Pharmaceutical mergers and megamergers stifle innovation

It isn’t lost on the public that the pharmaceutical industry is putting profits over people. Over 80% of Americans across party lines believe that lowering drug costs should be a “top priority” for lawmakers. Policymakers across the political spectrum have put the industry on notice, holding hearings with pharmaceutical company CEOs and introducing a flurry of policies to rein in high-cost medicines.

President Trump also made lowering drug costs a priority, and went as far as accusing drugmakers of “getting away with murder” on the campaign trail.

Yet the industry continues to operate as if it’s business as usual, putting profits over people’s health. Case in point: the second-largest pharmaceutical merger this year made headlines in late June with a $63 billion deal between AbbVie and Botox maker Allergan.

AbbVie’s CEO, Richard Gonzalez, framed the megadeal as having “a profound impact on AbbVie’s overall growth story while addressing concerns about the company’s reliance on Humira.” While that may seem benign, a closer look exposes a troubling industry-wide trend of billions of dollars of corporate resources going toward acquiring other pharmaceutical corporations with patent-protected blockbuster drugs instead of putting those resources toward “discovering and developing medicines that enable patients to live longer, healthier, and more productive lives” as the industry likes to claim.

Antitrust laws and regulations, which ensure competition and protect consumers from predatory business practices, play an important role in structuring the market. In the 1970s, free-market economists laid the intellectual groundwork for what became today’s broad reinterpretation of antitrust law. That resulted in regulators, including the FTC and the Justice Department, to adopt a hands-off approach to antitrust enforcement and apply less scrutiny to mergers of giant corporations. This lax approach to enforcement plays a role in structuring today’s increasingly concentrated pharmaceutical industry.

Megamergers, like the AbbVie and Allergan deal, deserve greater scrutiny not just from politicians but from the regulators who have the tools to do something about today’s increasingly concentrated, high-cost pharmaceutical industry. The FTC can self-correct by applying tougher scrutiny on these mergers.

Humira is the top-selling drug globally, and generates 61% of AbbVie’s total revenue off of patients reportedly paying close to $60,000 a year for the drug. AbbVie’s patent protections for Humira expire in 2023 when a cheaper version legally comes to market. As the only seller since 2003, AbbVie has market power — meaning the ability to skew market outcomes in the firm’s own interest without creating value or serving the public good — enabling the firm to hike prices and do whatever it takes to extend market exclusivity for Humira for as long as possible.

AbbVie’s aim in purchasing Allergan is to remain profitable by acquiring Allergan’s products, including Botox and the blockbuster eye treatment for dry eye, Restasis. In other words, instead of putting profit toward productive activities like research and development toward new blockbuster drugs to replace Humira or lowering drug costs, AbbVie will acquire its competition in order to diversify and remain profitable.

Consolidation in the pharmaceutical industry has troubling consequences. The number of mergers and acquisitions involving one of the top 25 firms more than doubled from 29 in 2006 to 61 in 2015, in part due to lax merger review. Between 1995 and 2015, 60 pharmaceutical companies merged into 10. There is little sign that the rise of mergers slowed in recent years.

Such consolidation has downstream effects on patients. Because internal research and development is expensive, yields inconsistent returns, and is often time-consuming, the biggest pharmaceutical firms are increasingly electing to access R&D by acquiring smaller firms. According to a recent study, “killer acquisitions,” in which one company purchases another to suppress research and the development of rival drugs, account for approximately 6% of all the mergers and acquisitions in the pharmaceutical industry. The same study found that eliminating killer acquisitions would raise the industry’s aggregate drug development by 4% a year.

While these trends in pharma may not be surprising, they should be alarming. AbbVie will spend $67 billion “to bypass the risky process of research and development by buying a portfolio of popular products as it faces the loss of patent protection for Humira,” as the New York Times astutely notes. This spending comes with a trade-off, since corporate resources could be used toward innovation, research and development, or lowering drug costs.

As regulators review the AbbVie-Allergan merger and continue to scrutinize Bristol-Myers Squibb’s $74 billion acquisition of Celgene, policymakers and candidates for office should put pressure on the FTC to reject these mergers. They should also remind regulators of the impact that consolidation has on patients and access to affordable and innovative medicines.

More stringent merger reviews can and should play a role in tackling the trend toward concentration in the pharmaceutical industry. While this is not a silver bullet to rein in high-cost medicines, it is a step in the right direction and a tool policymakers can use now. As candidates for office in 2020, lawmakers, policymakers, and the public debate reining in high-cost medicines, they should put pressure on regulators like the FTC to act. They should encourage the FTC to apply more scrutiny — or better yet, not approve — multibillion-dollar mergers in the pharmaceutical industry. The American public deserves to hear more from the candidates and lawmakers on their plans to take on the pharmaceutical industry and the drug affordability crisis.

Katy Milani is a fellow at the Roosevelt Institute.