A new wave of pharmaceutical industry mergers may be on the horizon, driven in part by the $1.3 trillion in overseas cash that U.S. corporations currently hold. If policymakers provide a tax holiday on repatriation of these funds, some experts say that U.S. pharmaceutical companies would be flush with cash and could likely spend a meaningful portion of this windfall on mergers.
While big mergers could have many impacts — on employment at home and abroad, competition, and drug prices, to name a few — one of the most important would be the effect on research and development productivity and innovation.
Analysts have tackled this topic before. Their work has been of mixed quality and, perhaps not surprisingly, has yielded mixed results. Pundits at the Institute for Competition Economics in Dusseldorf, Germany, for example, claimed last year in a Harvard Business Review article that previous drug company mergers had “substantially” reduced R&D and innovation, not only at the merging firms but at the merging firms’ competitors as well.
Another team, this one from Duke University, the University of Toronto, and Baruch College/CUNY, reached a different conclusion with its data-driven approach. The team’s review of hundreds of mergers and acquisitions from 1985 to 2009, published in Loyola University Chicago Law Journal, indicated that the correlation between merger and acquisition activity and FDA approvals of new drugs is “moderately positive,” both at an industry level and individual firm level.
Who’s right? Are those in need of new lifesaving drugs harmed by consolidation in the pharmaceutical industry, or are they helped?
We believe that one of the main problems with much of the previous research in this area has been an over-reliance on anecdotal reporting rather than employing systematic data analysis. Even when such analysis has been done, researchers have sometimes focused on research and development spending or patent activity as benchmarks of success, as if these metrics are indicators of — or even synonymous with — actual product innovation.
But they aren’t necessarily the same. Spending is just an input, measured in dollars or some other currency. The same is true with patents. There is a long distance between the laboratory where new compounds are discovered and the corner drugstore where medicines are purchased.
We sought to address this uncertainty by focusing on research and development productivity: the amount of innovation created as measured by the value of new FDA-approved compounds reaching the pharmacy, relative to input. After all, what matters to patients is the creation of quality medicines, not how much a company spends on research and development or the number of patent applications it files.
To determine whether mega-mergers benefit patients, we looked at what happened to research and development productivity in all of the major mergers going back to 2001, including the last big wave in 2009 that brought together Merck & Co. and Schering-Plough, Pfizer (PFE) and Wyeth, and Roche (RHHBY) and Genentech.
As expected, the results varied from year to year and company to company. But our report in Drug Discovery Today showed that mergers generally appeared to drive productivity up — and did so significantly.
Why might this be so? While mergers undoubtedly bring disruption to research and development, they also can be catalysts for addressing the fatal flaw of most research and development enterprises: the high cost of failure.
More than 90 percent of pharmaceutical industry spending on research and development goes into projects that never reach the market. Any intervention that helps reduce this waste can be a real boon to productivity.
There are really only two ways to fix the industry’s cost-of-failure problem: 1) start with better science, so you have fewer failures; and 2) employ better decision-making about when to stop projects so you can reallocate that capital to more-promising opportunities.
Mergers can help with both of these dimensions. They bring the best combined science of the merged organizations to bear on the difficult questions of which pathways, modalities, and molecules to pursue. Mergers also trigger reviews that drive the leadership of the new company to take a fresh look at research and development. These reviews can offer the leadership an opportunity to soberly and objectively reassess its scientific hypotheses in each disease area and reevaluate the combined research and development portfolio, eliminating those projects least likely to produce advances in treatment.
This spring cleaning can have a cathartic effect. The combination of the two factors — fresh science and a fresh look at the portfolio — can create a renewed research and development enterprise better able to bring new medicines to patients.
Our analysis doesn’t suggest that all mergers are good. Even from the perspective of research and development productivity, some mergers in our study appeared to have depressed the flow of new medicines to patients by slowing down or stopping promising projects. And there are considerations beyond the scope of our analysis, such as jobs or drug prices, that may be equally valid inputs to views about mergers and acquisitions.
Overall, however, the evidence indicates that large mergers increase, not decrease, the productivity of pharmaceutical research and development — good news for those in need of new therapies.
Michael S. Ringel is a Boston-based senior partner of The Boston Consulting Group and global leader of its research and product development topic. Michael K. Choy is a New Jersey-based partner at BCG. Both work in the firm’s health care practice area, which funded the research for this article.