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Not What the Doctor Ordered

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By Steven Pearlstein
Wednesday, January 28, 2009

Three things are indisputably true about the pharmaceutical industry:

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Over the past decade, there has been significant cross-border consolidation, involving major pharmaceutical companies and promising biotech firms.

Whatever operating efficiencies that consolidation may have generated, none of it was passed on to consumers in the form of lower prices.

During the same period, there has been a steady decline in the number of important new drugs flowing from company research labs.

All of which ought to raise serious questions about why the government's antitrust regulators should approve the latest industry mega-merger in which No. 2 Pfizer proposes to buy No. 11 Wyeth in a deal valued at $68 billion.

The impetus for this merger couldn't have been clearer: In 2011, the patent will expire on Pfizer's blockbuster cholesterol-lowering drug, Lipitor, which now accounts for a quarter of the company's revenue, and there is little in Pfizer's development pipeline to replace it.

Unable to stop the slide in its stock price by creating new drugs, Pfizer has concluded that the next best way to keep shareholders happy is through financial engineering. The company will borrow $22 billion at steep interest rates and pay a 29 percent premium to pick up Wyeth, which has been more successful moving from chemical compounds into biotech products and has a few high-potential products in development.

As they always do, the companies argue that the deal should sail through antitrust review. Using traditional antitrust analysis, that's exactly what would happen. The two companies have few, if any, overlapping products and the combination is expected to generate $4 billion in savings over the next three years. Even after the merger, there will be at least 10 large global players in the industry.

But pharmaceuticals is an industry that doesn't lend itself to traditional market analysis. Because the bulk of profits in the industry come from temporary monopolies -- government-granted patents -- the current marketplace is not where the important competition takes place. Rather, the real rivalry takes place "upstream," as companies compete to innovate, either by developing medicines in their labs or by buying up promising patents and biotech start-ups. And in that "market for innovation," it is hard to see how further consolidation would be good for consumers.

It is important to remember that, like many industries, the pharmaceutical industry divides itself into sub-markets -- cancer drugs, heart drugs, painkillers, vaccines -- and that because not all companies compete in all markets, there are only a few players in each. Eliminating one of the global players, therefore, risks reducing to a handful the number of players in each sub-market.

It is also important to remember that this is an industry that deserves to be treated with deep suspicion by antitrust regulators because of its congenital distaste for competition.

It is an industry that spends lavishly on lawyers and lobbyists to protect and extend its patents and throw up endless challenges to approvals of competitive drugs.


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