Pharma dealmaking hit by greater scrutiny of prices and competition

When Joe Biden was elected US president, it soon became clear the pharmaceutical and biotech sectors would face tougher regulation. The new administration prioritised efforts to curb drug prices increases and toughen scrutiny of mergers and acquisitions.

In March last year, the Federal Trade Commission (FTC) joined with its EU, UK and Canadian counterparts to announce they would rethink their approach to M&A by “Big Pharma”, noting the high volume of recent deals and fast-rising drug prices.

Two months later the Biden administration also backed a patent waiver for Covid-19 vaccines. This sent shivers through an industry that relies on intellectual property to generate profits and attract funding to develop new products.

But, as President Biden prepares to deliver his first State of the Union address to Congress on March 1, many analysts say that the administration’s efforts to boost the power of consumers at the expense of the pharmaceutical industry have had only mixed success.

Drug pricing reforms that would give government agencies more power to regulate pricing remain stalled in Congress. Meanwhile, European opposition to a Covid-19 patent waiver has blunted efforts to conclude talks on sharing intellectual property.

Nevertheless, the uncertainties over drug pricing and the FTC’s flagging of tougher antitrust scrutiny have had a chilling impact on dealmaking. These twin factors have contributed to a slide in valuations across the biotech sector — where business models rely on the prospect of future M&A to tempt venture capital groups, and other investors, to fund risky early-stage development.

According to industry data group Evaluate Pharma, there were just 112 biopharmaceutical takeover deals, worth $85bn, in 2021 — almost a third fewer than in 2020.

At the same time, the Nasdaq Biotechnology Index has fallen by more than a quarter since peaking in February 2021, reversing strong gains made during the prior two-year bull market. This compares with rises of two per cent and 11 per cent for the wider Nasdaq and S&P 500 indices respectively.

“Whenever a regulator implements a new regulation or, in this case, potentially a new way of interpreting to what degree they will regulate something, what is needed the most is clarity,” argues Brad Loncar, a biotech investor.

“As far as I know, since the FTC made this announcement in March of last year, there has been no clarity offered on what might change compared to past reviews.”

This shift in emphasis by regulators, towards promoting more competition and restraining price increases, has caused many analysts to predict that the era of pharma megadeals — such as Bristol-Myers Squibb’s $74bn acquisition of Celgene in 2019 — may be over.

And it has also created uncertainty over how regulators will treat acquisitions of smaller companies with unique technology and drugs in development.

$74bn Equity value of Bristiol-Myers Squibb’s acquisition of Celgene in 2019

Some pharma executives have warned that any step up in regulation to block smaller deals could undermine the funding structure of the entire biotech industry.

“I understand they [FTC] are concerned about antitrust but they also have to understand that the expertise of a biopharmaceutical company is very different than that of a small biotech company,” says Dean Li, president of Merck Research Laboratories. “I don’t know that they totally appreciate the total ecosystem.”

He adds that drugs developed by smaller biotechs are typically brought to market with the support of larger companies — through clinical trials, manufacturing and marketing — for the benefit of consumers.

Analysts say there is still no clear guidance on what types of deals could fall foul of the tougher approach signalled by the FTC and other global regulators, which established a multilateral working group last year to consider pharma consolidation.

Arman Oruc, partner in the antitrust and competition practice at law firm Goodwin, says the working group is still consulting. It remains to be seen, he adds, whether it will shake up regulatory approaches to procedures, remedies, divestitures and other elements of dealmaking.

The degree of interaction between the FTC, the UK’s Competition and Markets Authority, the European Commission and the Canadian Competition Bureau had already been increased but there have not, as yet, been any unusual regulatory decisions or outcomes on M&A transactions, Oruc says.

“It’s definitely more probing,” he explains. “In terms of the analysis, they [regulators] kick a lot more tyres, if you will. They look into a lot more issues. And they certainly go into a level of detail that the agency [FTC] didn’t go into, let’s say, even in a transaction like the [2009, $68bn] Pfizer-Wyeth combination — a mega-deal like that.”

This tougher scrutiny by global regulators comes at a time when some big pharma groups, such as Pfizer, are flush with cash due to revenues earned from Covid-19 vaccines and treatments.

On February 8, Albert Bourla, Pfizer chief executive, said the company would accelerate its business development efforts and expected to add at least $25bn in revenues through M&A by 2030.

Other big pharma companies, including Bristol-Myers Squibb, Merck and Amgen, are actively seeking to replenish their drug pipelines ahead of the loss of exclusivity later this decade of several blockbuster drugs, which each earn more than $1bn per year.

David Elkins, chief financial officer at Bristol-Myers Squibb, says the company remained optimistic about adding to its drug pipeline and did not see a big change in the regulatory environment.

BMS is particularly interested in acquiring early stage prospects, as well pursuing mid-stage bolt on acquisitions, he adds.

The next test case many of us are watching is Pfizer’s acquisition of Arena Pharmaceuticals . . . As more of these things happen, there will be greater regularity clarity on what can and cannot go through

“We think there is significant competition in the marketplace, and there are plenty of assets in the therapeutic areas that we’re in,” Elkins says. “There is still significant unmet medical need. So, you know, we remain optimistic about the prospects for future business development.”

Some industry experts say there is a need for test cases to be concluded in order to ascertain the full extent of the new boundaries in which the sector must operate.

“The next test case many of us are watching is Pfizer’s acquisition of Arena Pharmaceuticals,” says Loncar. “As more of these things happen, there will be greater regularity clarity on what can and cannot go through.”

Pfizer agreed a $6.7bn purchase of Arena, a company with some overlapping of drugs targeting inflammatory bowel diseases, in December 2021.

It had expected to close the deal within the first half of 2022 but recently notified investors that it had resubmitted its acquisition notice to the FTC. The move gives the regulator an extra 30 days to review the deal.

If regulators allow the Pfizer-Arena deal to proceed, it could unleash pent-up demand for M&A. If, however, they intervene it would send a negative signal to the industry, according to analysts.

“With more certainty will come more deal volume,” says Loncar. “Big companies have cash they need to spend; what is needed is a clear idea of the guardrails around how — not if — to spend it.”