Add greater antitrust scrutiny to the list of headwinds facing the pharmaceutical industry in 2021.
Under the administration of President Joe Biden, the U.S. Federal Trade Commission is rallying fellow regulators in Canada, the U.K. and Europe to revise the way they study the impact of pharmaceutical M&A. Antitrust reviews generally involve examining product and pipeline overlap, and FTC acting Chair Rebecca Kelly Slaughter envisions a more sophisticated approach that includes a transaction's effects on prices and access to medicines.
"Pharma is an area that depends so heavily on innovation and entry of new products often developed by small competitors," Slaughter told reporters on a March 16 call. "We need to make sure that we're not just thinking about the sort of traditional questions of market share, and instead, we're really looking at these questions about innovation and what's going to get new treatments and new drugs to market so that consumers have access to them and, importantly, have access to them at prices that they can afford."
Recognizing that several of the top pharmaceutical and biotechnology acquisitions since 2015 were cross-border deals, the FTC is joining forces with its international peers to "take an aggressive approach to tackling anticompetitive pharmaceutical mergers," Slaughter said in a March 16 FTC press release.
The FTC has been signaling such a shift since 2019, when Bristol-Myers Squibb Co. and AbbVie Inc. each announced a megadeal. Slaughter noted that deal size is not the only trigger for closer review, citing the agency's scrutiny of Roche Holding AG's $4.5 billion takeover of Spark Therapeutics in 2019.
The volume of M&A transactions in the industry has risen since 2017, although the number of deals dipped in 2020 amid the pandemic, according to data from S&P Global Market Intelligence. If deal volume slows further this year, it could impact banks, which have identified the healthcare industry as a growth area for 2021.
While the FTC's new stance appears more aggressive when compared with the approach of former President Donald Trump's administration, it is more of a return to neutral for the agency than a shift into activism, said Les Funtleyder, a healthcare portfolio manager at E Squared Capital Management LLC.
"We’ll have to see what it actually means in terms of enforcement," Funtleyder said in an interview. "Even though not really part of the FTC's remit, and it's not clear if M&A impacts prices, in the political climate we live in, people will draw conclusions between mergers and drug prices. That's something people have to reckon with."
Drugmakers are already wrestling with constraints on their ability to raise prices on their branded products, which is contributing to the rise in M&A, according to research from S&P Global Ratings.
"Companies unable to achieve growth through price increases need to spend more on M&A for that same growth so important to equity investors and equity valuations," Ratings analyst David Kaplan and colleagues wrote in a Feb. 23 report.
Pricing pressure is likely to persist this year and net prices for branded medicines will be relatively flat or even somewhat negative, according to the Ratings report. While the average price increase was smaller year over year, companies raised the prices of more generic and brand name drugs in the first few weeks of 2021 than in each of the previous two years, according to research from GoodRx Holdings Inc.
Higher prices can limit a patient's or a market's access to medicines. That lack of access represents a material risk for the industry, according to Damiano de Felice, director of strategy at the Access to Medicines Foundation.
"When governments see that access barriers are not addressed for important products controlled by certain companies, it is natural to expect that they will consider more aggressive approaches to ensure that the industry continues to earn its social license to operate," de Felice said in an email.
Large drugmakers do not need to buy whole companies to gain access to new products. Pharmaceutical companies can gain the rights to specific compounds or technologies through licensing deals that pay licensees when certain milestones are achieved. Such deals reduce development and regulatory risks involved in bringing experimental medicines to market and have less of an impact on a company's creditworthiness, the Ratings analysts wrote.
"We expect companies to increasingly use these risk-sharing agreements to address the rising tension between weaker balance sheets and the continued appetite for exposure to attractive investment opportunities," they said in the report.
Lessons learned from the new antitrust approach to pharmaceutical deals could be applied to other sectors, the FTC's Slaughter said. In volume and aggregate transaction value for deals of $5 billion or more, the healthcare industry ranks third behind telecom, media and technology companies and energy and utilities, which are first and second, respectively, according to Market Intelligence data.
"From the investor and company perspective, the important thing is that as long as the goal posts are laid out and everyone knows where they are, the industry will adapt just fine," Funtleyder said. "Investors hate uncertainty more than anything else."
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