Eller College Finance Professor Studies Association Between Pharmaceutical Mergers and Drug Price Increases
Sept. 22, 2020
Tucson, Ariz. (Sept. 22, 2020) In 2019, Alice Bonaime, Philip Rhoads Fellow and associate professor of finance in the University of Arizona Eller College of Management, along with Emma Wang ’20 PhD, received a grant from the Center for Management Innovations in Healthcare to research the net effect that pharmaceutical mergers have on both price and innovation in the industry.
Their main finding? Prices go up while innovation stays the same.
After obtaining comprehensive drug price data from the National Average Drug Acquisition Cost (NADAC) survey that was conducted for the Centers for Medicare and Medicaid Services (CMS), Bonaime and Wang found that when pharmaceutical companies merge, drug prices go up 2.4-3.5 percent. At the same time, although funding innovation is a common justification for drug price increases, there is no evidence companies develop more new drugs after merging.
So who’s really benefitting from these mergers? The study finds stock prices of acquiring firms jump 1.5 percent on average around merger announcements, even more if the acquirer and target produce similar types of drugs. It therefore appears these deals benefit company shareholders at the expense of the consumers.
Before any merger happens, certain conditions need to be met—the Federal Trade Commission and Department of Justice must approve the mergers before they pass.
Some of the regulations include how long a company would maintain higher prices before a competitor comes in and prices them out. If it takes more than two years for a third party to move in, then the merger should not be approved.
“Understanding the nature of competitive forces in this industry provides insights into how to better regulate this important industry and contain drug prices,” says Bonaime.
The other regulation is that the price increase cannot exceed 5 percent.
“Our findings therefore inform policy around drug pricing by proposing careful antitrust enforcement as one potential remedy for rising drug prices,” says Bonaime. “Even so, the welfare costs from higher drug prices associated with these mergers should be weighed against their benefits to shareholders as well as the costs associated with increasing enforcement.”
Bonaime and Wang’s research continues to dive deeper into how pharmaceutical mergers “generate significant shareholder value, but fail to spur meaningful innovation,” says Bonaime.