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Drug companies keep merging. Why that's bad for consumers and innovation.

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The Federal Trade Commission's acting chairwoman, Rebecca Kelly Slaughter, recently announced that the agency would collaborate with regulators in Canada and the European Union to review its guidelines for evaluating drug company mergers. This move may signal more active policing of consolidation in the pharmaceutical industry. For prescription drug users and society at large, this is a welcome — and long overdue — change, one with the potential to spur innovation and offer more treatment options to Americans.

In the past few decades, three waves of mergers have substantially increased concentration in the pharmaceutical industry. The first wave occurred from approximately 1988 to 1991, with the second following between approximately 1996 and 2002. The third began in 2010 and remains ongoing.

The result of these merger waves has been a dramatically consolidated industry. In 1987, the combined market share of the eight largest drug companies stood at a relatively low 36%. By the conclusion of the first merger wave, it had grown to 42%; by 2012, in the wake of the second merger wave, the ratio had climbed to 53%. All told, between 1995 and 2015, the 60 leading pharmaceutical companies merged to only 10.

As a result, now only a handful of manufacturers are responsible for sourcing the vast majority of prescription drugs: Just four companies, for example, produced more than 50% of all generic drugs in 2017.

This dramatic consolidation has remade the pharmaceutical industry. Before 1988, a robust cohort of drug manufacturers often competed across multiple therapeutic areas. This competition encouraged exploring different possible approaches for treating the same disease state as well as treatments for a wider range of health concerns, increasing the potential for innovations that might improve lives.

Although this marketplace was better for innovation, drug companies were drawn to merging because of the lure of increased market power, improved synergies, larger economies of scale and more diverse product portfolios.

Abrupt changes to the environment surrounding the pharmaceutical industry also encouraged consolidation. In the late 1980s, widespread deregulation at both the state and federal level may have facilitated an uptick in mergers, particularly as companies with expiring drug patents sought to make up for their revenue losses by acquiring other profitable drugs.

The second merger wave beginning around 1996 can be traced in part to another external shock, as globalization spurred firms to join forces to reach more potential markets. Similar to the first merger wave, "patent cliffs," in which many of a company's drugs were set to lose their lucrative patent monopoly around the same time, also helped push firms to combine forces.

But the newly consolidated pharmaceutical industry actually stifled innovation. In the period following merger waves one and two, the industry generated fewer new molecular entities each year compared to pre-merger levels. Merged drug companies also spent proportionally less on research than their non-merged competitors.

Consolidation also enabled drugmakers to directly quell competition through what were known as "killer acquisitions," in which they acquired innovative peers solely to stop potential competition. Moreover, with the assistance of pharmacy benefits managers, newly giant pharmaceutical firms could leverage their dominant position with one type of drug to suppress competitors for another one of their drugs, or they could use the combined power of multiple drugs to shore up a waning monopoly position. Both of these practices could block cheaper drug competitors from reaching patients, inhibiting access and affordability.

In short, consumers were the losers from the two waves of drug company mergers. They confronted higher prices and fewer choices — and saw companies exploring fewer paths that might produce breakthroughs. To make matters worse, around 2010, another wave of mergers began.

This wave is ongoing and looks quite different from the previous two, although its causes are familiar. Again, deregulation is a prominent factor: In 2010, the FTC raised the Herfindahl-Hirschman Index thresholds, the index used to trigger antitrust investigations, a move some saw as a mandate for consolidation. Moreover, interest rates have remained at or near 0% in the decade since the 2008 financial crisis, providing a favorable environment for the lending that facilitates mergers and acquisitions.

As with the earlier waves, giant drug companies have merged. But in a new twist, in recent years, most consolidation has featured bigger players acquiring smaller start-ups. The difference reflects a dramatic shift in the structure of the pharmaceutical industry. Faced with stagnating research productivity, large drugmakers now rely on outsourcing their new drug research to start-ups and other small pharmaceutical firms.

Increasingly, these smaller players specialize in high-risk research and early drug development, with larger firms then gobbling them up and navigating the FDA's regulatory process. For example, 63% of all new molecular entities in 2018 came from smaller biopharma firms, compared with just 31% in 2009.

Unlike its predecessors, the third wave has coincided with an increase in new molecular entities. Yet this isn't all positive news for consumers. Unfortunately, all new drugs are not created equal. Modern drug innovation has skewed increasingly toward "orphan drugs" and other rare disease treatments intended for diseases affecting fewer than 200,000. For example, nearly 60% of new drugs received an orphan drug designation in 2018, compared to a mere 10% in 1998.

This means that although more drugs may be gaining approval, these new drugs increasingly treat splinter groups, rather than addressing disease states and health concerns that commonly affect large portions of the population, such as heart disease, diabetes, reproductive health and the need for new antibiotics. Rather than offering new hope to the millions of Americans afflicted by these common but sometimes debilitating conditions, the system's incentives push innovation into the more lucrative market for orphan drugs.

Moreover, in the current industry structure, a small clique of powerful drug manufacturers are responsible for shuttling new drugs through late-stage regulatory processes, leaving innovators with little choice other than acquisition by or partnership with an entrenched firm. This, too, can be problematic for consumers. The public regulatory process for drug development is rooted in concerns for patient safety. But when large pharmaceutical companies serve as a secondary gatekeeper to FDA approval, they have every financial incentive to focus on maintaining their market position, not safeguarding the public interest.

The end result of now three waves of pharmaceutical consolidation is decreased or diverted new drug innovation, fewer treatment options and higher prices. Consumers have lost as firms fuse together to bolster the bottom line.

The recent FTC announcement is an encouraging indication that regulators finally may be considering the repercussions of drug mergers, but the proof will be in the resulting policy. Changes to the review and oversight process can only come if society recognizes that too much consolidation stifles innovation. In addition, more small or midsize companies bringing their drugs to market can offer an inspiring call to action for larger firms to bolster their own efforts. Otherwise, for Big Pharma, the famous expression gets a corollary: Why beat your smaller competitors; they have no choice but to join you.

Robin Feldman is author of "Drugs, Money, & Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices" and the article "The Cancer Curse: Regulatory Failure by Success." This piece was written for The Washington Post.