Pharmaceutical Mergers: Do We Have The Right Cure?

Abstract

Few federal agencies wield tools more powerful than the Federal Trade Commission’s authority to review—and deny—proposed mergers between companies. This authority is powerful for a reason: Large mergers can be uniquely harmful to the United States economy, potentially reducing competition, undercutting consumer choice, and inflating prices. 

The pharmaceutical industry is particularly sensitive to merger harms, given the limited number of competitors and the inelasticity of demand for prescription drugs. As a result, when pharmaceutical companies seek to merge, the FTC often requires that one of the companies divest ownership of certain drugs not yet on the market—so-called “pipeline” drugs––to a third party.

FTC evaluations deem the pipeline divestiture program a complete success. But does it really work? As a client once said when asked this question, “It depends on what you mean by ‘it’ and ‘work.’” In prior research, the FTC determined the success of a divestiture based solely on whether it occurred––rather than whether it meaningfully preserved competition post-merger. Our first-of-its-kind study reveals that pipeline divestitures have not in fact worked. Using conservative measures, our analysis shows that 81% of divested pipeline products fail to attain even a 1% share of their relevant markets. 

But all is not lost: With a few key changes, drug divestiture can indeed achieve its intended effects. We recommend that the FTC require either a “crown jewel divestiture” (selling the on-market product, not the pipeline product) or a “skin in the game divestiture” (if the pipeline product fails, the company divests its on-market product).