Prior to the year-end holiday season, the United States Government Accountability Office (“GAO”) released the results of its long-awaited study into the prescription drug industry’s “Profits, Research and Development Spending, and Merger and Acquisition Deals.”1 The report responds to Congressional inquiries related to increasing consumer spending on prescription drugs. Importantly, the GAO report, whose findings are based on industry players’ financial performance, R&D spending, clinical trials, and published studies from industry experts, contains several observations about the potential effects of consolidation on drug prices and new drug development.
These conclusions, while largely unspectacular, portend continued scrutiny of the drug industry by the current administration, including the Federal Trade Commission. Maintaining competition and innovation within the pharmaceutical industry were notable aspects of the 2016 Republican platform,2 and President Trump has repeatedly taken aim at prescription drug prices through tweets, public statements, and a draft executive order.3 With respect to merger and acquisition activity, federal enforcers, in particular the FTC, are likely to pay even closer attention to any proposed tie-ups in prescription drug markets, scrutinizing not only market structure and activity, but also the transaction’s potential effects on incentives to innovate.
The GAO report includes several findings that are potentially relevant to antitrust aspects of future transactions:
- Revenues and margins have generally increased over 10 years, particularly among the largest companies. Specifically, according to the GAO, the largest 25 companies accounted for nearly 75 percent of industry sales, and drug company margins tend to be higher than in other industries. The increasing concentration of sales among the largest companies, coupled with the GAO’s conclusions about relative margins, may well lead to questions whether there is a meaningful relationship between consolidation and pricing.
- Certain drug categories are highly concentrated. According to the GAO, a number of specific drug markets have only a few companies producing products, including generic versions of products. The GAO report identifies anti-diabetics, anti-rheumatics, and anti-virals, among others, as categories with relatively few players, which suggests that proposed consolidation in these categories may warrant special attention in this administration.
- Prices in concentrated markets, particularly concentrated generic markets, tend to be higher as concentration increases. While acknowledging other factors such as brand loyalty, demand inelasticity, and drug characteristics have an influence on drug pricing, the report finds that both brand-name and generic drug markets have lower prices as the number of competitors increases. Thankfully, outside of the generic merger context, the FTC’s typical framework for assessing transactions is not at all formulaic, and, therefore, the GAO conclusion in this regard will have little impact.
- Mergers and acquisitions may reduce the volume and success of R&D. The GAO report suggests that research and development activity for new treatments, particularly at the earliest development stages, may be chilled by mergers and acquisitions among larger firms. Product innovation is an integral part of merger analysis, and drug pipelines and R&D activities have consistently been part of the FTC’s review of drug transactions. The GAO’s finding may fuel skepticism by the FTC toward claims that mergers and acquisitions are necessary to increase innovation and product development.
The GAO’s findings and conclusions may be unsurprising to stakeholders in the pharmaceutical industry and seem like more of the same. But the report’s takeaways, combined with other government efforts to focus a large lens on the industry, may well translate into increased antitrust enforcement in the pharma M&A area over the coming months.