Mergers and Innovation in the Pharmaceutical Industry

UCL Centre for Law, Economics and Society presents

Mergers and Innovation in the Pharmaceutical Industry

by William S. Comanor (University of California)
chaired by Dr Ioannis Lianos (UCL)

on Monday 12 November 2012
from 4.30 - 5.30pm

About the talk:
The pharmaceutical industry has encountered a period of dramatic structural change. The first manifestation has been a productivity shock as the number of new molecular entities approved for introduction into the United States market between 1970 and 2010 grew only slightly despite an increase in inflation-adjusted research and development expenditures at a rate of roughly seven percent per year. As a result, the R&D cost of an average new molecule has skyrocketed -- from roughly $40 million at year 2000 price levels in clinical testing costs alone for drugs introduced during the 1980s to $280 million for 1990s drugs, and even more recently. This result has occurred despite the emergence of radically new means to discover candidate molecules -- DNA analysis combined with gene splicing -- and the growth of a new biotech industry oriented around those techniques. Third, because of the expiration of key patents without commensurate replacement, legal changes, and insurance mandates, generic fulfillment of prescriptions has risen from 17 percent in 1980 and 30 percent in 1990 to upwards of 70 percent by number in 2009. Post-patent-expiration price competition has become more intense, compelling main-line drug companies either to innovate or fade away. Fourth, and not unrelated to these trends, the traditional pharmaceutical industry has experienced a wave of mergers, causing the disappearance of many companies that once were at or near the industry's innovative vanguard.

While industry leaders explain their mergers as a response to these shocks and a partial solution to the declining productivity problem, this paper advances the reverse hypothesis: that instead of enhancing R&D productivity, the merger wave has jeopardized it. Our central thesis emphasizes the uncertainties inevitably encountered in new drug discovery and development and the role of "parallel paths" -- i.e., the pursuit of multiple approaches to solving any given medical problem -- in coping with those uncertainties.

About the speaker:
William S. Comanor is Professor of Economics at the University of California, Santa Barbara (UCSB), and also Professor of Health Services in the UCLA School of Public Health. At UCLA, he serves as Director of the UCLA Research Program in Pharmaceutical Economics and Policy and directs a seminar on pharmaceutical economics. At UCSB, he is Director of the MA Program in Economics and regularly teaches a course in Antitrust Economics. He received his Ph.D. in economics from Harvard University and was a post-doctoral fellow at the London School of Economics. Prior to joining the faculty at the University of California, he was on the faculty of both Harvard and Stanford Universities. He has authored and edited 5 books and over 100 professional articles in economics; and was designated a Distinguished Fellow of the Industrial Organization Society in 2003.

In addition to his academic positions, Dr. Comanor has served twice with the federal antitrust enforcement agencies in Washington, DC. He served as Special Economic Assistant to the head of the Antitrust Division, U.S. Department of Justice in 1965-66, and also as Chief Economist and Director of the Bureau of Economics, U.S. Federal Trade Commission from 1978 to 1980.