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Why the new pharma business model can be bad for research and development

A new report from Rep. Katie Porter has an illuminating case study on the value of antitrust in health care.

Rep. Katie Porter (D-CA) released a new report on how pharmaceutical mergers affect research and development.
Tom Williams/CQ-Roll Call, Inc via Getty Images

Success in the pharmaceutical industry these days often looks something like this. A small, scrappy biotech research company comes up with a promising new treatment. Then a major pharmaceutical manufacturer will acquire that smaller company, along with its intellectual property, and bring the treatment to market.

The big pharma company makes money on the retail sales. The smaller outfit makes money when it’s acquired by Big Pharma. Everybody wins ... right?

Not necessarily, according to a new investigation from Rep. Katie Porter (D-CA) shared exclusively with Vox. Porter’s office zeroed in on Immunex, a small biotech firm that was bought by one of the major pharma companies in the early 2000s — and promptly saw its culture of innovation and risk-taking start to deteriorate.

These transactions happen all the time. The number of mergers and acquisitions by the top 25 pharma firms doubled from 2006 to 2016. In 2018, small companies accounted for 64 percent of the new drugs brought to market that year, up from 31 percent in 2009. There was a business logic to this shift, according to a 2014 paper from the University of Pennsylvania: The large drug companies felt their own R&D pipelines weren’t producing enough results to justify the cost. So they switched to acquiring small companies and helping those therapies get FDA approval and mass market distribution.

In an ideal world, this system could make sense. The big drug company deploys its know-how to help an innovative product reach patients. But too often, Porter contends citing the findings of her investigation, these mergers and acquisitions end up squelching innovation. Her report cites prior research that found R&D and new patents declined after a company was acquired.

“The less competition that exists in the pharmaceutical industry,” Porter writes, “the less likely the industry will actually focus on innovation and new cures that can save lives.”

How the Amgen-Immnex merger helped set back cancer research

Amgen acquired Immunex in 2002. The bigger company had been eager to get its hands on a new treatment for rheumatoid arthritis being developed by the smaller biotech firm. The treatment, called Enbrel, was projected to bring in billions of dollars in annual sales.

This kind of acquisition happens all the time, according to research cited in Porter’s report. Increasingly, the business model of large drug makers is to use their immense resources to buy up other companies that have already done the legwork on 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 hearing testimony from an Amgen executive that he thought downplayed the role of Immunex in developing Enbrel.

This scientist, Laurent Galibert, and several other former Immunex (and, eventually, Amgen) employees described what happened at the company after Amgen acquired it: Amgen ended most of Immunex’s research into immunotherapy for cancer treatment. This was in the early 2000s, when immunotherapy (which tries to activate the body’s immune system to fight a cancer) was still on the fringes of mainstream science.

Today, immunotherapies are seen as one of the most promising frontiers in cancer treatment. Immunex was years ahead of the game — only to see those efforts stall out once it was gobbled up by a bigger fish, according to its former employees.

“We had anticipated immunotherapy when everyone else thought it was a dream,” Galbraight told Porter’s office. “It took everyone else 11 years to realize that we were right.”

What can be done about all of this?

Porter has some prescriptions for situations like this. She wants the Federal Trade Commission to review prior mergers and to reevaluate its standards for the anti-competitive risks of any future mergers. She is also pressing Congress to pass legislation that would bring small mergers, currently exempt from FTC oversight, under the agency’s purview.

Consolidation in health care is a problem much bigger than the pharma industry. Hospitals have been merging with one another and buying up physician practices; health insurers have been consolidating as well. The overwhelming consensus of researchers is that this market consolidation leads to higher prices and lower quality for US patients.

US health care relies on markets. Almost all health care providers, both doctors and hospitals, are private. More than half of health care is privately financed. The feds and state governments play an important role in setting the rules of the road, and in paying for much of the medical care Americans receive, but the country’s health system depends on healthy competition to deliver care to people and to restrain costs.

According to Martin Gaynor at Carnegie Mellon, who authored a paper last year on how health care markets could be made more efficient, the average hospital market in the US is considered “highly concentrated” according to the criteria used by federal agencies. So is the average market for specialist physicians and health insurers. Primary care doctors just barely miss the cut, but it’s close.

“Something I would be concerned about is so many geographic areas in the US are dominated by one really big health system. They don’t want more competition,” Gaynor says. “If you’re a firm and you’ve merged or acquired to dominate the market, you want to maintain that position, enhance it if you can.”

The conditions are ripe for anti-competitive contracting in many places, and we know that higher prices, which providers can negotiate under these circumstances, account for most of the health care spending growth seen over the last decade.

Health care has a lot of issues, and antitrust enforcement can be part of the solution

Antitrust enforcement is usually slow (it took nearly 10 years for the Sutter case to be resolved) and it’s by nature surgical (every individual monopoly gets targeted with its own enforcement case). A more aggressive federal government can make examples out of bad actors, but in order to get costs under control across the country, more sweeping reforms are probably needed.

But big changes to US health care are hard. Single payer is off the table for the time being. Even rate-setting, like the kind seen in Maryland, may too aggressive for the more moderate members of the Democratic Senate majority, especially because the health care industry is sure to mobilize against such a proposal.

Nobody is talking about shiny new health care cost controls in the middle of a pandemic when health care workers have been hammered. Porter’s ambitions could also be hampered by pharma’s new political clout after delivering Covid-19 vaccines in record time.

But medical consolidation isn’t going away. It is a structural problem driving the nation’s health care affordability crisis. If Biden is serious about doing something, he’ll need to contend with the problems described in this new report.

This story appears in VoxCare, a newsletter from Vox on the latest twists and turns in America’s health care debate. Sign up to get VoxCare in your inbox along with more health care stats and news.

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