A recent article by Colleen Cunningham, Florian Ederer, and Song Ma in the Journal of Political Economy coined the term “killer acquisitions.” This term describes an incumbent’s acquisition of an innovative target whose innovation the incumbent subsequently terminates. The incumbent’s incentive is to protect its market from potential competition. Antitrust regulators have increased their scrutiny of transactions in both the pharmaceutical industry and other industries such as technology in which “killer acquisitions” are at issue. This article evaluates Cunningham, Ederer, and Ma’s methodology and findings, and the implications for antitrust enforcers.
Cunningham, Ederer, and Ma study the pharmaceutical industry to test whether an incumbent can have a financial incentive to acquire an innovative target and then terminate further development of its innovation. The authors focus on acquisitions involving target drugs in early development that overlap with an existing drug in the acquirer’s portfolio.
Cunningham, Ederer, and Ma make several important assumptions in their analysis of “killer acquisitions.” Cunningham, Ederer, and Ma define overlapping drugs as those that are in the same therapeutic class with the same mechanism of action. Therapeutic class refers to the type of illness or disease that the drug is intended to treat (e.g., antidepressants are a therapeutic class), while the mechanism of action refers to the biological mechanism through which the drug treats the illness (e.g., select serotonin reuptake inhibitors (“SSRI”) and serotonin and norepinephrine reuptake inhibitors (“SNRI”) are two different mechanisms of action through which antidepressants work). The authors find that drug projects acquired by incumbents with an overlapping drug are 23.4 percent less likely to have continued development activity compared to drugs acquired by incumbents without an overlapping drug. The authors estimate that “killer acquisitions” occurred in five to seven percent of all pharmaceutical acquisitions and affected four percent of all drug projects. Notably, the “killer acquisitions” tended to occur in environments in which the acquirer has market power and in transactions that are valued below the Hart-Scott-Rodino (“HSR”) reporting threshold.
However, their definition of overlap drugs does not conform to how antitrust practitioners typically define a product market and may not capture relevant economic substitution patterns. For example, a consumer of antidepressants may find SSRIs and SNRIs to be economic substitutes even though they have a different mechanism of action. Additionally, among drugs in the same therapeutic class with the same mechanism of action, there are plausible reasons a consumer may not find two drugs to be economic substitutes, e.g., if one drug was administered orally as a pill and the other was administered via injection.
Another limitation concerns the authors’ definition of development activity. Cunningham, Ederer, and Ma focus on development milestones such as a new patent application to indicate continued development; the lack of such development milestones indicates a “killed acquisition.” The metrics used in the paper, while informative, do not capture the most relevant development milestone, which is a drug reaching the market. It may be the case that incumbents with overlap drugs are more likely to end early-stage development of an acquired drug sooner than non-overlapping incumbents because they more quickly realize the drug is unlikely to be successful. Incumbents who acquire overlap drugs may be just as likely or more likely to bring an acquired drug to the market. If this were the case, then the observed patterns in the data could be explained by an optimal project selection motive rather than a “killer acquisitions” motive.
Still, Cunningham, Ederer, and Ma’s article offers strong suggestive, but not definitive, evidence that “killer acquisitions” are occurring in the pharmaceutical industry. However, there is an open question about the economic significance of this effect. The authors find that only about twenty percent of acquired drug projects have any continued development activity regardless of incumbent overlaps; generally, the literature finds that only a fraction of these ultimately will reach the market. It is unclear how many “killed acquisitions” would otherwise have made it to the market and had a competitive impact.
Identifying a pharmaceutical “killer acquisition” that is an antitrust violation poses a significant challenge for antitrust enforcers. There are legitimate reasons aside from the “killer acquisition” motive for ending product development of an acquired drug. Distinguishing between drug projects that have been or are likely to be terminated for “killer acquisition” motives and drug projects that are terminated for other reasons is a non-trivial task. Antitrust practitioners should consider both documentary evidence and economic evidence to identify a “killer acquisition.” For example, documents from the incumbent firm may indicate whether the acquirer views the target’s drug project as a threat to their market. Economic evidence on market shares and customer substitution patterns can indicate whether the incumbent has market power. Additionally, an evaluation of whether the target has any unique characteristics, entry costs, and whether there are similar drugs in development by other firms can indicate whether the target is competitively significant and its acquisition would result in a lessening of competition.
The Federal Trade Commission evaluated such evidence in its 2019 review of Bristol-Myers Squibb Company’s (“BMS”) acquisition of Celgene Corporation (“Celgene”). The FTC focused on a potential overlap in oral treatments for moderate-to-severe psoriasis, a chronic skin disease. The FTC investigation revealed that Celgene’s product Otezla was the dominant product on the market. The FTC also found that BMS’ drug in development was likely the next entrant into the market, and therefore the most competitively significant potential entrant. Finally, the FTC found that no other potential entrant was comparable to BMS. The FTC thus determined that a divestiture of Otezla was necessary to maintain competition in the market for oral treatments of moderate-to-severe psoriasis.
“Killer acquisitions” are likely to be an area of continued focus for antitrust enforcers. However, more research is needed on both the extent and economic significance of “killer acquisitions” in the pharmaceutical industry as well as other innovative sectors.