Mergers that Matter

M&A activity is intense in the pharmaceutical industry. These include large companies buying small innovative upstream firms, but also include acquisitions of companies that already own FDA-approved drugs. 

Policymakers have suggested that the frequency of M&A and the general trends in prescription drug prices are connected. In particular, there are concerns that mergers that consolidate portfolios that do not have therapeutic market overlap can both evade regulatory scrutiny and contribute to increased prices.

At a high level, we find that about 1/3 of the marketed drugs in our sample are transacted at some point. Most are transferred into portfolios that do not contain a therapeutic substitute ("same market"). There is significant heterogeneity in deals: there are some large mergers (e.g., Pfizer-Wyeth) but also significant large-to-small and small-to-large transfers of portfolios and individual drugs.

Although infrequent, we show that mergers that consolidate drugs in the same therapeutic area and evade regulatory scrutiny (HSR thresholds) lead to large price effects (~88% increase). These deals are frequently structured as U.S. marketing rights licenses, which likely helps keep the transaction dollar value below HSR review thresholds. 

Drug markets have a distinctive market structure, but the same logic from standard merger models applies: i) net prices reflect companies bidding for preferred formulary position; ii) if you own substitutable drugs, then higher cost sharing or restrictions aren't as painful because some drugs are diverted within your portfolio. 

Consistent with this model, we also find that the overlapping drugs exhibit a decrease in coverage generosity after the merger event.

We find much weaker evidence that mergers that don't create product market overlap are generating large price effects on average.

Digging a little deeper using the theories on portfolio effects, we find some evidence that acquiring a blockbuster drug helps companies negotiate better prices for their existing drugs (~19 percent increase). Acquisitions of a large number of drugs also seems to help (~28 percent increase). However, these cases are rare.

To complement the price analysis, we use detailed insurance plan data to show that full exclusion of a company's product portfolio is rare (which would be a sign that negotiations are happening at the portfolio level). There is some evidence of infrequent tying across pairs of products owned by the same company.