Mergers, Prices, and Innovation: Lessons from the Pharmaceutical Industry
The significant surge in pharmaceutical mergers and acquisitions (M&A), averaging a 50% year-to-year increase over the last decade, has drawn concerns regarding its potential impact on consumers. Claims made by pharmaceutical companies suggest M&A, by increasing synergies, will cause innovation to increase and the firm to become more efficient, passing on lower prices to consumers. However, regulators worry firms, in gaining market power through M&A, will raise drug prices and have less incentive to innovate. The prior literature has not yet come to a consensus on how mergers and acquisitions will impact these outcomes. This paper empirically assesses M&A's effects, employing an event study design and difference-in-differences analysis along with new, more comprehensive data on innovation and net prices. I show that, upon an M&A event, firms increase research and development (R&D) spending, decrease filed patents, and do not experience significant changes in the the number of drugs passing through clinical trials compared to pre-M&A levels. Further, I show decreases in patents come from primary patents on new technologies, rather than secondary patents, suggesting that firms use M&A to substitute their internal R&D by acquiring new technologies in development from smaller firms. They then increase R&D spending to support the progression of these assets through clinical trials. However, despite financial backing, I find firms are largely unsuccessful in advancing newly acquired drugs through development. I also find, after M&A activity, net drug prices increase by 19%. These increases occur both in mergers and acquisitions where targets and acquirers have overlapping and non-overlapping therapeutic area portfolios, suggesting multiple mechanisms for price increases. Ultimately, these findings emphasize that M&A leaves consumers at a net loss, with higher drug prices and a pharmaceutical industry that is less efficient at producing the innovation that defines its business model. Therefore, it is critical that regulators consider the impact consolidation has on innovation, in addition to traditional measures like prices, when evaluating whether mergers and acquisitions are ultimately beneficial for consumers.
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