Of the 156 merger enforcement actions the FTC took against healthcare companies between 1996 and 2021, 73 actions were against prescription drug developers, 38 were against hospitals and clinics and 28 were against medical equipment or device companies. This was more merger enforcement actions than any other industry including manufacturing and energy. The FTC Chair, Lina Kahn, voiced concerns that a merger boom in the U.S. would stretch agency resources. In 2022 healthcare deal revenues hit an all-time high of $45 billion. The FTC has asked to increase their 2024 budget targeted at tackling healthcare merger challenges by $70 million. Why are pharma M&A deals under scrutiny?
Market Consolidation and Monopoly Power
M&A activity in the pharmaceutical industry has led to market consolidation where just a few large companies dominate the market. The power from being a dominant player can be abused by setting higher prices, restricting access to essential medications or stifling innovation.
An FTC lawsuit aimed at blocking Amgen’s $27.8 billion buyout of Horizon Therapeutics seems to be focused on Amgen’s history of enhancing the monopoly positions of its drugs through product bundling and rebate schemes. The FTC argues that Amgen’s ability to exploit the market through therapies acquired from Horizon would be damaging to the competitive marketplace.
Impact on Research and Development
Regulators have tended to look only at product-level overlaps between buyers and their targets when placing pharma M&A deals under scrutiny. It has resolved them by forcing the merging companies to sell off some products. Celgene had to sell their psoriasis drug, Otezla, to Amgen to get the FTC to clear its $74 billion acquisition by Bristol Myers Squibb because of a competing treatment BMS was developing. Allergan sold off a digestive drug called Brazikumab so regulators would approve its $63 billion takeover by Abbvie.
The problem in divesting an experimental drug to a biotech or spinning it out into a separate entity is the risk of failure seems to increase. These companies are often less experienced in R&D manufacturing or marketing. Robin Feldman, Director of the Center for Innovation at the University of California, found that of the 56 pipeline products sold as part of merger settlements with the FTC, only 36 were approved and fewer had any significant sales.
M&A also tends to make companies focus on short-term profitability versus long-term research and development. Any reduction in R&D investments negatively impacts the discovery of new drugs and treatments. Protection of existing drugs becomes a priority and can impede the development of bio-similars. All actions that will only increase pharma M&A deals under scrutiny.
On February 22, 2023 Amazon acquired primary care company One Medical for $3.9 billion. On February 27 the FTC warned Amazon and One Medical to keep patients’ healthcare data private and not use it for marketing or advertising purposes. Data privacy has been a top concern for the FTC. They recently completed huge settlements with digital health companies GoodRx and Better Help for sharing patient data with social media platforms.
Robert Wells, a healthcare compliance attorney, argued that “pharmaceutical industry consolidation is an area where we are likely to see increased scrutiny and increased enforcement activity in the near-term…particularly situations that might appear to be anticompetitive – so big fish swallowing a little fish to eliminate competition.” Legislation currently under way to increase funding for the FTC and increased fees for larger mergers will only restrict the M&A activity further.