Big Pharma: Why the drug industry faces a 3-front battle with the FTC, Medicare, and the White House
The Federal Trade Commission had its first win earlier this week in its crusade to block drug company deals: Sanofi (SNY) on Monday ended its up-to-$735 million licensing deal with Maze Therapeutics.
It was a victory for FTC Chair Lina Khan, who is starting to make good on her threats to take a closer look at smaller deals — which is necessary, the agency believes, to slow down growing monopolies in the pharma business.
But the win was more than a move to block Sanofi’s ability to scale in the Pompe disease therapy market. The collapse of the deal is the latest example of how the pharmaceutical industry is battling the US government on a number of fronts, including the White House's move to license drugs that were developed with federal funding, the FTC's scrutiny of deals, and the Medicare drug pricing talks.
The White House
The announcement by the Biden Administration to license drugs is an attempt to reduce the cost of certain drugs in the US.
The "march-in rights" as they are known, established by the 1980 Bayh-Dole Act, allows the government to exercise intellectual property rights on patents developed with the use of federal funds or by the government. The most recent example of such government research being used in a commercial product is the work from the NIH that eventually lead to the Moderna (MRNA) COVID-19 vaccine — which Moderna eventually paid the government rights for, after it lost a legal battle.
Robin Feldman, a professor and director of the Center for Innovation at UC Law San Francisco, said "the government is flexing muscles that it has rarely flexed in the past."
Rutgers Law School professor Michael Carrier said if the government is able to march in, "This is a shot that would be heard around the world. The US is the country in the world where pharma perhaps cares the most about protecting its IP rights; in many cases it's the largest market."
A key reason of concern: This is the first time ever the government has used increasing drug costs as a reason to trigger march-in rights. That's a significant change from the stance of prior administrations.
And as expected, the industry trade group, PhRMA, isn't thrilled.
"If government bureaucrats are allowed to take away patent protections at any time, there is no incentive for biopharmaceutical manufacturers to collaborate with the government or universities, returning us to the pre-Bayh-Dole era where promising new technologies sat on the shelf benefitting no one," the organization said in a statement.
Globally, though, the White House announcement was welcome news.
Shortly after a request for comment from Yahoo Finance, World Health Organization Director-General Tedros Adhanom Ghebreyesus posted on X that he welcomed the announcement, and that governments should use all legal tools to promote broader access to medicines.
FTC scrutiny
The FTC's track record on pharma deals isn't great. It previously tried, unsuccessfully, to block Amgen’s (AMGN) $28 billion acquisition of Horizon Therapeutics. It asked for more details and more closely scrutinized Pfizer’s (PFE) $43 billion acquisition of Seagen, ultimately allowing the deal to go through. (Pfizer received approval this week and will close the deal Thursday.)
"Ultimately, [Khan] is losing all those cases. They’re not actually doing something that changes the nature of the industry," said Craig Garthwaite, director of healthcare at Northwestern University Kellogg School of Management.
The FTC, however, sees it differently, and counts the Amgen case as a win.
"The FTC’s settlement on the Amgen Horizon deal has extensive, binding agreements on all of the concerns we raised in the complaint we filed in court. This agreement is a legal victory for the FTC, but an even bigger win for Americans who need access to affordable medicine," said FTC spokesperson Douglas Farrar in a statement to Yahoo Finance.
And the end of the Sanofi/Maze deal validates the FTC's strategy: putting the spotlight on the acquisition of smaller, earlier-stage companies by Big Pharma — a longtime growth strategy in the industry.
Smaller firms are nimble and can conduct early-stage research that isn't weighed down by a large company bureaucracy. These companies provide larger firms the opportunity to to bolster pipelines. Pfizer, for example, has acquired three companies in the past year, including Seagen, to help fill a $17 billion loss expected by patent expirations by 2030.
Critics contend that such deals show that Big Pharma doesn't do much R&D, and therefore shouldn’t be charging high prices on drugs.
But, Garthwaite said, "The infrastructure to actually take a drug from Phase 2 to Phase 3 ... run the clinical trial well ... is an exceptionally expensive fixed cost structure. We don't want 40 firms to spend that money."
Medicare
Medicare officials have targeted 10 drugs that they will start price negotiations for in the coming year. There are already concerns about the impact on the bottom line.
Analysts were largely not surprised by the first drugs targeted — as evdienced by the lack of stock movement the day of the announcement. The industry is waiting to undergo negotiations, and investors are waiting to see how much of a price cut the government eventually demands.
Companies have pushed back with nearly a dozen lawsuits, claiming that the process is unconstitutional.
In response to the drug pricing negotiations, companies have already said they are reconsidering deals that could land them on the target list, and anticipating which blockbusters could land on future lists.
For example, Novo Nordisk (NVO), which found itself surprisingly on the list for one of its insulin products, is also weighing the potential if its weight loss and diabetes drugs, Wegovy and Ozempic, end up a target of Medicare.
Next?
UC Law's Feldman says that all these government actions "send a message to the pharmaceutical industry: Get your house in order, or we will make things very difficult for you."
But the long-term odds of success on these three fronts aren't great, experts told Yahoo Finance.
Garthwaite said that policymakers are being short-sighted in their efforts, and called the Biden administration's efforts "crass."
"The real lack of access is if the product doesn’t exist. It’s a luxury in some ways to be able to debate the existing price of a product," he said.
Rutgers' Carrier and James Love, director of Knowledge Ecology International and an expert on intellectual property rights, warn the efforts may not have the desired impact.
"It sounds like a three-front war that they could lose dramatically. But I would just focus on the modest nature of these [efforts]," Carrier said.
In addition, the strategies by the Biden administration could easily be ended by future administrations.
Ultimately, though, the legal system may decide the winner. UC Law's Feldman anticipates the patent battle, much like the Medicare lawsuits, could morph into a larger legal battle.
"If [the US government] actually decide[s] to land a punch, I would expect this to go to the Supreme Court," she said.
Updated with a statement from FTC.
Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. Follow Anjalee on all social media platforms @AnjKhem.
