The Federal Trade Commission has loomed large over M&A in the biopharma industry in the last two years. The antitrust regulator attempted to block Amgen’s $27.8 billion takeover of Horizon, stopped Sanofi’s licensing deal for Maze and won its effort to force Illumina to divest Grail.
At Thursday’s Financial Times–Endpoints News US Pharma and Biotech Summit, Endpoints Executive Editor Drew Armstrong spoke with FTC Deputy Director of the Bureau of Competition Rahul Rao about the regulator’s antitrust approach in biopharma, how it views the PBM industry, and more.
This conversation has been substantially edited for concision and clarity. (The full recording will be available for attendees here.)
Drew Armstrong: I want to start with something that we considered a Rosetta Stone about what the FTC is doing, which is a 2022 meeting the FTC held with academics and antitrust experts to explore new approaches in antitrust. Is there any kind of a unifying theory of what either changed in the industry that you all felt that new approaches to antitrust were needed? Or had existing tracks of enforcement fallen short?
Rahul Rao: There wasn’t a flash point. There wasn’t a seismic event that happened. We looked around at the market, and we saw that something was a little bit off. What we’re seeing is we’re seeing greater consolidation and the effects of that consolidation. We’re seeing higher prices, we’re seeing reduced access, and pain points throughout the market. What that tells us is, something wasn’t working right in terms of what we were doing as regulators.
Armstrong: Over the last two years, we’ve seen some of that theory become enforcement actions, such as with Sanofi-Maze and Amgen-Horizon [Note: the FTC successfully blocked the Sanofi deal; Amgen’s closed with conditions]. How much of that was exploratory testing the bounds of authority, versus “we’ve established this and we’re going after this and every transaction henceforth.”
Rao: Those cases that you mentioned, they all rely on the same statute, the Clayton Act, and it’s the law that we have always applied to mergers. We applied it to very traditional horizontal mergers and we applied it to vertical mergers, such as the Grail-Illumina. It’s not as if the law is changing or we’re experimenting with new laws. We are applying the law to current market realities.
We didn’t have bundling in the 1920s. Business practices have changed. But at its core, what we’re focused on is preserving and protecting competition without without fear or favor.
Armstrong: One of the comments I hear from the pharma industry is, “This is the least concentrated industry out there. There are only three cell phone carriers. There are dozens of big pharma companies.”
Rao: There are three cell phone carriers. Are people happy with theirs? We have one dominant domestic airline manufacturer. We have a handful of airlines. I think we can tell that we’d all be better off if there were a little more competition.
With pharmaceuticals, if you’re counting every startup every early stage of development, there are a lot of companies. But are they competitors, in terms of how we measure consolidation? In the pharma space, we really only have a handful of dominant firms that are capturing upwards of 70%, 80% of overall market profits. And those firms are disproportionately not developing new products. What they are doing is capturing the revenue from drugs that others are creating,
Armstrong: So how has the era of precision medicine changed things? Drugs are getting much more narrowly tailored. We’re going to see things that look more monopolistic because that’s where the science is headed.
Rao: It actually goes to how we need to apply our current laws, which are 110 years old, to current market realities. You can have a company that creates an amazing product, and it develops market power that way because no one can beat it. That is 100% okay. But what we don’t want is for someone to preserve market power through anticompetitive means, to use a monopoly position to influence their dominance on other markets, or to preserve their position in a way that harms the next startup.
Armstrong: Does the FTC have a view on what the company formation, growth and acquisition life cycle should look like? I ask that in the context of the Sanofi-Maze deal that you all blocked. A lot of people were saying, “well, that’s just the way the industry works.”
Rao: We’re going to get a bit philosophical here. If we go back to the founding of our antitrust laws, the innovation behind our country and our philosophical identity, there is clear preference in the way our laws were written for build over buy. You can see that in the concept of Manifest Destiny. There’s something about America that is about pioneers and creating. That aspect of our DNA weaves into our laws.
Now, we have seen a lot of companies across multiple markets successfully grow organically, scrappy startups such as Amazon out of somebody’s garage, or Facebook-slash-Meta founded in a dorm room. The market realities of pharma are different. It’s sometimes a lot harder to develop a drug but hard to monetize it, as opposed to developing an app, which may be easy to do in your dorm room, but hard to monetize.
Armstrong: So you see a distinct line between the tech industry, versus what we see in biopharma?
Rao: Pharma is heavily regulated. It takes expertise to get things through the FDA, to bring things to market. Those are not necessarily points of friction in tech. So, there are different market realities, and in biopharma, there may be more of a propensity to have to be acquired or get some kind of outside assistance to take an early-stage drug to the next stage.
Sanofi-Maze, the core wasn’t that Maze sought to be acquired by a company that could help bring its product to market or could get it through regulatory hurdles. The problem, as the complaint alleged, was that Maze was being acquired by the monopolist. It’s not a question of Maze wanting to exit in a certain way. It’s the question of the monopolist being the one acquiring it.
Armstrong: Maze, was that structurally anticompetitive? Or was there some behavior within the transaction that made it anticompetitive?
Rao: We bifurcate remedies into what we call structural and behavioral. One of the more recent developments in antitrust enforcement is disfavoring behavioral remedies. Asking someone to not do something doesn’t change their incentive to do the thing you don’t want them to do. It just forces them to be more creative. As a result, we’ve seen a lot of behavioral remedies that failed.
Armstrong: I want to shift gears. There’s been a lot of talk today about PBMs, where you have insurers and drugstores and PBMs that have consolidated or are vertically integrated. I remember covering the CVS-Aetna merger, and the promises that it would save money for patients. Has it? Has it been good for competition?
Rao: That is not a question that has a yes-or-no answer, at the moment. The problem we face is, that we have this new actor playing a central role in an industry getting more and more vertically integrated, and the role they are playing is clearly consequential, but also somewhat opaque.
With our PBM study, we’re studying how the incentives work, and we’re studying how vertical integration is affecting prices so that we can more accurately say, “Where is something going wrong?” On paper, PBMs seem like a good idea. The question is, why is that not manifesting the way we think it should?
Armstrong: Have you identified ways the PBM market isn’t working or remedies?
Rao: That’s TBD. We’re seeing the effects of a dysfunctioning market. We’re seeing prices go up when prices should go down. We’re seeing access decrease when competition should make access increase. And we’re seeing that at a time when PBMs have been playing a more outsized role in the drug supply chain, and that supply chain is getting more vertically integrated. The fix to that is something we’re exploring.
Armstrong: Thank you for being here.