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UI study shows drug prices fall after some big pharma mergers

When big pharmaceutical companies merge, the perception is that drug prices rise, but a University of Iowa study finds that’s not always the case.
Study co-author Amrita Nain, a professor of finance at the UI’s Tippie College of Business, says in select situations, merging firms cut costs — and prices — as they may have overlapping products that treat the same medical conditions.
“If you look at companies that sell generic drugs, and about 70-to-80% of prescriptions in the United States are for generic drugs,” Nain says, “so firms that are focusing on these generic drugs that are basically just copying existing drugs after their patents have expired, these drug prices actually decline after a merger.”
If a company has developed a new drug therapy and placed a patent on it, creating a multi-year monopoly on that drug, prices tend to go up if there’s a merger, but Nain says that’s not always true for others that focus on generics.
“Their business model is really different,” Nain says, “They’re focusing on high-volume sales of low-price drugs. It’s a very competitive market, and these firms tend to use mergers as a way of cutting costs, getting more efficiency, and then passing these cost cuts onto prices so they can be more competitive in the generic drug market.”
Nain says prices may fall after a merger that brings reduced overhead in areas like staffing, marketing, research and development, and distribution networks. Still, it depends on the type of company and the type of drug being made.
“If you look at the price of drugs that are manufactured by highly innovative firms, like brand-name drugs or patented drugs, those actually tend to go up in price by about 6.2%,” Nain says, “but if you focus instead on generic drugs, those decline by almost 6%, so it’s almost exactly in the opposite direction by about the same magnitude.”
Nain says the UI study has important implications for policy, especially for anti-trust authorities like the Federal Trade Commission.
“Over the last few years, the FTC has been really aggressive about blocking mergers,” she says. “I would suggest proceeding with caution and that some mergers may actually be beneficial for patients. So look at the difference between the type of drugs they’re selling, instead of saying a blanket ‘no’ to mergers in general.”
One downside to mergers, Nain says, is that there’s a risk of reducing innovation in the pharmaceutical industry. The study finds merged companies that lowered prices saved money by cutting research and development, while also trimming back on the creation of new therapies.