'The lights are no longer green': Antitrust regulators reassess pharma deals

Thursday, June 10, 2021

Source: BioPharma Dive

Biotech and pharmaceutical executives often describe dealmaking as the industry's lifeblood, arguing that acquisitions build pipelines, drive competition and give investors a reason to fund innovative startups. Drug company opponents dispute those points and their arguments may now have gained powerful allies in global antitrust regulators.

In March, the Federal Trade Commission and its counterparts in Europe, the U.K. and Canada announced they will reassess how they review drugmaker deals, pointing in particular to two recent multi-billion dollar buyouts, Bristol Myers Squibb's takeover of Celgene and AbbVie's purchase of Allergan.

Rebecca Kelly Slaughter, the FTC's acting chair, didn't detail how regulators' views might change. However, antitrust experts expect the agencies will scrutinize whether larger companies use their wider portfolio of drugs to force insurers to accept higher prices, as well as how acquisitions may discourage innovation by thwarting competition.

"This is a pretty clear signal that the lights are no longer green," said antitrust attorney David Balto, who represented unions and consumer groups in objecting to the Allergan deal. "They're now yellow or red, and companies need to be much more cautious about the deals they consider."

Illumina, the dominant provider of DNA sequencing in the U.S., has learned that first hand, as the FTC and the European Commission recently challenged its proposed acquisition of Grail, an up-and-coming rival.

The biotech and pharma sectors have taken notice, although there hasn't yet been a noticeable impact on investment or dealmaking activity. In April, for example, U.S. regulators cleared AstraZeneca's $39 billion buyout of rare disease drugmaker Alexion. 

"We have to treat it as a credible threat," said Bruce Booth, partner in the venture capital firm Atlas Ventures. "[But] as a negative risk, it has yet to be priced into the financing world."

"A more expansive approach"

Currently, the FTC focuses on overlaps between marketed drugs or between marketed and experimental drugs owned by merging companies. The FTC typically accepts divestiture of the marketed drug to resolve its objections.

That may no longer be the case in the future. "Going forward, I hope the commission will take a more expansive approach to analyzing the full range of competitive consequences of pharmaceutical mergers," Slaughter wrote in her dissenting statement on clearance of the Bristol Myers-Celgene acquisition.

"I urge not only the commission, but also researchers and industry experts to think carefully and creatively about these cases, and in particular to study the effects of recent consummated mergers on drug research, development and approval," she added.

Through a spokesperson, Slaughter declined comment for this article.

The FTC's reassessment of pharma mergers might not have happened if not for President Joe Biden's election. Joseph Simons, who was Donald Trump's appointee as chairman, stepped down on Jan. 29, and Biden named Columbia University professor Lina Khan, a critic of concentration among the biggest technology companies, to take Simons' place, giving Democrats a 3-2 majority.

Biden will get a chance to nominate a second FTC commissioner as he nominated Rohit Chopra, who joined Slaughter in dissenting in the AbbVie-Allergan and Bristol Myers-Celgene cases, to become director of the Consumer Financial Protection Bureau. Another nominee could allow Biden to put a stamp on more expansive antitrust policies.

PhRMA, the powerful industry trade group, is unsurprisingly critical of the regulators' efforts to review drugmaker deals. "These mergers and acquisitions can facilitate the transfer of knowledge and expertise required to push the envelope of scientific discovery, support the development of new and lifesaving medicines, and enhance competition," spokesperson Brian Newell said in a statement.

But U.S. antitrust regulators have redefined their views on anti-competitive mergers before. After the FTC lost numerous challenges to hospital mergers in the 1990s, the agency reviewed its approach and later won court rulings based on a more tightly defined analysis of what constituted a market.

Essentially, the FTC narrowed how large it considered those markets to be and redefined which mergers were viewed as anti-competitive, according to Balto. "That's an example of what might come about," he said.

The FTC is currently revising its view of hospital competition in another way, by assessing how mergers affect nurses' wages.

Consolidation and innovation

In the case of pharma consolidation, the FTC's competitive analysis is likely to go in two directions: how bigger companies may have led to higher prices for marketed drugs, and how pharma companies' acquisition of drugs in development may suppress innovation.

Previously, antitrust regulators' review of megamergers largely discounted the possibility they would translate into higher drug prices, aside from instances in which there were product overlaps that risked permitting anti-competitive behavior.

But list prices have often risen faster than inflation in recent years, prompting some experts to suggest the market leverage of increasingly large companies enables them to pry open insurers' wallets.

Booth doesn't believe the data supports that claim, pointing to how even the biggest companies like Pfizer and Novartis account for very little of the $1.2 trillion in global pharmaceutical sales.

"We're an incredibly fragmented sector despite the scale of the top 20 big pharmas," he said in an interview.

In 2019, the 10 largest drugmakers accounted for 42% of worldwide prescription drug sales, according to numbers from EvaluatePharma. Roche, at 5.5% market share, was the largest, followed by Novartis and Pfizer.

On large drugmaker innovation, meanwhile, Slaughter appears to be moved by analysis from two economists, Justus Haucap and Joel Stiebale of the Düsseldorf Institute for Competition Economics. Slaughter cited their work in her dissenting statement on Bristol Myers' acquisition of Celgene.

The two scholars analyzed 65 major pharma deals subjected to review by European competition authorities. Companies were headquartered in the U.S. as well as Europe. They found that innovation activities, as measured by patents issued and R&D expenditures, shrunk not just for the merging firms but also for their competitors.

"Especially with pharmaceuticals, it's very important to be the first one to come up with a new product. It's a winner-takes-all or a winner-takes-most market," Stiebale said in an interview. "So then if you buy one of your main competitors, there's less risk that somebody overtakes your research."

The remaining rivals to merged companies "seem to have reduced their innovation efforts, so that this is very suggestive that competition is the driver," he said. The analyzed firms cut back their research and development activities by more than 20% over the four years following each deal, Stiebale and Haucap found. 

Killer acquisitions

Other economists have looked at the fate of experimental drugs being developed by small biotechs that were acquired by bigger companies.

In describing "killer acquisitions," Colleen Cunningham of the London School of Business and Florian Ederer and Song Ma of the Yale School of Management estimated that drugs acquired through the buyout of small biotechs were modestly less likely to be taken forward if the larger company had overlapping projects.

The economists calculated that between 5% to 7% of acquisitions each year fit the description of a killer acquisition.

The FTC appeared to be considering this question in its 2019 review of Roche's acquisition of gene therapy developer Spark Therapeutics.

The commission considered whether the Swiss pharma had an incentive to abandon or delay Spark's hemophilia A gene therapy to defend the market share of its top-selling drug for the condition, Hemlibra. In the end, the FTC concluded that, because other biotechs were developing hemophilia A gene therapies, Roche still had an incentive to develop Spark's.

While the work of Cunningham and her colleagues hasn't taken a prominent role in commissioner's analyses, the FTC appears aware of them and cited their paper in describing its retrospective reviews of mergers and acquisitions.

Booth, of Atlas Venture, argues acquisitions are a positive, allowing research, talent and money to be recycled into new projects.

He also disputes the claim that big pharma frequently buys out companies to shut down competition. Target companies should be able to determine whether that could happen when negotiating a sale, he said.

"I've never heard of pharma buying something and just shooting it for anti-competitive reasons," he added.

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