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Big pharma deals show industry’s weak spots

(Credit: Brian Tucker / BioPharma Dive )

Big pharma is getting bigger.

Three of the largest takeovers in the industry’s history were announced within the past 14 months, creating what would have been the 5th, 9th and 10th largest drugmakers by last year’s revenue numbers.

Large-scale M&A among drugmakers isn’t a new phenomena. Expiring patents, coupled with persistent struggles to develop new drugs, spur periodic waves of consolidation. 

One change from years past, though, is the role played by intensifying political and market pressures on drug prices.

“Today’s deals relate to upcoming patent expirations, but the uncertainty around regulatory efforts targeting pricing is much greater today than it was in 2009,” said Michael Levesque, a senior vice president at credit ratings agency Moody’s, referring to a landmark year when Pfizer bought Wyeth and Merck acquired Schering-Plough.

On top of that, drugmakers face insurers and buying groups that are consolidated to a point that’s resulted in higher rebate payments and reduced net prices for drugs in certain competitive classes. 

Bristol-Myers’ $74 billion deal for Celgene, along with Takeda’s $62 billion buyout of Shire and AbbVie’s $63 billion acquisition of Allergan, form a response in effect if not in intent. 

Yet rather than a sign of strength, pharma’s recent mega deals hint at the industry’s weak spots, with pricing joining a list that includes R&D failures and over-reliance on top sellers. 

All split up

In most U.S. states, just three insurers control more than 80% of the market. Nationwide, the top three pharma benefit managers, responsible for negotiating drug rebates, are all now owned by the three largest payers — UnitedHealth, CVS and Cigna. And three drug wholesalers dominate the distribution of prescription drugs throughout the U.S.

It’s a different story in the pharma industry, which remains substantially fragmented even after three takeovers totaling $200 billion have shaken up its top ranks. 

Pfizer, the biggest company by drug sales, commands just 6% of the global market for brand-name medicines. The top 10 companies, meanwhile, account for about 41% combined, according to EvaluatePharma data. 

“Size doesn’t matter as much as in other industries,” said Peter Behner, global transactions leader for EY’s life sciences consulting, in an interview.

“There are other industries that, as they mature, begin to consolidate. They are no longer top-line [revenue] driven, but margin driven,” explained Behner. “This dynamic is not as true in this industry as it is in others.” 

The three mega deals of the past 14 months, though, suggest scale could become more important in a world where pricing — and by extension revenues — become more unpredictable. 

Public and political scrutiny has checked pharma’s ability to pursue aggressive price hikes, while strengthened PBM clout has meant sizable rebates in markets for diabetes, cholesterol, migraine and hepatitis C drugs. 

“Scale is important because of negotiating with payers,” said Moody’s Levesque. “We believe a broader portfolio helps pharmaceutical companies negotiate formulary positioning and rebate levels.” 

Giovanni Caforio, the CEO of Bristol-Myers, suggested a similar logic when discussing the Celgene deal on a recent earnings call. 

“It was important for us during a period of policy transitions and changes to have a broader and more diversified portfolio that goes across multiple types of reimbursement with more growth opportunities into different diseases,” he noted.

Policy changes such as those proposed by recent legislation from the Senate Finance Committee could make high exposure to Medicare and Medicaid markets a riskier proposition for businesses built on pricing power.

And in a U.S. election cycle that features drug prices as a top issue, large deals have become another avenue of attack for presidential hopefuls seeking to hold pharma to account. 

“Mergers that mean more money for drug company CEOs while patients pay the price are not a solution to skyrocketing drug costs,” wrote Massachusetts Senator Elizabeth Warren on Twitter in January, responding to Bristol-Myers’ Celgene deal.