The Federal Trade Commission’s (FTC) latest lawsuit reveals the agency’s continued bias against mergers and the presumption that size determines anti-competitiveness. The agency petitioned to block pharmaceutical company Amgen from merging with Horizon Therapeutics, arguing the action is necessary to reduce prescription drug costs for consumers. However, the agency’s focus is misplaced. Prescription drug costs are largely inflated due to middle-men negotiations, not company mergers that could drive innovation and provide much-needed resource allocation to pharmaceutical research and development.
It is no secret FTC has aggressively attempted to block mergers and acquisitions it finds unpalatable. This administration’s FTC has already brought similar lawsuits in the technology and healthcare sectors; however, this action signals the first of potentially many similar official actions in the pharmaceutical industry. Denying the opportunity for markets to correct naturally through increased competition and improved solutions – there can be no doubt this will have a chilling effect on innovation in the pharmaceutical research sector.
The FTC argues that Tuesday’s filing “sends a clear signal to the market: The FTC won’t hesitate to challenge mergers that enable pharmaceutical conglomerates to entrench their monopolies at the expense of consumers and fair competition.”
The FTC’s primary concern is whether the merger would make two drugs currently produced by Horizon, thyroid eye drug Trepezza and gout treatment Krystexxa, less accessible and affordable to consumers. In a process called ‘cross-market bundling,’ the FTC alleges that Amgen would harm competition by offering higher rebates to pharmacy benefit managers (PBM) companies that preference these two drugs over any competition.
According to the FTC, these antitrust actions are aimed at preventing conglomerate monopolies from forming in sectors with large at-risk groups. This highlights a fundamental misunderstanding of the pharmaceutical industry and the market forces that play a significant role in increasing consumer costs.
PBMs have long been criticized for not passing on cost savings to consumers, an issue that has only gathered steam in the past few months. PBMs are contracted intermediaries that assist insurance providers in administering pharmacy benefits, often designing cost structures for their client’s plans. On most drugs, PBMs negotiate rebates and discounts on behalf of health plan providers while maintaining an extremely close relationship with drug manufacturers who want their drug placed higher in preference for each of the health plan formularies. This has meant that a mixture of opaque deal-making, and perverse market incentives, have kept artificially inflating drug prices – hurting consumers.
In a bipartisan effort, Congress has started discussing reform to PBMs’ transparency requirements. In fact, many states have already begun changing transparency regulations to ensure market forces are not obscured. It is a weird quirk of the U.S. healthcare system that drug manufacturers are simultaneously condemned for protecting their intellectual property and incentivized to negotiate with opaque middlemen that artificially raise costs.
Intellectual property is an essential feature of the pharmaceutical industry’s business model. Many drugs, while structurally similar, produce wildly different results and require years of research and development in clinical trials on patients who often have limited options for pursuing further treatment. To prevent market structures that would enable more patients to have access to these drugs is reckless and contrary to the regulator’s moral obligations.
To reduce drug prices for consumers, the FTC and other agencies should find ways of increasing market competition between drug manufacturers and reducing barriers that prevent manufacturers from dealing with pharmacies directly, thereby reducing the need for PBMs that attract handsome fees for bundling demand.
The FTC’s limited strategy of overwhelming industries with regulatory oversight, over finding ways to reward innovation will kill sectors of the economy that we collectively need to flourish. This will not only hurt us but also future generations that rely on us to find ways of making industries self-reliant and adaptable.
Antitrust enforcement should focus on consumer impact and the agency should recognize that it isn’t a panacea for all consumer harms. Efforts to reform the PBM system would go a lot farther in benefiting consumers than actions to prevent Amgen from acquiring Horizon. Blindly focusing on a firm’s size prevents other more meaningful reforms. Regulators ought to prevent actions in the market that jeopardize the consumer and not prevent mergers that could contribute to the long-term productivity of the pharmaceutical industry.
Ben Dennehy is the Communications Manager at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.