Deal with it: FTC regulation of innovative biopharmaceutical escalates during record-breaking M&A streak

The ever changing landscape of M&A

Executive Summary

  • Amid a streak of health care merger and acquisition (M&A) activity in 2018 and 2019, the Federal Trade Commission (FTC) is taking an aggressive stance in its review of biopharmaceutical deals
  • Historically, FTC involvement in health care M&A was concentrated in ‘non-innovative’ areas: overlapping generic portfolios, hospital / provider consolidation, and medical devices
  • Before 2019, there is only one example of the FTC targeting novel therapies or manufacturer pipelines in its review of anticompetitive mergers
  • This year alone, the FTC has delayed USD 100 bn worth of M&A transactions, turning their attention to the innovative technologies that often drive acquisitions in the first place
  • The shifting nature of these investigations reveals two emergent focuses from regulators:1. Requiring divestment of profitable branded products in competitive disease states (Example: the FTC response to the BMS acquisition of CELGENE)
    2. Expanding anti-competitive risk to consider company pipelines and minimize potential overlap with future product launches (Example: the suspected FTC investigation into the ROCHE acquisition of SPARK)

CBPartners’ Take: For large mergers and bolt-on acquisitions to endure as routine tactics in restocking pipelines and ‘de-risking’ internal R&D, FTC resistance may need to be considered when assessing downside M&A risk

The Federal Trade Commission (FTC) has played a recurring role in health care news this year

The regulatory gatekeepers, The FTC,  are taking on alleged generic price-fixing, breakthrough health care technologies, brand-biosimilar contracting, and health care mergers.

During a red-hot biopharmaceutical M&A run in 2019, the FTC delayed three major acquisitions. The regulatory hold-ups are leaving biotech analysts and industry execs wondering if the burst of BD activity can withstand increased scrutiny from Washington.

A comparison of different mergers and acquisitions

 

    1. In August, the BRISTOL MYERS SQUIBB ($BMS) acquisition of CELGENE ($CELG) was delayed, and the merging companies were forced to offload the $CELG psoriasis brand OTEZLA to push the deal to the finish line. The FTC was concerned that the transaction would bring three psoriasis products, OTEZLA, ORENCIA, and pipeline therapy BMS-986165, all to the same manufacturer
    2. Last week, ROCHE ($RHHBY) announced a seventh extension to its acquisition of SPARK ($ONCE). Analysts suspect regulators are holding up a partnership that will leave $RHHBY with hemophilia blockbuster HEMLIBRA™, and two hemophilia gene therapies in the SPARK pipeline (SPK-8001 and SPK-9001)
    3. Last week, ABBVIE ($ABBV) announced the FTC will be opening an investigation into its USD 63.0 bn acquisition of ALLERGAN ($AGN), despite announcements from both companies that they would be divesting two assets, SKYRIZI and brazikumab, to stave off anticompetitive fears

 

The $BMY / $CELG, $RHHBY / $ONCE, and $ABBV / $AGN mergers sit within a string of splashy M&A moves. In 2018, the health care industry saw a record 1,348 acquisition and partnership activities.

Not only is M&A-volume growing, but the deals themselves are larger as well: the TAKEDA / SHIRE (2018 – USD 62 bn), BMS / CELGENE (2019 – USD 74 bn), and ABBVIE / ALLERGAN (2019 – USD 63 bn) mergers all fall into the historical top ten. As acquisitions remain a routine part of the industry playbook to replenish pipelines, the FTC is taking a closer look at the nuts and bolts of deals that underpin industry growth. If the last year is any indication, FTC resistance is quickly emerging as another variable to consider when scoping M&A risk.

The changing nature of the FTC’s role in health care M&A

To compare, the FTC opened 186 total investigations across sectors in 2012-2018; 34% were in health care, with investigations spanning biotech, pharma, hospital systems, medical technology, and managed care.

In this stretch before 2019, most of the FTC’s involvement in health care focused on ‘non-innovative’ areas: 47% of these investigations examined hospital and provider consolidation, and 52% focused on biopharmaceutical mergers concerning generic products – branded therapies were rarely the focus of enforcement activities.

The Federal Trade Commissions role within healthcare

Of the 186 investigations conducted between 2012-2018, only one concluded with the FTC requiring a company to offload innovative technologies. In 2015, the NOVARTIS ($NVS) acquisition of GLAXOSMITHKLINE’s ($GSK) oncology portfolio was held-up by the Commission.

The FTC argued that commercial overlap between highly specialized melanoma brands, TAFINLAR and MEKINIST ($NVS), and $GSK pipeline therapies (now approved BRAFTOVI™ and MEKTOVI® ), would result in $NVS discontinuing development of the assets from $GSK. The target indication was considered too niche for one company to own both combinations. $GSK was forced to shed BRAFTOVI™ / MEKTOVI® to ARRAY BIOPHARMA (acquired by PFIZER earlier this year) before regulators allowed the USD 16 bn pipeline-grab to proceed.

To contrast, we’ve seen the FTC investigate over USD 100 bn worth of M&A volume in 2019 alone, driven by higher profile indications and complex therapies.

New trends in FTC enforcement activities in 2019

FTC reactions to the $BMY / $CELG and $RHHBY / SPARK deals reveal new trends in the expanding regulatory purview of the Commission

      • Requiring divestment of profitable branded products in competitive disease states
      • Expanding anti-competitive risk to consider company pipelines and minimize potential overlap with future product launches

       

    A shift in the Federal Trade Commission - a focus on novel technologies and company pipelines

    The case of the $BMY / $CELG acquisition is peculiar: the FTC ruled that $BMY would need to offload one of two psoriasis agents, OTEZLA ($CELG) or ORENCIA ($BMS), for the deal to move forward. Given the heavyweight brands carrying psoriasis indications (e.g., REMICADE, HUMIRA) in a growing disease state – 15+ brands are marketed in psoriasis, and total sales are expected to grow to USD 22 bn by 2022 – the anticompetitive argument seems like a difficult one to make.

    Would $BMY really be advantaged in a packed disease with powerhouse competitors? More specifically, with OTEZLA set to change hands to AMGEN ($AMGN), which markets a competing psoriasis biologic, ENBREL, why didn’t we see the same level of pushback from the FTC?

    The aggressive regulatory mindset is seen again through the ROCHE / SPARK deal. The suspected clash is due to the intersection created by the ROCHE blockbuster HEMLIBRA™, and pipeline hemophilia gene therapies from SPARK (SPK-8001, SPK-9001).

    If the pipeline really is the roadblock, it means the protracted delay is driven by a therapy that is still a year away from filing with the FDA – specifically, in a space where pipeline hemophilia gene therapies are a dime a dozen.

     What does this mean for M&A?

    As analysts predict whether pharma M&A can continue to set year-over-year records, the growing involvement of the FTC may cause companies to take a second look before pulling the trigger on larger acquisitions and smaller bolt-on deals. If this trend of aggressive FTC regulation continues, the efficient industry model where larger biopharmaceutical companies acquire smaller biotechs to provide maximum research and development (R&D) leverage to cash on-hand may prove complicated.

    Additionally, it remains to be seen how this trend will affect consolidation in areas of intensive R&D focus (oncology and rare disease), where commonplace ‘specialization’ in tumors or disease areas may be re-branded by the FTC as anti competitive.

    CBPartners will be monitoring the FTC’s activity closely to better understand how future M&A may be treated and how firms can best prepare themselves to execute smooth and successful acquisitions going forward.

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