Pharma mergers might boost short-term profits. But long-term value? Think again, because everyone knows that big mergers hurt innovation. That’s the claim, at least, repeated by critics every time a major pharma combo hits the news.
Problem is, those complaints tend to be based on anecdotal evidence, from scientists who’ve seen their work hit the slough of despond as one big R&D operation integrated with another. But now, the Harvard Business Review has some empirical evidence.
Two researchers from the Institute for Competition Economics in Germany set out to address drug mergers from an antitrust perspective. All well and good for competition watchdogs to look at overlaps in companies’ marketed products and pipelines, they figured. What about the drugs that might have been developed, but weren’t?
The researchers analyzed 65 pharma deals, comparing the participating companies before and after they combined. They also analyzed companies that were developing drugs in similar therapeutic areas, but hadn’t merged.
“Our results very clearly show that R&D and patenting within the merged entity decline substantially after a merger, compared to the same activity in both companies beforehand,” the authors, Justus Haucap and Joel Stiebale, wrote in the HBR.
That’s to be expected, the authors posit, because merger-minded companies often target rivals with similar pipeline assets, to gain strength in particular drug markets. But here’s what else the authors found: “On average, patenting and R&D expenditures of non-merging competitors also fell--by more than 20%--within four years after a merger. Therefore, pharmaceutical mergers seem to substantially reduce innovation activities in the relevant market as a whole."
Haucap and Stiebale’s paper includes patent counts and R&D spending numbers, and they conclude that “innovation output” by the merged company decreases, on average, by more than 30%. Among the merged company’s competitors, output declined by 7%, on average, they found.
The men’s research “is the first to show that there are follow-on effects across the industry,” wrote Derek Lowe at In The Pipeline, which has sliced and diced pharma M&A for years.
“Inside the merged companies, there’s a great deal of disruption, as many readers here can testify,” Lowe wrote. “But across the industry as a whole, things get less competitive the fewer players there are and the fewer the approaches being tried.”
As for the business effects? Profitability increased post-merger, for the merged companies and for their competitors, too. For the merged company, the profits may depend on cost cuts; in integrating, the post-merger company “decreases its scale” compared to the two merger partners, pre-acquisition. For “non-merging rivals,” profits tended to grow on increased sales.
“What we have, then, is probably a perverse incentive--companies can improve their numbers by doing mergers and acquisitions, but that very activity hurts their long-term prospects and those of the entire industry,” Lowe observes.
McKinsey & Co. analysts emphasized the “shareholder value” effects of megamergers in a 2014 study, and they found that, reductively speaking, the deals worked. Lowe picked apart that research, as did ex-Pfizer R&D chief John LaMattina, who wrote up his own rebuttal in Forbes, enumerating the many ways repeated megamergers sap the life out of research, as focus and energy go into logistical decisions, layoff worries, and the like--and away from science.
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