As FTC cracks down on pharma M&A, analyst sees potential chilling effect on large deals

The U.S. antitrust watchdog believes that its current process of reviewing large pharma mergers just doesn’t work. As experts propose heightened scrutiny, at least one analyst is projecting a potential chilling effect on big pharma deals.

Since March 2021, the U.S. FTC has been working with international counterparts to revamp pharma antitrust reviews. Eventually, the agencies will likely adopt a holistic approach, which may discourage mid-to-large size deals, Berenberg analyst Zhiqiang Shu, Ph.D., wrote in a Thursday note.

The FTC has become concerned about the consolidation in the biopharma industry and the growing market power of existing leaders through M&A.

“We must not limit our enforcement to existing products and pipeline products,” U.S. Federal Trade Commissioner Rebecca Kelly Slaughter said during a two-day virtual workshop on exploring new approaches to reviewing pharma M&A.

During the event this week, experts argued that scale doesn’t drive innovation in biopharma. Over the past few years, large pharma’s share of new compounds has slowly declined, Patricia Danzon, an expert of healthcare economics at the University of Pennsylvania, said during the event. These days, small firms now contribute about 70% of novel drug entities.

Meanwhile, studies have found that after mergers, combined companies’ R&D output declines, Arti Rai of Duke University noted. This raises concerns that large mergers may become “killer acquisitions,” in which the purchaser hampers innovation by buying out competition. Still, this falls within the FTC’s existing antitrust practice of looking at overlap between portfolios and pipelines.

FTC’s Slaughter also wants to review the effects of proposed mergers on innovation industrywide, not just R&D at the merging firms. She pointed out, for example, that if a merger reduces the number of large pharma companies that could be potential buyers of new technologies from biotech startups, that deal may in turn affect the availability of capital to the startups. This could give the merged firm power and incentive to foreclose other innovators, thus deterring investment.

Experts also voiced concerns with the increased bargaining power of large firms in drug pricing negotiations. If a merged biopharma owns a “must-have” or blockbuster product, the company could bundle the star med with new assets gained from the acquisition and force higher prices, Danzon said. Many studies have shown a strong connection between high market concentration and rising drug prices, she added.

That’s why Danzon is suggesting that the FTC dig into the past drug contracting practices of companies involved in proposed mergers.

During the event initiated by the FTC and the U.S. Department of Justice, experts generally agreed that past bad actors who have engaged in anti-competition tactics should receive extra scrutiny. These tactics include pay-for-delay deals, which involve paying a generic developer to postpone the launch of a generic drug; product-hopping, which involves switching patients to patented drugs while winding down older, off-patent alternatives; and patent thickets, Berenberg’s Shu noted.

“Conduct is informative of intent, which is indicative of effect,” Shu observed in his note.

Shu expects the FTC will incorporate more factors into a holistic approach to enforcing antitrust laws. The FTC has recently challenged several high-profile hospital mergers, arguing they would increase prices and reduce the quality of care, Shu noted.

If the FTC’s current stance on hospital mergers is any indication of the direction U.S. regulators are taking, Shu said “it is reasonable to believe” that the FTC and DOJ “will likely challenge large and mega-mergers” in the biopharma sector moving forward.