical out-licensing relationships in generics mergers.

Comparative Analysis: Amgen–Horizon and Illumina–Grail

Amgen–Horizon: Behavioral Constraints to Prevent Foreclosure

In late 2022, Amgen announced a $27.8 billion acquisition of Horizon Therapeutics, a company with two high-priced orphan drugs enjoying monopolies: Tepezza for thyroid eye disease and Krystexxa for refractory chronic gout. No horizontal overlap existed—Amgen did not sell competing drugs in those niches.

The FTC's challenge was based on a novel theory of conglomerate harm: that Amgen might use its portfolio of 20+ blockbuster drugs as leverage to entrench Horizon's monopolies. The concern centered on bundled rebates or cross-product deals. For example, Amgen could threaten to withhold rebates on covered drugs (Enbrel for arthritis, Prolia for osteoporosis) unless insurers favor Tepezza and Krystexxa on formularies. Such bundling might freeze out any future rival attempting to compete with those drugs.

Amgen fought this claim, noting that bundling rebates across such disparate products is not standard practice and publicly insisted it had "no reason, ability or intention" to bundle Horizon's drugs. In May 2023, the FTC sued to block the deal—a shock to the industry—on this bundling theory.

In September 2023, Amgen and the FTC reached a settlement before trial, allowing the deal to close with a consent order imposing conduct remedies. The consent order, lasting 15 years, explicitly prohibits Amgen from bundling Tepezza or Krystexxa with any other Amgen product for rebate or contracting purposes. Amgen cannot condition discounts for its portfolio on an insurer's coverage of those Horizon drugs. Additionally, Amgen must seek prior FTC approval for any acquisition of products treating the same conditions for the next 10 years. A compliance monitor receives Amgen's relevant payer contracts and annual reports.

This case shows a different flavor of remedy: rather than transferring an IP or financial right, Amgen agreed to keep Horizon's products commercially separate. There is no royalty being paid to a third party, but the FTC also barred Amgen from exclusive licensing of any biosimilars or generics to Tepezza/Krystexxa to prevent workarounds.

Illumina–Grail: Royalty Firewalls and a Rejected Remedy

Illumina's attempted re-acquisition of Grail is a cautionary tale of a vertical merger where behavioral remedies were offered but not accepted. Grail was a startup spun out of Illumina in 2016, developing a multi-cancer early detection blood test. Illumina is the dominant supplier of next-generation sequencing technology, an essential input for Grail's test and all similar cancer blood tests.

In 2020, Illumina moved to buy back Grail for $7.1 billion before Grail had any revenue. The antitrust risk was vertical: Illumina could harm competition in the nascent MCED testing market by using control of NGS supplies to favor Grail or hobble rivals. Grail's competitors (Guardant, Exact Sciences, Freenome) depend on Illumina sequencers. If Illumina gave Grail cost advantages, early technology access, or competitor data—or conversely charged rivals more, delayed support, or refused to sell newer sequencers—it could tilt the playing field unfairly.

Illumina proposed comprehensive remedies known as the "Open Offer." This included binding commitment to supply NGS products and services to all U.S. oncology customers on equal terms for 12 years. All Grail's competitors would get the same price Grail pays for sequencing (cost-plus pricing ensuring Illumina doesn't cross-subsidize Grail), no degradation of support or technology, and strict confidentiality firewalls protecting competitors' data.

Additionally, Illumina highlighted that pre-merger Grail owed Illumina a 7% royalty on test sales from a 2017 agreement. By acquiring Grail, Illumina eliminated this royalty, ostensibly allowing Grail to operate at lower cost. Illumina pledged that "100% of those royalty savings" would pass to test users. However, the FTC was skeptical: Grail had options to renegotiate or eliminate that royalty even without the merger, making it not a merger-specific efficiency.

The FTC and EC found the remedy insufficient: no behavioral fix could fully replicate competitive pressure from having Grail operate as a truly independent firm. By late 2023, after losing appeals, Illumina announced it would divest Grail entirely.

The Illumina/Grail saga introduced the concept of a "royalty firewall"—Illumina essentially tried to firewall off Grail's economics by treating Grail as if it were an independent customer. If Grail isn't advantaged on cost or technology, Illumina only earns industry-standard profits from Grail's business, akin to a third-party royalty. This is conceptually similar to Pfizer's remedy of giving up Bavencio royalties: both aim to remove the extra benefit from integration.

Academic Evidence: Pipeline Divestiture Failure Rates

Robin Feldman's UC Hastings Studies

Robin Feldman's UC Hastings study of 56 pipeline product divestitures from 2008 to 2018 found only 36% resulted in actively marketed products—a 64% failure rate. Her proposed solutions include "crown jewel divestitures" (selling on-market products rather than pipeline assets) and "skin in the game" requirements (if pipeline products fail, companies must divest marketed products).

A subsequent 2025 study from the same research team found only 14% of divested generic drugs created significant competition versus 80% for brand-name drugs, suggesting remedy effectiveness varies dramatically by asset type.

American Antitrust Institute Analysis

The American Antitrust Institute's 2020 white paper documented that just under 20% of unique branded and generic firms engaging in repeated M&A or divestiture asset purchases accounted for 45% of pharmaceutical assets changing hands between 1994 and 2020. Many divestiture purchasers subsequently became antitrust defendants themselves.

Critically, between 1994 and 2020, no challenged pharmaceutical merger was litigated in federal court, providing no judicial record on remedy effectiveness. All settlements were negotiated, leaving fundamental questions about remedy efficacy unanswered.

FTC Internal Studies

The FTC's internal 2017 merger remedies study evaluated 24 pharmaceutical orders and found "startlingly high" failure rates for complex pharmaceuticals. This led Bureau Director Bruce Hoffman to announce in 2018 that the FTC would no longer accept pipeline divestitures for inhalants and injectables—categories with particularly high development complexity.

Other Notable Cases and Trends

Pipeline "Killer Acquisition" Enforcement

In December 2023, the FTC moved to block Sanofi's $150 million license of Maze Therapeutics' Pompe disease drug—even though Maze's drug was only Phase 1. The FTC framed it as Sanofi (the incumbent in Pompe disease with Nexviazyme) trying to buy out a nascent rival instead of competing, calling it a "monopolist seeking to eliminate a nascent threat."

This case did not proceed to remedies; Sanofi abandoned the deal. But it signals that regulators might not accept even license transactions if seen as removing future competitors. The threshold for intervention has lowered to very early pipeline acquisitions, a shift from past practice.

AbbVie/Allergan: The Brazikumab Precedent

In 2020, the FTC and EC cleared AbbVie's $63 billion Allergan acquisition only after requiring divestiture of two assets including brazikumab, an IL-23 inhibitor in development, to AstraZeneca. The brazikumab divestiture was an EU condition as well, demonstrating global coordination on pipeline remedies.

This case established the template for pipeline asset sales with funded development terms, where the divesting company provides support to ensure the asset can continue development under new ownership.

Global Context

Outside the U.S., authorities have also imposed creative remedies. China's MoFCOM reportedly cleared AstraZeneca's acquisition of Alexion in 2021 only after AZ agreed to certain price and supply guarantees for rare disease drugs in China—a behavioral fix though details remain non-public. These global nuances mean large mergers could face a patchwork of remedies: perhaps a divestiture in the U.S., a different concession in the EU, and behavioral commitments in China.

Comprehensive Table of Antitrust Royalty and IP Remedies in Pharma M&A

Expanded Table: Key Features of Remedy Structures by Type

Financial Structuring Implications

How Companies Model Remedy Concessions

From the merging parties' perspective, the ideal remedy solves the antitrust problem while sacrificing the least amount of deal value. This often means giving up a piece not central to the strategic rationale of the merger.

In Pfizer–Seagen, Bavencio was peripheral (a legacy collaboration asset, not part of Seagen's core). In Amgen–Horizon, bundling was not core to Horizon's value (the value lies in monopoly pricing which remains intact; the remedy just prohibits adding more monopoly via bundling). In deals where the overlap is exactly the main asset, sometimes no painless remedy exists—if Company A is buying Company B mostly for B's drug that competes with A's drug, the only fix would be divesting one of them, negating the merger's point.

Net Present Value Considerations

Companies incorporate remedy costs into deal models through several approaches:

Direct Asset Value Loss: When divesting a product or pipeline asset, the NPV of that asset's projected cash flows is subtracted from synergy calculations. For marketed products with established revenue, this is relatively straightforward. For pipeline assets, valuation involves probability-weighted scenarios accounting for development risk.

Royalty Stream Valuation: Forfeited royalties are valued using discounted cash flow analysis based on projected sales, royalty rates, remaining exclusivity periods, and competitive dynamics. Pfizer's Bavencio royalty NPV of $50–75 million against a $43 billion deal illustrates how relatively minor these concessions can be.

Opportunity Cost Assessment: Behavioral remedies like Amgen's no-bundling commitment involve harder-to-quantify opportunity costs. If the company never intended the prohibited conduct, the cost is minimal. If bundling strategies were part of the deal rationale, the economic impact could be substantial.

Tax and Accounting Treatment

Donations to 501(c)(3) organizations like AACR may be tax-deductible, subject to limits, partially offsetting lost income. Pfizer gains goodwill by supporting cancer research. Divestiture proceeds create taxable gains, while divested assets come off the balance sheet. These secondary effects influence remedy design.

Antitrust Theory Behind Royalty/IP Remedies

Horizontal Overlaps

Horizontal overlaps between merging competitors are ideally fixed by maintaining the number of competitors. If Company A and Company B both have a drug for Disease X, merging them would reduce competition from two to one. A structural remedy divests one drug to Company C, keeping two competitors.

In Pfizer/Seagen, the overlap was less direct (different modalities in bladder cancer), so full divestiture wasn't warranted. Instead, the remedy targeted the problematic incentive: Pfizer's stake in a rival's drug. By removing that stake, it's as if Pfizer isn't "holding one of the competitors" financially anymore.

For pipeline versus pipeline overlaps, regulators often require one program be sold to someone else to continue independently. This can include royalty arrangements where the seller retains a financial interest—but agencies prefer such arrangements be as clean as possible to avoid ongoing entanglement.

Vertical Foreclosure

Foreclosure in vertical mergers is about incentive and ability. The remedy must remove the ability or incentive to foreclose (ideally both). Illumina's proposal tried to remove ability (binding itself to equal treatment) and incentive (making Grail not extra profitable compared to others). The FTC doubted enforceability and completeness of incentive removal.

Full divestiture of Grail eliminates both: Illumina has neither ability nor incentive to favor Grail once it doesn't own it. In other vertical contexts, companies have set up quasi-structural fixes like hold-separate business units or firewalled subsidiaries with independent decision-making, but enforcement remains wary of durability.

Innovation Competition and Nascent Competitors

A key concept is potential competition. If a big firm acquires a pipeline product that would one day compete with its blockbuster, the harm is loss of future competition. If that pipeline is divested to someone else, competition may still emerge. But if the pipeline is very early-stage (low probability of success), is divestiture meaningful or just an illusion of a fix?

This debate is ongoing. The FTC's challenge of Sanofi/Maze (Phase 1 asset) suggests they believe even early pipelines count, and maybe no remedy short of blocking is adequate if the pipeline asset is essentially the whole deal. In contrast, for medium-stage pipelines (Phase 2/3), they might attempt divestiture remedies.

Looking Ahead: Policy Implications and Future Trends

Increased Scrutiny of Pipeline Acquisitions

Firms might proactively divest or license out overlapping pipeline assets and even consider royalty-free licenses to ensure divested programs succeed. The FTC's new stance raises the question: if a big pharma acquires a biotech mainly for a pipeline drug that overlaps their own, will they be forced to divest one of the programs? The answer increasingly seems yes, or the deal may be blocked entirely if the pipeline is the deal.

Evolution of Royalty-Based Remedies

The Pfizer–Seagen case may well become a reference point: a relatively small concession (in financial terms) that removed a roadblock for a very large deal. It highlights that even in a stricter antitrust era, deals can proceed if companies identify competitive pressure points and address them head-on. The royalty donation model—creating structural separation through charitable transfer rather than competitive sale—may prove especially influential for future transactions where traditional divestiture buyers cannot be identified.

Global Coordination Challenges

Large mergers face potential patchworks of remedies: perhaps a divestiture in the U.S., a different concession in the EU, behavioral commitments in Asia. Companies often negotiate packages acceptable to multiple jurisdictions, adding complexity to remedy design.

Hybrid Structural-Behavioral Approaches

One novel idea floated in antitrust circles is the use of "crown jewel" provisions—if a conduct remedy fails or certain metrics aren't met, the company would automatically divest a specified asset. This is rare but indicates how enforcement might tie conduct and structural relief together.

Conclusion

Royalty divestments and IP concessions are emerging tools in the antitrust remedial toolkit for pharma mergers, offering tailored solutions when traditional product divestitures are either unnecessary or insufficient. The Pfizer–Seagen case showcased an innovative remedy—donating a royalty stream to remove a conflict of interest—that allowed a $43 billion deal to close without diminishing its strategic value, all while satisfying regulators' concerns about competition. This win-win outcome demonstrates regulators' pragmatism in late 2023: despite a generally tougher stance on big pharma mergers, the FTC showed willingness to accept a narrowly scoped fix grounded in a traditional horizontal theory of harm.

The historical record reveals at least 15 significant cases since 1996 featuring IP licensing, royalty arrangements, or partial financial interest remedies. These range from the detailed royalty-rate specifications in Ciba-Geigy/Sandoz forming Novartis, to the sophisticated shareholding caps and governance restrictions in J&J/Actelion, to the mandatory licensing requirements in Mallinckrodt/Questcor. Each demonstrates that regulators—particularly the European Commission—have shown flexibility in accepting complex financial arrangements when they effectively address competitive concerns.

However, academic evidence reveals troubling failure rates for pipeline remedies. With 64% of pipeline divestitures failing to produce marketed products according to Robin Feldman's research, and the FTC itself acknowledging "startlingly high" failure rates for complex pharmaceuticals, there is growing pressure to develop more effective remedy structures. The 36% success rate for pipeline divestitures compares poorly to near-universal success for marketed product sales.

This tension between regulatory preference for structural remedies and the practical challenges of pipeline asset transfers may drive increased adoption of innovative financial interest arrangements. License returns (Novartis/GSK), shareholding caps (J&J/Actelion), out-licensing maintenance (Teva/Allergan), partial patent divestiture (Biovail), and royalty donations (Pfizer-Seagen) represent a toolkit that preserves deal value while addressing competition concerns when traditional divestitures prove impractical.

For industry practitioners and legal advisors, the key takeaway is to engage with agencies early, offer creative solutions (even if that means donating profits or capping certain behaviors), and ensure any proposal truly fixes the problem without undermining the deal's value proposition. In doing so, companies can achieve successful mergers that continue to drive innovation and growth, while regulators can claim credit for protecting consumer and patient interests—a balanced outcome in the spirit of effective antitrust enforcement.

Disclaimer: This article is for informational purposes only. The author is not a lawyer or financial adviser, and nothing in this content should be construed as investment, legal, or regulatory advice. Readers should consult qualified professionals for guidance on specific transactions or compliance matters.