Consolidation and Competition in the Pharmaceutical Industry

Kettler, H.

Monograph
September 2001

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A number of potentially important structural developments are taking place in the pharmaceutical industry. On the one hand, we are witnessing a large number of mergers and acquisitions between companies across countries, suggesting a move towards a small number of large global players. On the other hand, a large number of new companies have entered in the industry over the past 15 years. Many are biotechnology companies that specialise in research and/or developing technologies for the discovery and pre-clinical stages of the research and development (R&D) process. Many new contract sales organisations (CSO) and contract research organisations (CRO) have also been created, a number with global reach, to provide specialised services to the large pharmaceutical companies.

Empirical analyses of these trends highlight a series of important questions of particular interest to industrial economists and policy makers. What changes in the industry are motivating the major companies to become larger but at the same time allowing new groups of small, specialised companies to flourish? Are the global leaders and the small specialist biotechs rivals or collaborators? Is there a move away from the traditional vertically integrated model of R&D towards something new? What role do scale and scope play in this move? Finally, do policy makers need to rethink how they assess competitive conditions in the pharmaceutical industry?

On October 16th, 2000, the Office of Health Economics hosted a conference entitled 'Consolidation and Competition in the Pharmaceutical Industry' which set out to debate these questions, drawing on the expertise of representatives from academia, industry, investors and government. This volume of papers draws on the presentations made at that conference. The participants presented a broad range of information and opinions but a number of key themes did emerge.

There was a general consensus that the traditional large pharmaceutical companies are undergoing a transformation but to what end was less clear. To explain the move towards 'global oligopoly', Galambos focuses on the major changes in the innovation process over time, while Walton identifies the growth in both R&D and marketing costs relative to the growth in markets as a key motivator for companies to seek larger scale. Grabowski shows that returns from new pharmaceuticals are highly skewed, with only 30 percent of products launched in the early 1980s recovering average R&D costs. The skewness in net present value for products launched in the 1990s may be even greater given estimates of increases in R&D costs. Grabowski suggests that only large companies can afford the investment needed to bring innovative blockbusters to market.

It is unclear, however, whether larger companies are more effective than smaller ones at R&D. Galambos argues in favour of important scale and scope economies in R&D but Walton's empirical analysis found significant economies only in marketing.

At the same time as larger pharmaceutical companies are merging, they are also increasing their expenditure and involvement with biotechnology and other specialised research companies by way of alliances and licence deals. Kettler analyses the nature and the implications for R&D of the growing interactions between these segments. She finishes by investigating whether the increasing amounts spent on external partnerships represent a temporary strategy by major companies, undertaken while they catch up with the new technologies and fill temporary gaps in their R&D pipelines. This is a position supported by Galambos. Or does the increase in external partnerships represent a real shift towards a new R&D model?

Pammolli uses data and analysis of the alliances and networks between universities, major companies, and biotechs to show that there are key performance advantages in conducting R&D via a network rather than solely in-house. Kay also predicts a substantive transformation where technological developments mean that large companies increasingly act in the manner of book publishers: coordinating the process, financing production and marketing the output; with most of the value added coming from the 'originators' — the discovery companies.

In the final three chapters, competition policies in the US and EU are explored. In addition to assessing the competitive implications of traditional merger and acquisition activity, both Levy and Langeheine point out that regulators on both sides of the Atlantic are increasingly having to tackle competitive issues relating to new types of research collaborations and sales arrangements. Assessing the impact on competition of innovation is becoming a key policy issue alongside the traditional concern with competition between existing products in final markets. Yarrow makes another key point, which is that the need for the additional layers of sector specific regulations in pharmaceuticals that exist in most EU countries is not proven. It may well be that competition policy on its own provides a comprehensive framework for the regulation of new and existing activity within the sector.