“Merger mania is gripping the global pharmaceutical industry” scream the headlines. Pfizer is buying Wyeth, Roche is buying Genentech, Merck is buying Schering-Plough, Gilead is buying CV Therapeutics, and GlaxoSmithKline is rumored to be considering purchasing Allergan.
The best way to understand all these pharmaceutical mega-mergers is to recognize an industry battening down the hatches against the coming tsunami of harmful government policies that are aligning against the innovative pharmaceutical industry.
The first is the Obama administration’s push for health care “reform.” The pharmaceutical industry has long been the scapegoat for high health care costs, despite the fact that drugs are responsible for only about 10 percent of all health care costs, and its growth rate is down to 4.9 percent, the lowest since 1963. Arguably, in making it possible to treat illness with pills rather than costly surgery and hospitalization, pharmaceuticals SAVE health care dollars. But that hasn’t stopped politicians from demagoging an easy target.
One predictable outcome of health care reform will be either explicit or implicit price controls, such as “allowing the government to negotiate prices” for participants in Medicare Part D. Governments, of course, DON’T negotiate—they dictate, as the financial services industry is learning today.
Already funded this year is a new government agency devoted to “comparative effectiveness” studies. Everywhere comparative effectiveness has been implemented, but most notably in the U.K., the result has been restrictions on patient access to the latest and best drugs as a means of rationing care. It obviously discourages drug innovation if the government won’t let people have them.
Yet another factor is patent reform, which congressional committees considered today. While there are legitimate issues driving changes to our patent system, all analysts recognize that if anything resembling the patent reform legislation currently before Congress becomes law, the net effect will be negative for the pharmaceutical industry’s need for strong patent rights as a way of funding and incentivizing research and innovation.
In sum, if government policy continues to move in this direction, the future climate for pharmaceutical innovation is negative, and the companies are reacting accordingly. In the near term, that’s bad for the newly redundant employees at merged companies. But, in the long term, the real opportunity cost of the government’s policies are you, me, and people around the world who will suffer and die from diseases that might have been cured had government policy encouraged, rather than discouraged, pharmaceutical innovation.