Author: Matthew Thomas

Increased Regulatory Scrutiny of Pharma Mergers & Acquisitions Raises Concerns for the Industry

This year has been another significant year for
consolidation within the biopharmaceutical industry. There has been an
estimated $208
in transactions ; including Bristol-Myers’ $74 billion acquisition
of Celgene in January
to AbbVie’s $63 billion acquisition of Allergan in June which allows large
biopharmaceutical companies to dominate the broader deal landscape in the
industry. There are emerging signs, however, that the government is beginning
to take a closer look at biopharmaceutical consolidation, pushing for
divestments or potentially blocking the deals in court.

Signs of greater regulatory scrutiny have been most evident
within the pending acquisition by Roche of Spark Therapeutics. Roche entered
into an agreement to purchase Spark Therapeutics in February
for $4.8 billion. Spark Therapeutics currently markets the only FDA approved
gene therapy, Luxturna, which is used to treat certain retinal eye diseases.
Roche is hoping to take advantage of other gene therapy treatments developed by
Spark, particularly their hemophilia A research which Roche believes will complements
their own hemophilia treatment, Hemlibra. Despite being a relatively small
transaction in terms of size, both the Federal Trade Commission (FTC) and the
Competition and Markets Authority (CMA) in the United Kingdom have taken note
of the transaction, with the CMA filing an ‘Initial
Enforcement Order
’ to temporally block the transaction from being
completed. Just this past week, Roche extended
the deadline for shareholders of Spark Therapeutics to tender their shares to
approve Roche’s acquisition, the seventh time that Roche has pushed back the
tender offer deadline for Spark Therapeutics.

There is little official mention of what concerns the FTC
and the CMA have with Roche’s acquisition of Spark Therapeutics, but some analysts
point to the potential overlap between the two companies’ hemophilia business
and may push Roche to divest Hemlibra to obtain approval for the Spark
Therapeutics acquisition. Some feel this is an unusual step for the FTC to request,
particularly in light of the robust existing market for hemophilia products.
Analysts, however, point to the consent degree between Bristol-Myers and the
FTC that permit their acquisition of Celgene if Bristol-Myers chose to divest
rights to Otezla,
a drug to treat psoriasis, to Amgen for $13.4 billion. Otezla was considered
one of Celgene’s most profitable products, expected to generate $2.3 billion in
annual sales
by 2023. Given that Amgen already has a strong psoriasis pipeline, including
Enbrel and Amgevita, a biosimilar to AbbVie’s Humira, some were confused
as to why the FTC permitted Amgen to acquire Otezla.

AbbVie’s pending acquisition of Allergan did not raise the
degree of early scrutiny that the Bristol-Myers-Celgene transaction did, but
this trend is starting to move. In September, the FTC sent an additional ‘Request
for Additional Information
’ letter to AbbVie, delaying the completion of
the transaction at least an additional thirty days. AbbVie has kept with the
early-2020 date as when the transaction will be finalized. A number of consumer
advocacy groups have requested
the FTC intervene in the pending transaction. They point specifically to
AbbVie’s manufacturing of Humira, which continues to be the best-selling
drug in the world. Humira continues to invite scrutiny due to its high price,
set at $58,612 in 2017. Allergan also markets Botox, primarily used for
cosmetic purposes. These advocacy groups are concerned that another large
biopharmaceutical tie-up will raise the prices of a greater drug portfolio,
particularly in light of Humira’s expiring patent
in 2023.

Increased biopharmaceutical consolidation continues to raise
concern among Congress. Last month, Sen. Amy Klobuchar (D-MN) and eight
senators sent a letter
to FTC Commissioner Joseph Simons requesting the FTC take greater scrutiny of
these transactions and ensure that any anti-competitive activities are
remedied. Sen. Klobuchar, along with Sens. Cory Booker (D-NJ), Kamala Harris
(D-CA), Elizabeth Warren (D-MA) and Bernie Sanders (I-VT)[sk1] 
are all competing to be the 2020 Democratic presidential nominee. Given the continued
focus on the price of prescription drugs, both in Congress
and by President
, the FTC may push for larger divestments and more aggressive consent
decrees to limit future price increases among acquired companies.

Setbacks to the Trump Administration’s Health Care Initiatives

The Trump Administration has undergone setbacks recently in its attempt to reshape the health care landscape. Since the 2017 failure to repeal the Affordable Care Act (ACA) through Congress, the Administration has attempted to use agency power to affect changes to provisions of the ACA. Such changes have been inspired from Republican proposals to limit federal involvement in health care and granting significant discretion for states to run their own programs.

The Centers for Medicare and Medicaid Services (CMS) has directly dismantled many of the provisions of the ACA through expanded approval of state waivers for Medicaid compliance. Under Section 1115 of the Social Security Act, the Secretary of Health and Human Services (HHS), through CMS, can grant states waivers on Medicaid requirements to allow states greater flexibility in shaping their health care programs. This effort has been one of the cornerstone programs under Seema Verma, the CMS Administrator. Administrator Verma previously oversaw the expansion of Indiana’s Medicaid program in 2015. Then-Governor Mike Pence made a deal that Indiana would accept Medicaid expansion in exchange for requirements that enrollees contribute monthly payments to offset some of the cost to the state. That was a unique arrangement at the time, but some in the Obama Administration felt that it would be the only way to get reluctant states to accept an expanded Medicaid program. Once the Trump Administration came into office, CMS began to examine the ability to grant Section 1115 waivers in relation to mandating work requirements for Medicaid recipients. In January 2018, Kentucky became the first state to tie Medicaid expansion to work requirements for enrollees. Seven other states have since successfully applied for waivers to require employment to receive benefits. These waivers have been challenged in court a number of times; Kentucky in particular lost twice. A District Judge in Kentucky blocked implementation of the work requirements in June 2018, holding that HHS had failed to properly consider the request and remanded it back for further examination. The waiver was reconsidered and granted for a second time. However, last week, the same judge once again blocked Kentucky’s program as well as blocked Arkansas’ work requirement waiver, holding that the waivers go against the spirit of Medicaid’s goals.

Eight states in total have expanded Medicaid with the condition that enrollees be employed or seeking work. Utah passed a referendum in the 2018 elections that expanded Medicaid access but the Utah Legislature limited that expansion by requiring enrollees to be employed and raising the income threshold for eligibility. Virginia’s 2018 Medicaid expansion was approved after several years of negotiation as the Republican controlled Virginia General Assembly would only support expansion in exchange for limited work requirements. Georgia has most recently accepted a very limited Medicaid expansion that forbids complete expansion and sets a June 2020 deadline to agree to a waiver or the expansion will be voided.

The most recent legal setback for the Administration has been the rejection of the Department of Labor’s (DOL) association health plan rules (AHPs). These rules allowed for small businesses to join together to purchase health plans, similar to how large employee plans are already structured. The AHPs would not have to abide by many of the coverage requirements the ACA mandates, but would require insurance to cover individuals with pre-existing conditions. Eleven states, led by Pennsylvania, filed a lawsuit against the DOL, alleging that the AHPs violate both the ACA as well as well as violating ERISA guidelines on allowing for groups to join together in AHPs even though they do not have any business connection. Last week, a District Judge invalidated the DOL rule, holding that DOL’s interpretation goes against the language of ERISA.

One legal success for the Administration was the December 2018 ruling by a Texas District Judge finding the ACA was unconstitutional. In NFIB v. Sebelius, the Supreme Court found that the individual mandate, which requires individuals to maintain health insurance and penalizes them if they don’t, was constitutional under Congress’s taxing power because the penalty was treated as a tax. The Texas District Court Judge’s ruling found that because the penalty under the individual mandate was reduced to zero as part of the Tax Cuts and Jobs Act of 2017, the mandate could no longer be justified as a tax and the whole law was thus unconstitutional. Many court watchers do not believe the lawsuit will ultimately succeed at the appellate level, but the Department of Justice (DOJ) recently reversed its position in a brief filed with the U.S. Court of Appeals for the Fifth Circuit, refusing to defend any part of the ACA, believing it to be unconstitutional in whole. The DOJ’s previous position was that only the individual mandate was unconstitutional but the rest of the law could be upheld if the mandate was not. Recognizing the political implications of such a change, the Republican attorneys general of Ohio and Montana filed an amicus curiae with the Fifth Circuit urging them to reject the conclusion that the entire ACA is unconstitutional and limit scrutiny to the individual mandate.

The legal setbacks on a narrowing of provisions of the ACA have once again put a spotlight on health care within the political sphere. President Trump recently declared that, “The Republican Party will soon be known as the party of health care.” Republicans in particular are concerned that this reexamination of the ACA will endanger their 2020 reelection prospects and thus, are blocking attempts to reexamine the ACA. Senate Majority Leader Mitch McConnell has rejected any new attempt to repeal the ACA, viewing any opportunity impossible with the Democrat controlled House of Representatives. The issue of health care will continue to be a pressing political issue as the House of Representatives examines various proposals for ‘Medicare for All’ programs and the Republicans focus on many of their initiatives to bring down health care costs through drug pricing issues and other non-coverage focused initiatives.

Does a New Round of Pharmaceutical Deal-Making Invite Regulatory Scrutiny?

On January 3rd, Bristol-Myers Squibb
Co. agreed to purchase Celgene Corp. for approximately $74
. Once the deal closes, it will be the largest pharmaceutical
acquisition in history.
The acquisition is driven by Bristol-Myers’ expansion into immuno-oncology drug
manufacturing and the potential to leverage Celgene’s research pipeline to boost
Bristol-Myer’s pipeline in the future. It is expected with this deal that other
drug makers will begin looking at larger style acquisitions to remain
competitive in the evolving drug market.
Such business pickup, however, may draw increased government scrutiny, as
concerns about corporate consolidation and its impact on drug pricing may push
the government to intervene in some of these acquisitions.

With this acquisition, Bristol-Myers will acquire Revlimid, a drug that treats multiple myeloma. Revlimid currently accounts for a majority of Celgene’s profits, grossing approximately $5.8 billion in 2015. Although Revlimid continues to increase in sales each year, it has had to contend with a number of patent challenges. While Revlimid is set to expire in 2024 in Europe and 2027 in the United States, Celgene has agreed to allow India’s Natco Pharma Ltd. capped sales in the United States in 2022 and lifts that cap in 2026. Bristol-Myers’ acquisition of Celgene would make the new company less dependent on a single drug and would also enable Bristol-Myers to take advantage of Celgene’s immuno-oncology research. Bristol-Myers currently markets Opdivo, a drug used to treat metastatic melanoma and non-small cell lung cancer. Bristol-Myers has been working with smaller drug makers in several combination studies to expand Opdivo’s use, and the acquisition of Celgene could allow greater research opportunities.

The last five years have seen a great deal of consolidation within the pharmaceutical industry, as larger firms have been acquiring smaller firms to take advantage of certain “blockbuster” drugs these firms have created. For instance, in 2018, the French drug maker Sanofi purchased the hemophilia spinoff of Biogen Inc., Bioverativ Inc., for approximately $11 billion. With this deal, Sanofi attempted to improve its rare disease portfolio by acquiring a promising research pipeline. Larger scale acquisitions have been less popular than small scale acquisitions mostly due to Pfizer Inc.’s failure to acquire generic drug maker Allergan PLC in 2016.

In 2015, Pfizer announced a deal to merge with Allergan for approximately $160 billion. The deal would have allowed Pfizer to re-domicile for tax purposes in Ireland, commonly known as a tax inversion, and take advantage of Allergan’s generic drug pipeline to build synergies within Pfizer’s lagging production pipeline. Under the Obama Administration, the Department of the Treasury issued new guidance on structural requirements for tax inversions that were explicitly written to block the Pfizer-Allergan merger. Pfizer ultimately ended discussions with Allergan and has not made any new major acquisitions after both this, and the attempted acquisition of British drug maker AstraZeneca PLC in 2014, failed due to opposition by the British government. More recent large scale pharmaceutical consolidation has continued with primarily European firms taking the lead, such as Irish drug maker Actavis’ acquisition of Allergan in 2015 for $70.5 billion and Japan’s Takeda Pharmaceutical Co.’s acquisition of Irish drug maker Shire PLC for $62 billion in 2018.

If other pharmaceutical firms begin large scale acquisitions, as many pharmaceutical executives have spoken positively of, there is likely to be increased regulatory pressure on these deals. The Trump Administration has sought to lower the price of drugs on the market, specifically pointing to Celgene’s Revlimid, which currently costs $719.82 per dose. In 2017, Opdivo cost approximately $13,100 for a monthly dosage. There has already been some congressional scrutiny of the proposed deal, as many congressional representatives have petitioned the Federal Trade Commission and the Department of Justice to examine the acquisition, and whether the transaction will lead to higher drug prices. Neither agency has responded to the proposed deal as of yet, but either agency may intervene before the deal is expected to close later in 2019. Whether any potential antitrust concerns will be raised is still unknown as the Department of Justice declined to block CVS Health’s 2018 acquisition of the insurance company, Aetna. The government will likely look to the price increases that occur after the Celgene acquisition and whether further consolidation follows before they take a more definitive step in regulating pharmaceutical acquisitions.

Developments in Drug Pricing and Anti-Kickback Laws

On Wednesday, President Trump signed the Patient Right to Know Drug Prices Act. The bill tackles a number of issues that stand in the way of lowering high drug prices, particularly the discussion over the ‘gag rule’ in interactions between insurers and pharmacists. Under the current provisions of the gag rule, insurers are forbidden from disclosing whether the cash price for a drug is in fact cheaper than the price offered under the patient’s insurance plan. The new law will rescind that prohibition. However, it will only apply to name-brand prescriptions and not generics, but many are hopeful that it will raise an overall awareness for consumers about the actual prices they are paying for their prescriptions.

The Trump Administration is also working to lower drug prices by examining some of the specifics of federal anti-kickback laws that relate to prescription pricing. Under current law, pharmaceutical and insurance companies are not allowed to offer any benefit to physicians to prescribe one particular drug versus another. There is a significant exception in these regulations, however, known as ‘safe harbor rules.’ Under these exceptions, pharmaceutical companies and prescription benefit managers (PBMs), the companies that administer pharmaceutical plans on behalf of insurers, are allowed to negotiate the prices of a particular drug by discussing the different prices the manager will offer the drug for.

This once again has put the spotlight on drug rebates offered by pharmaceutical companies. With rebates, firms offer monetary incentives to encourage insurers to carry their drug, lessening the overall cost for insurers to carry the drug. These rebates are meant to be administered to the consumer, but in many instances are taken by the PBMs to boost their profits. Pharmaceutical companies have recently attempted to combat these strategies, partially in an attempt to deflect some of the criticism towards them on drug pricing, by offering generics with lower prices, so that the PBMs will receive lower rebates on the negotiated drugs. The FDA is currently examining the administration of rebate plans and is considering ending the exceptions they have under anti-kickback statutes.

Ultimately, any of these steps to reduce drug pricing will not be broadly impactful, as expansive steps to allow Medicare to directly negotiate the price of drugs with producers have failed to gather sufficient bipartisan support. Further, much of the controversy surrounding high drug prices have been focused on some of the more infamous instances, such as Sarepta Therapeutics’ $300,000 per year muscular dystrophy treatment . Until successful generics reach the market, these specialized treatments will be under no pressure to lower their prices.

It is unlikely that there will be any unified support to take more aggressive steps to lower drug prices, but pharmaceutical companies seem to recognize to some degree the public backlash to these prices and have taken steps to cap drug prices, most notably beginning with Allergan’s promise to increase drug prices by no more than 10% year-to-year.

In his statement at the bill signing, President Trump spoke of the bipartisan nature of lowering prescription drug prices. He also spoke generally about upcoming steps the Department of Health and Human Services will begin to take to further bring down prices. It remains to be seen what further steps will be taken, but is likely both Congress and the Trump Administration will continue to evaluate how they can change many of the regulations on drug prices that keep them so high.