The Novartis-Glaxo-Lilly Swap’s Downside: Less Research

The asset shuffling announced today by three of the world’s biggest pharmaceutical companies makes sense at a time when drugmakers, facing a declining number of patent protections and soaring development costs, want to focus on their most profitable product lines. But consolidation could bode ill for the rest of us in two ways: Less competition may mean less spending on research to cure disease, and even higher drug prices.

In the three-company deal, Novartis will buy GlaxoSmithKline’s cancer drugs for as much as $16 billion and sell most of its vaccine division to Glaxo for $7.1 billion. Glaxo and Novartis will form a consumer-health joint venture, and Eli Lilly, for its part, will purchase Novartis’s animal-health unit for $5.4 billion. The trio is swapping assets “so that each can specialize in what they’re good at and make it even more profitable,” Ori Hershkovitz, a managing partner at Sphera Funds Management in Tel Aviv, told my colleague Oliver Staley.

By narrowing their focus, however, the companies will inevitably pare R&D spending and decrease scientific and market competition for the next health breakthroughs, says John LaMattina, who spent 30 years as a research scientist at Pfizer, the last three of them as its chief of global R&D. Since leaving the company in 2008, LaMattina says he’s watched Pfizer slash its R&D almost in half—after acquiring Wyeth Pharmaceuticals in 2009—as other drug companies have made similar cuts after mergers. “You will no doubt have fewer people doing cancer research and one fewer competitor in the oncology field” after Novartis swallows up Glaxo’s cancer unit, says LaMattina, a senior partner at PureTech Ventures in Boston.

Academic studies show that innovation clearly declines after drug companies merge, but may revive later, says Ken Getz at the Tufts Center for the Study of Drug Development. A recent Tufts Center study found cycle times for drug development and regulatory approval increase by nine months at companies after a merger, “a pretty substantial amount,” Getz says. An older study, however, shows researchers “hit a groove” again and their productivity recovers about three years after a merger.

Mergers can push up prices because competition declines, says John Hoadley of Georgetown University’s Health Policy Institute. When there are multiple drugs to treat the same disease, manufacturers negotiate more favorable rates, he says. “To the extent that choices are reduced, there’s less incentive to negotiate on price.”

Drug-company consolidation also hampers access in poor countries, says Tahir Amin, co-founder of the nonprofit group Initiative for Medicines, Access & Knowledge in New York. The race to develop and market antiretroviral drugs to combat HIV infection was instrumental in bringing costs down for sufferers in Africa and elsewhere in the developing world, he says. “If only a few companies can shape the market, it’s left to the few to decide what public health looks like.”

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