20 Jun 2018
Awardwinning research finds evidence of companies buying up competitors to shut down development
Pharmaceutical companies may stamp down on competition through mergers and acquisitions, according to new research. Around 7% of all pharma mergers and acquisitions from 1989 to 2011 were "killer acquisitions," used strategically to eliminate competition from smaller companies.
This is the key finding in a new study by Colleen Cunningham, Assistant Professor of Strategy and Entrepreneurship at London Business School, Florian Ederer, Assistant Professor of Economics at Yale School of Management and Song Ma, Assistant Professor of Finance at Yale School of Management.
The paper received the Charles River Associates Award for the Best Paper on Corporate Finance at this year’s Western Finance Association (WFA) annual meeting, which took place on 19 June. “We’re honoured to have won this prestigious and highly selective award,” Dr Cunningham said.
The researchers identified a trend whereby a large pharmaceutical company with a successful drug brand acquires a smaller competitor that is developing a rival drug to treat the same illness. In this way, an existing pharma company can halt the new drug's development. It can also continue to control market share and raise prices.
“We argue that an incumbent firm may acquire an innovative target and terminate development of the target’s innovations to pre-empt future competition,” said Dr Cunningham. “We call such acquisitions ‘killer acquisitions’ as they are intended to eliminate potentially promising, yet likely competing, innovation.”
Dr Cunningham and her colleagues analysed more than 35,000 drugs in development in the US from 1989 to 2011 and found that those that had been acquired by incumbent pharmaceutical companies were more likely to be terminated than non-acquired drugs, especially when the acquiring company already had a highly similar product.
This suggests that drug companies sometimes buy up smaller ones specifically to shut down rival innovation. The study found that these mergers and acquisitions were potentially adversely affecting research and development: if these deals hadn’t taken place, the number of drugs continuing to be developed each year would increase by 5%.
This means that these killer acquisitions may be preventing the development of medical treatments.
“Our research shows that acquisitions can have potentially destructive consequences,” said Dr Cunningham. “Rather than incumbents acquiring nascent technologies to incorporate entrepreneurial innovation and maximise joint surplus, a significant driver may be to kill the threat of creative destruction – where startups’ inventions topple entrenched, less innovative incumbents.”
An example is Mallinckrodt Pharmaceuticals, which had to pay US$100 million (£75 million) in a settlement with the Federal Trade Commission in 2017 for violating US anti-trust laws. Its subsidiary Questcor acquired the US development rights to Synacthen – a rival to its drug Achtar, a hormonal treatment for multiple sclerosis and infantile spasms – in 2013 and promptly discontinued its development for the US market.
“Questcor was punished for eliminating competition pre-emptively,” said Dr Cunningham. “What we see is that an incumbent firm may acquire startups simply to shut down the startup’s projects thereby preventing them from developing products that, if successful, would cannibalise the incumbent’s profits.”
She added: “If incumbent firms use killer acquisitions to pre-empt competitive entrants before they enter the market, market competition will be harmed. Our results on the killer acquisition phenomenon around the FTC review thresholds, which highlights the fact that the phenomenon is more prevalent for acquisitions that are too small to scrutinise, exacerbates this concern.”
“Our findings suggest we may see lower rates of innovation not only because incumbents hesitate to innovate, but also because incumbent firms with market power acquire innovators to pre-empt competition and as a consequence may be inhibiting technological progress.” The incumbents’ desire to kill competition may therefore have costly consequences not just in terms of competition but also for patients.