Big Pharma risks overdosing on M&A

Prometheus Biosciences

19/04/2023 17:33

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, April 19 (Reuters Breakingviews) - Drugmakers
are rushing to an M&A party they would rather not attend. The
industry started 2023 with $65 billion of U.S. deals, triple the
volume from this time last year and a 50% jump from the decade
average, according to Refinitiv data. A big reason is that
Medicare, the single biggest payer in the world’s largest
market, will soon be able to negotiate price cuts. It’s a
dangerous recipe for misallocating capital.
    The United States accounts for a whopping 58% of
pharmaceutical sales in Organisation for Economic Co-operation
and Development nations, according to a recent RAND study.
Prescription drugs cost, on average, more than twice as much in
the United States, with branded ones running three times higher.
    Medicare is responsible for about a third of U.S. sales.
Under the Inflation Reduction Act signed by President Joe Biden
last year, the country’s hulking healthcare program for the
elderly can push for lower prices on 10 of the biggest selling
drugs starting in 2026, and up to 20 more each year by the end
of the decade. The Congressional Budget Office estimates their
net prices will fall 50%, leading to about $100 billion of
savings through 2031. Amgen  AMGN.O  and Merck  MRK.N  both have
said the law would hurt sales and operations.
    One way to plug the gap is to buy promising drugs and
therapies, but even earlier than usual before they’re proven
effective. Medicare can only seek discounts after products have
been approved for sale for nine or 13 years, depending on their
type. This all goes some way to explaining why Merck unveiled
plans this week to buy Prometheus Biosciences  RXDX.O  for $11
billion and Amgen agreed to pay $28 billion for Horizon
Therapeutics  HZNP.O  late last year. Both targets have
potential blockbusters whose prices wouldn’t be eligible for
Medicare reductions for a while. Pfizer  PFE.N  agreed to pay
over $40 billion for Seagen  SGEN.O  in March. European
companies such as Sanofi  SASY.PA  and AstraZeneca  AZN.L  also
have joined the burgeoning acquisition frenzy.
    The problem is that such money is often poorly spent.
Projected returns on drug development for the top 20 companies
was a pitiful 1.2% last year, according to Deloitte estimates. A
surge of speculative asset buying will jack up the premiums paid
and further jeopardize their profitability. It’s a good outcome
for shareholders of selling companies, but buyers run a big risk
of overdosing on deals.
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    CONTEXT NEWS 
    There have been $65 billion of U.S. pharmaceutical and
biotechnology acquisitions announced since the start of the
2023, three times as much as during the same period a year
earlier and 50% more than the average over the past decade,
according to Refinitiv data.  
    U.S. President Joe Biden in August signed into law the
Inflation Reduction Act, which allows Medicare to negotiate
discounts on pharmaceuticals starting in 2026. The government
healthcare program for the elderly can negotiate discounts on
the top 10 drugs by spending and without competition from
copycat therapies. The number under negotiation would rise to 20
drugs annually by 2029. The law also sets limits on price
increases for drugs under Medicare.
    The Congressional Budget Office estimates price negotiations
will lower net prices of selected drugs by about 50% and save
the government nearly $100 billion by 2031.   

 (Editing by Jeffrey Goldfarb and Amanda Gomez)
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