“Killer” Acquisitions: We Come to Bury, Not Boost, Innovation
- Killer acquisitions” happen when larger firms acquire smaller ones and discontinue projects under development that may eventually become competitive.
- More than six percent of all acquisitions in the pharmaceutical industry in the U.S. fit this definition.
- If it were not for these types of acquisitions, the number of drugs being developed in the U.S. would increase by five percent a year.
Imagine being dependent on a particular drug – or having a child dependent on it – and watching its price inflate by 97,000 percent over an 18-year period. That’s exactly what happened to many users of Acthar, a drug designed to treat a rare form of epilepsy and other serious immune-related illnesses; they watched as a vial of the drug rose from $40 in 2001 to $39,000 in 2018.
Here’s how it happened: Acthar is made by Questcor, a firm that for many years was the leading producer of the adrenocorticotropic hormone drugs used to treat specialized conditions. In the mid-2000s, a competitor began developing a synthetic version for marketing in the U.S.. But it went nowhere: Questcor acquired the development rights to the synthetic alternative and shut down U.S. development. The price of Acthar continued to soar.
Colleen Cunningham, assistant professor of strategy and entrepreneurship at London Business School, says this episode highlights the features of “killer acquisitions” – a pre-emptive move by a large firm to swiftly snuff out promising innovation that might ultimately become competition.
Cunningham studied the phenomenon with colleagues Florian Ederer and Song Ma, both of Yale School of Management. She reported on their study at the Organizational Economics Conference held recently at Smith School of Business.
Snuffing Out Innovation
Their study looked at more than 35,000 drug projects in the U.S. – from their origins through development — over a 21-year period. The data included clinical trials, drug patents, and other development-related information.
They found that drugs under development were less likely to be further developed if they were acquired by companies that had overlapping projects.
Overall, in the case of pharmaceuticals, killer acquisitions account for six percent of all acquisitions, or approximately 48 out of every 758. The cost in lost innovation is substantial: If it were not for killer acquisitions, the number of drugs being developed in the U.S. on an annual basis would increase by five percent.
“What this paper finds is that incumbents sometimes acquire entrepreneurial targets and terminate innovation,” says Cunningham, “particularly when products overlap and there is little competition.”
Evading Regulatory Review
The acquirers seem to be shrewdly avoiding regulatory review. The researchers found evidence that acquiring firms make their move when the acquisition is exempt from pre-merger review by the Federal Trade Commission (FTC). Typically, acquisitions in this industry below US$200 million are not investigated.
“These review exemptions can result in stealth consolidation: anticompetitive acquisitions whose small size enables them to escape regulatory scrutiny but whose cumulative eﬀect is large,” the researchers write in their paper.
The prevailing view of technology-based acquisitions is that the acquiring firm aims to incorporate and further develop the innovation of the start-up firm. This research reminds us that many acquisitions have the opposite aim — in the words of the researchers, “creator destruction” to ward off the threat of “creative destruction.”
While the dominant firms may appear to engage in killer acquisitions at consumers’ expense, sometimes they are held to account. In Questcor’s case, the firm was punished by FTC regulators for preemptively eliminating competition, with its parent company (Mallinckrodt, which acquired Questcor in 2014) ultimately agreeing to pay a $100 million fine.