Pharmaceutical companies and biotech companies have undeniably enjoyed a very profitable 2021, and probably rightly so, for bringing to the market in record time effective vaccines to fight against COVID-19.
Yet, with the boost from COVID-19 revenues likely to moderate over the next years, pharma and biotech will probably need to turn to other profitable avenues for growth in the industry, such as acquisitions and price increases. The overall picture for 2022 is positive given the amount of cash amassed by some of these companies. According to investment bank SVB Leerink, U.S. and European pharma groups could have $500 billion for acquisitions, with Pfizer, Novartis and Johnson & Johnson accumulating a staggering $150 billion.
But here is where companies may face regulatory headwinds, both in U.S. and in Europe. On the one hand, the U.S. Congress and the European Commission are preparing new legislation which may include price regulation. On the other hand, regulators are becoming stricter when they apply antitrust laws to mergers and acquisitions to avoid monopolistic practices.
The approach to these policy issues may have a direct impact on innovation in the years to come. While the U.S. and Europe claim that the upcoming reforms will provide incentives for innovation while ensuring access to affordable medicines, this seems easier said than done.
In the U.S., the drug price regulation that Congress is considering will limit the amount that Medicare patients can be asked to pay out of pocket for drugs, it would restrict how much companies can increase their prices each year and it would allow Medicare to negotiate directly with drug makers on prices.
The fine balance between these three elements will determine whether the regulation will have a significant impact on innovation. Too many restrictions on how to set prices and R&D budgets in big pharma firms will be cut and startups may lose high-risk investors that count on the significant rewards when they are successful. Big pharma companies also rely on biotech for the developing of some drugs and they invest or acquire these companies when they have promising results. Excessively high prices sometimes may be regulated by the market, as it is the case of Biogen, a Boston biotech firms, that decided to halve its prices for an Alzheimer’s drug after insurers were reluctant to pay for the treatment.
Prices
The negotiations are still ongoing, and the bill text could change or fail to become law, but there have already been some changes that suggest the impact on innovation may be less severe than with the initial text. The original House proposal would have allowed the government to lower the prices of up to 250 expensive drugs, no matter how new or how innovative they were. The latest proposal limits this power. Drugs would be subject to price regulation after 10 years in the market, allowing drug companies to charge high prices for all these years. This may be a good compromise to ensure a proper reward of intellectual property and avoid some patent abuses.
In Europe, drug prices are already significantly lower due, in part, because countries negotiate directly with drug companies and have more bargaining power. The European Commission has also vigorously enforced antitrust rules to limit “excessive pricing” and agreements to delay the entry of generic products. Thus, EU’s legislative efforts will likely focus on building a resilient supply chain in Europe and continuing promoting the entry of generic drugs.
Acquisitions
The European Commission launched a public consultation that concluded in December, and the estimated timeline for the new regulation is the fourth quarter of 2022. Yet, as the scope of the EU regulation may not include price regulation and drug companies rely more on the highly profitable U.S. market than the EU market, the EU rules may not have a significant impact on innovation.
However, merger control may represent a more important risk for companies than a few years ago as regulators tighten its grip to control acquisitions by big pharma companies. This risk, as well as potential drug price regulation, may be the reason behind the drop in biotech deals, down 18% from 2020 according to Evaluate Pharma. In the U.S., the Federal Trade Commission (FTC), under its new chair Lina Khan, may take a more aggressive approach in merger enforcement suggesting that new pharma deals could be scrutinized and eventually brought to court more often than before.
Illumina is probably the best example of deals went wrong. In 2019, the FTC blocked the $1.2 billion Illumina-Pacific Biosciences deal, which was also blocked in the U.K., because it could limit the competition in the DNA sequencing market. Two years later, Illumina is fighting to get approval of its $7 billion acquisition of Grail, specialized on early cancer screening tests, which has slim chances to get approved.
Yet, the biggest risk for innovation in the U.S. does not stem from the FTC, but from the Capitol, where the fine-tuning of the proposed legislation will likely determine the future of small biotech startups.
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