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Three Questions

Three Questions: Prof. Florian Ederer on ‘Killer Acquisitions’

A recent lawsuit alleged that a billionaire investor bought the rights to a new drug just to eliminate a potential competitor, drawing attention to so-called “catch-and-kill” acquisitions. Research from Yale’s Florian Ederer and Song Ma, along with coauthor Colleen Cunningham, investigates how such acquisitions may blunt innovation and ultimately be harmful to patients. We asked Ederer to explain why a catch and kill merger can be damaging and what to do about the phenomenon.

A bear trap with a pill bottle on the trigger

Patrick Soon-Shiong has been accused of buying a drug in order to stop a potential competitor. How widespread is this kind of thing in the pharmaceutical industry?

Patrick Soon-Shiong, the billionaire biotech investor, has been accused of “catching and killing” the drug Cynviloq to stop its progression to market. Cynviloq is a slightly improved version of the blockbuster chemotherapy drug Abraxane that would have competed with Abraxane, produced by Celgene, where Soon-Shiong was the largest shareholder. I have no knowledge of the underlying facts in this case, but the allegations are consistent with a pattern that my collaborators and I have termed “killer acquisitions.” My research with Colleen Cunningham (LBS) and Song Ma (Yale SOM) documents that such killer acquisitions in which incumbent firms acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition, are quite pervasive in the pharmaceutical industry. According to our most conservative estimates, almost 6% of all acquisitions of drug projects in development are killer acquisitions. That’s about 50 killer acquisitions per year.

The lawsuit claims that this drug would have saved patients, hospitals, and the government more than a billion dollars. Besides cost, how else does “catch and kill” affect patients?

Patients are hurt by killer acquisitions in several ways. First, because killer acquisitions reduce competition, prices charged to hospitals and patients are higher. This is the most important effect in this particular case because the two drugs (Cynviloq and Abraxane) are almost identical. Second, in many other cases, the target of a killer acquisition would offer additional variety (e.g., greater effectiveness, fewer side effects…) that would benefit consumers if the development of the drug was not halted after an acquisition. Third, killer acquisitions may also distort the direction of new drug development. Increased takeover activity and killer acquisitions by incumbents may spur innovation of very similar (so-called “me-too”) drugs at the expense of the origination of truly novel treatments.

Do you think there should be consequences for killer acquisitions?

There already are heavy fines and penalties for violating U.S. antitrust laws, which should deter killer acquisitions. However, one of the most interesting findings of our work is that these acquisitions disproportionately occur just below thresholds for antitrust scrutiny. In many cases, these acquisitions do not trigger FTC notification requirements for pre-merger review. In related research, Tom Wollmann (Chicago Booth) has shown that such “stealth consolidation” may have large anti-competitive effects particularly in segmented industries. As a result, the best way to rein in anti-competitive market consolidation may simply involve taking a closer look at transactions that currently avoid antitrust scrutiny.

Department: Three Questions