After FTC surprises, pharma should expect more M&A scrutiny in 2020—and here's why

In 2019, several major biopharma deals hint an unexpected snag: stepped-up antitrust scrutiny. Pharma watchers might well wonder whether the Federal Trade Commission (FTC) is reviewing pharma M&A more closely, especially when pipeline overlaps are involved.

By the looks of it, it might just be.

At least three high-profile biopharma buyouts this year were handed the FTC’s so-called “second request,” which indicates the agency finds it necessary to conduct further inquiry and hence a lengthier review.

They are Bristol-Myers Squibb and Celgene’s $74 billion tie-up, Roche’s $4.3 billion deal for Spark Therapeutics and AbbVie’s planned $63 billion acquisition of Allergan, which is still under investigation. All three have a surprise element, with each one reinforcing industry watchers’ impression that future large biopharma M&A deals will have a tougher time selling themselves to a more inquisitive FTC.

Evaluating a niche market

Even though people knew FTC staff were taking a closer look at Bristol-Myers and Celgene’s “marketed and pipeline products” for psoriasis, they were still caught off guard in June when the FTC required Celgene to sell off fast-growing Otezla to win a go-ahead.

Initially, analysts were puzzled for three reasons. First, the psoriasis market is loaded with competition. Even at its projected peak of more than $2 billion in sales—including in other possible immunology indications—Otezla is far from a dominant force in the field.

Second, the overlap in question involves Bristol’s TYK-2 inhibitor BMS-986165, which is still working its way through phase 3 testing. As Wolfe Research analyst Tim Anderson wrote in a June note to clients, “it is unusual for FTC to be worried about an unapproved product because there is still development risk.” Plus, those two drugs belong to two different drug classes, “which would also generally provide FTC some measure of comfort,” he wrote.

Then, Celgene’s $13.4 billion decision to transfer Otezla to Amgen—which already sells megablockbuster TNF inhibitor Enbrel—only compounded the confusion. As SVB Leerink put it at the time, “we still don’t understand why having Otezla in the same portfolio as a TYK2 in phase 3 is not OK, but having it in the same portfolio as Enbrel and a biosimilar Humira, both for the same indication, is OK.”

RELATED: After big M&A year, will pharma move away from massive deals in 2020?

Everything finally cleared up when the FTC granted its blessing in November. Turns out, the agency was not simply looking at the overall psoriasis arena but the niche market of oral treatments.

“While many injectable and infused products are approved to treat moderate-to-severe psoriasis, some patients object to them or find them inconvenient,” the FTC said in a statement. It argued that BMS-986165 is the most advanced oral treatment that could compete directly with Otezla.

If potential dominance in a particular dosage form raises eyebrows, similar cases could be made for such benchmarks as dosing intervals or safety advantages, even if two drugs have different mechanisms of action and would otherwise only occupy a fraction of a large disease area.

Pipeline vs. marketed divestitures

A pipeline drug didn’t just cause headaches for BMS and Celgene. Roche’s Spark buyout was delayed multiple times as U.S. and U.K. antitrust reviews dragged on. The problem? Putting Roche’s Hemlibra and Spark’s investigational gene therapy SPK-8011 under one roof might hurt competition in hemophilia A treatment, the FTC initially figured.

In fact, FTC Chairman Joseph Simons has made clear the commission intends to examine in-development drugs more closely. The agency would even consider drug candidates in phase 1 or 2 during an analysis, especially if those potential products look more likely to succeed down the line, Simons reportedly said on the sidelines of the International Antitrust Law and Policy Conference in September. That’s a fair point, considering that many drugs now win accelerated FDA nods based on phase 2 results.

Luckily for Roche, though, the FTC reviewers realized plenty of other competitors are working on hemophilia gene therapies, and killing or stalling development of SPK-8011 would only be a loss for the Swiss drugmaker if it wants to stay competitive. The deal's final unconditional approval notwithstanding, the extensive, 10-month investigation still speaks to the extra rigor FTC applied to its analysis.

RELATED: Roche wraps up $4.3B Spark buyout as FTC thumbs-up ends antitrust ordeal

Now, it’s AbbVie’s turn to get a taste of the FTC’s increased appetite for thoroughness. Even though the Illinois drugmaker labeled its second request as “expected,” it really shouldn’t be, especially given that buyout target Allergan already volunteered to jettison two obviously overlapping drugs.

Indeed, the Abbvie-Allergan merger is driven by diversification. Unlike the Bristol-Celgene marriage, which combines two leading oncology players, AbbVie is buying Allergan for the very reason that their offerings do not look alike. That disparity, in fact, has some investors worried the deal will create chaos instead of value.

The two drugs Allergan plans to sell are brazikumab and Zenpep. Brazikumab and AbbVie’s newly approved Skyrizi are both IL-23 inhibitors, and both are under testing in inflammatory bowel diseases—an overlap that's even more important given the market share AbbVie’s Humira owns. As for Zenpep, it competes directly with AbbVie’s Creon as pancreatic replacement enzymes.

What is the FTC still worried about? One theory is that, instead of experimental brazikumab, the agency actually wants AbbVie to get rid of Skyrizi, a recently approved blockbuster hopeful.

What's the FTC thinking?

Clues could be found in a speech Bruce Hoffman, director of the FTC’s Bureau of Competition, gave last February. In prepared remarks (PDF) for last year’s GCR Live Annual Antitrust Law Leaders Forum, Hoffman said the agency won’t take pipeline-product selloffs as remedies for competition concerns, especially in the inhalants and injectables markets. Instead, it will push companies to sell marketed drugs.

Hoffman noted a “startlingly high” rate of failure with these complex drugs in development. And that failure rate meant such selloffs wouldn't necessarily have the desired effect. Indeed, they could well fall short of the commission’s “overall ‘pretty good’ rate of merger remedies succeeding,” according to the GCR.

“Based on a history of problems with divestitures in this area, our view is that divesting ongoing manufacturing rather than products that haven’t yet come to market places the greater risk of failure on the merging firms, rather than the American public,” he said.

Bristol-Myers and Celgene’s move to offer up Otezla instead of BMS-986165 follows that guideline, even though the two drugs are straightforward small molecules rather than specialty formulas.

More caution beyond product overlap?

Roadblocks could arise from a concern beyond product overlap—and in a voice that's growing louder against multibillion-dollar pharma deals in general. A group of unions and public interest groups urged Simons to consider blocking the AbbVie-Allergan marriage, citing the companies' habit of using price hikes, rebate walls and controversial intellectual property tactics to stifle competition.

Then, lawmakers piled on. Sen. Amy Klobuchar—joined by eight other colleagues, including frequent pharma critics Sen. Elizabeth Warren and Sen. Bernie Sanders—wrote to Simons, asking his FTC to put a microscope on multibillion-dollar pharma deals “against a backdrop of ever rising prescription drug spending.”

AbbVie-Allergan and BMS-Celgene were named as poster children for problematic transactions. The lawmakers argued the two tie-ups could give the combined companies “increased negotiating leverage to force buyers to provide them with more favorable terms across multiple product categories.”

The call even resonated among top ranks at the FTC. In November, two Democratic commissioners voted against Bristol’s Celgene takeover despite the agreed-upon Otezla selloff.

In his dissenting statement after the 3-2 vote, Commissioner Rohit Chopra questioned the “status quo approach” of examining only product overlap when reviewing pharma mergers. “Will the merger facilitate a capital structure that magnifies incentives to engage in anticompetitive conduct or abuse of intellectual property? Will the merger deter formation of biotechnology firms that fuel much of the industry's innovation?” he asked.

Similarly, Commissioner Rebecca Kelly Slaughter suggested that examining only drug-level overlap is “too narrow.”

RELATED: Bristol-Myers’ $74B Celgene buy wins antitrust nod in FTC party-line split vote

With the presidential election looming, drug pricing is only getting more attention. Will the FTC cave in to political pressure and expand its review scope? Probably not, at least for now, when Republicans hold three of the five commissioner seats.

In her counterargument, Commissioner Christine Wilson, a Republican, explained that, despite her own concerns about high-flying drug prices, many of the causes “fall outside the jurisdiction and legal authority” of the FTC.

Commissioner Noah Joshua Phillips compared the logic of Chopra’s choke-off-innovation argument as “saying an individual defendant is guilty of a crime because there is too much of that crime in society.” He also defended the FTC’s current practice as following antitrust laws, which don’t “guard against other harms posed by mergers.”

Still, as Bristol-Myers’ case has indicated, even if the Democrats don't succeed in eventually blocking a merger, more delays in antitrust reviews should be expected for large pharma deals.