Success in the pharmaceutical industry nowadays often looks like this. A small, seedy biotech research company comes up with a promising new treatment. Then a large pharmaceutical company will acquire that smaller company along with its intellectual property and bring the treatment to market.
The big pharmaceutical company makes money from retail sales. The smaller outfit makes money when bought from Big Pharma. Everyone wins … right?
Not necessarily, according to a new research by Rep. Katie Porter (D-CA) shared solely with Vox. Porter’s office focused on Immunex, a small biotech company that was bought by one of the big pharmaceutical companies in the early 2000s – and immediately saw its innovation and risk culture deteriorate.
These transactions take place all the time. The number of mergers and acquisitions by the top 25 pharmaceutical companies doubled between 2006 and 2016. In 2018, small businesses accounted for 64 percent of new drugs launched that year, up from 31 percent in 2009. There was a business logic behind this shift to a 2014 paper from the University of Pennsylvania: The big drug companies felt that their own R&D pipelines were not producing enough results to justify the cost. So they switched to small business acquisitions and helped those therapies get FDA approval and mass market distribution.
In an ideal world, this system might make sense. The large pharmaceutical company uses its know-how to reach patients with an innovative product. But too often, Porter claims that, relying on the results of her investigation, these mergers and acquisitions stifle innovation. Her report cites previous research that found R&D and new patents to decline after acquiring a company.
“The less competition there is in the pharmaceutical industry,” Porter writes, “the less likely the industry will actually focus on innovation and new remedies that can save lives.”
How the Amgen and Immnex merger helped drive back cancer research
Amgen acquired Immunex in 2002. The larger company was keen to get its hands on a new treatment for rheumatoid arthritis developed by the smaller biotech company. The treatment, named Enbrel, was expected to generate billions of dollars in annual sales.
This type of acquisition is ongoing, according to research in Porter’s report. Increasingly, the business model of large drug manufacturers is to use their immense resources to buy up other companies that have already done the groundwork for developing a therapy, rather than spending their own money on research and development.
According to her report, which included interviews with several former employees, a former Immunex scientist reached out to her office after receiving testimony from an Amgen executive that he downplayed Immunex’s role in the development of Enbrel.
That scientist, Laurent Galibert, and several other former Immunex (and eventually Amgen) employees described what happened in the company after it was acquired by Amgen: Amgen ended most of Immunex’s research on immunotherapy for cancer. This was in the early 2000s when immunotherapy (which tries to activate the body’s immune system to fight cancer) was still on the fringes of mainstream science.
Immunotherapies are considered one of the most promising frontiers in cancer treatment today. Immunex was years ahead of the game – only to see those efforts fade when it was devoured by a larger fish, according to its former staff.
“We were expecting immunotherapy when everyone else thought it was a dream,” Galbraight told Porter’s office. “It took everyone else 11 years to realize we were right.”
What can you do about it?
Porter has a few recipes for such situations. She wants the Federal Trade Commission to review previous mergers and reassess its standards for the anti-competitive risks of future mergers. She also urges Congress to pass legislation that would bring small mergers that are currently exempt from FTC oversight into the agency’s purview.
Consolidation in healthcare is a much bigger problem than the pharmaceutical industry. Hospitals have merged and bought doctors’ offices; Health insurers have also consolidated. The overwhelming consensus among researchers is that this market consolidation is leading to higher prices and lower quality for US patients.
The US healthcare industry relies on markets. Almost all healthcare providers, both doctors and hospitals, are private. More than half of health care is privately funded. The government and state governments play an important role in setting road rules and paying for much of the medical care Americans receive. However, the country’s health system depends on healthy competition to supply people and keep costs down.
According to Carnegie Mellon’s Martin Gaynor who wrote a piece of paper Last year, the average hospital market in the US was rated “highly concentrated” by federal agency criteria in an effort to improve the efficiency of the healthcare markets. Such is the average market for medical specialists and health insurers. General practitioners rarely miss the cut, but it’s close.
“I would worry that so many geographic areas in the US are dominated by one really big healthcare system. They don’t want more competition, ”says Gaynor. “If you are a company and you have merged or acquired to dominate the market, you want to maintain that position and improve if you can.”
The terms for anti-competitive contracts are ripe in many places, and we know that the higher prices vendors can negotiate in these circumstances have accounted for most of the growth in healthcare spending over the past decade.
Healthcare has many problems and antitrust enforcement can be part of the solution
Antitrust enforcement is usually slow (the Sutter case took almost 10 years to resolve) and inherently surgical (each individual monopoly is attacked with its own enforcement case). A more aggressive federal government can turn bad actors into examples, but more comprehensive reforms are likely to be needed to get costs under control across the country.
But big changes in US health care are difficult. Individual payer is off the table for now. Even setting interest rates like those seen in Maryland can be too aggressive for moderate members of the Democratic Senate majority, especially as the health industry is sure to mobilize against such a proposal.
No one is talking about shiny new healthcare cost controls in the middle of a pandemic when healthcare workers have been hammered. Porter’s ambitions could also be hurt by Pharma’s new political clout after delivering Covid-19 vaccines in record time.
But the medical consolidation is not going away. It is a structural problem that is fueling the country’s healthcare affordability crisis. If Biden is serious about doing something, he must address the issues described in this new report.
This story appears in VoxCare, a newsletter from Vox about the latest turns in the American health debate. Register for Get VoxCare in your inbox along with more health stats and news.
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