Is industry consolidation stifling pharma innovation?

By Melissa Fassbender contact

- Last updated on GMT

(Image: iStock/choness)
(Image: iStock/choness)

Related tags: Mergers and acquisitions

In a year of “merger mania,” researchers suggest the elimination of competition is reducing innovation in the pharmaceutical industry.

Earlier this year, PwC told us​ that this so-called “merger mania​” could leave strategic contract research organizations (CROs) vulnerable in 2016. In fact, mergers topped the research institute’s annual list of top health industry issues.

Over the past couple years we’ve seen a tremendous amount of acquisition​,” said James Prutow, advisory partner, PcW. And as M&A increases, researchers at the Düsseldorf Institute for Competition Economics (DICE), Germany, Joel Stiebale and Justus Haucap, suggest​ innovation does the opposite.

According to the researchers, within the sample of pharmaceutical companies, innovation activities – which were measured by patents and R&D expenditures – decline substantially, both for the merged entity and among its non-merging competitors after M&As.

While a reduction in innovation of merging firms could in principle be due to efficient elimination of duplicated R&D, our results for competitors indicate that innovation declines due to a reduction of competition induced by mergers​,” Stiebale told us.

For the researchers, these results raise concerns about the negative consequences for patients in the long run, given the rate of M&A in the industry.

Stiebale and Haucap explained that the results also have important implications for competition authorities that have approved all these M&As. “Competition authorities aim to block mergers that are expected to increase prices or reduce innovation outcomes​,” said Stiebale.

And the issue isn’t just among big pharma, as the researchers found innovation declines after mergers with target firms “that have relatively small market shares in the relevant product markets​.”

Stiebale explained that because of the small market share, such mergers raise “little concerns in terms of price effects, indicating that regulators have underestimated negative consequences on innovation.​”

The researchers also said the results are interesting for managers aiming to undertake mergers, as “it is likelythat innovation outcomes will gain importance in competition authorities' decisions in the future​,” said Stiebale.

This is not only case for mergers that are expected to reduce R&D but also for mergers in which managers can convince the authorities that there will be post-merger efficiency gains in innovation​,” he added.

Research: Innovation Suffers When Drug Companies Merge
 by Justus Haucap in HBR Blog Network​ on 2016-08-03 12:05:51

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