Over the past few decades, the pharmaceutical business has been subjected to a number of significant changes, some of which include an increase in the amount of competition from generics, an increase in the expenses associated with drug development, and an increase in the likelihood of commercial failure. Many pharmaceutical companies are consolidating their operations through mergers and acquisitions (M&A) in order to cut expenses and open up new revenue channels in order to better compete in today's market. Although the implementation of this approach has resulted in an all-time high number of mergers and acquisitions deals in the sector, it has also given rise to concerns regarding the effect that consolidation will have on the rate of innovation. Regulators and researchers usually focus on how mergers and acquisitions will influence competition, but innovation is often disregarded. Recent academic studies, on the other hand, have revealed a negative association between consolidation in the pharmaceutical industry and innovation in the newly amalgamated company. Because of concerns over innovation, legislators in both the United States and Europe are currently examining proposed agricultural mergers.

To address these concerns, innovation analyses should focus on whether consolidation helps firms support aggregate drug innovation in the present ecosystem rather than solely on internal mergers and acquisitions and invention. If the consolidated firms are the only innovators in the area, innovate internally, and have few external sources of innovation, concerns about innovation harm may be relevant. However, in the present ecosystem, such scenarios are rare. Consolidation can free up resources for external innovation and stimulate demand for externally sourced inventions, encouraging biotech and small company innovation. As long as there is enough market competition to force firms to develop in order to maintain profitability and market share, consolidation appears to boost aggregate creativity. Despite the increasing number of M&A deals, the pharmaceutical industry has seen record drug approvals and continued growth in recent years (Shepherd, n.d.).

Joanna Shepherd (2017) analyze that the recent shifts in the pharmaceutical landscape have triggered a surge in mergers and acquisitions, prompting questions about their potential impact on drug innovation. However, as elucidated in this article, such concerns may stem from an outdated perspective on the drug innovation process. While traditional pharmaceutical companies once dominated drug discovery, today, innovation primarily stems from external sources such as biotech firms and smaller entities. Consequently, analyses focused solely on internal R&D fail to capture the broader innovation ecosystem. Instead, a more comprehensive approach is needed to assess whether consolidation fosters a greater demand for external innovation, ultimately enhancing overall drug innovation within the industry.

Toon van der Gronde (2017), in the contemporary healthcare landscape, the escalating costs of prescription medications have ignited widespread concern, surpassing other healthcare expenditures in several disease domains and causing a global scarcity of essential medicines. Conducted against this backdrop, this systematic review by Toon van der Gronde (2017) delves into the intricate web of factors influencing drug pricing, drawing insights from a meticulous analysis of literature retrieved from diverse sources, including Pubmed, Financial Times, New York Times, Wall Street Journal, and the Guardian. The findings underline a seismic shift in drug life cycles, profoundly impacting the dynamics of patent medicine markets, traditionally perceived as a reliable revenue stream for immensely profitable pharmaceutical corporations. Notably, market dysfunctions coupled with a surge in merger and acquisition activities have facilitated unwarranted price hikes even for off-patent drugs. Governments, in response, have endeavored to exert influence over drug prices through interventions and the adoption of Quality-Adjusted Life Years (QALY) measures in healthcare policies, yet frequently grapple with unforeseen repercussions. Against this backdrop, potential short-term policy remedies include patent reform legislation, reference pricing mechanisms, outcome-based pricing strategies, and incentivization schemes for healthcare professionals to prescribe cost-effective medications.

Nevertheless, the efficacy of these measures still needs to be improved due to a shortage of systematic research, leading to a proliferation of ad hoc decisions that inadvertently exacerbate the scarcity of essential drugs. Looking ahead, the evolving landscape poses novel challenges necessitating innovative policy interventions, for which this review provides comprehensive recommendations. In conclusion, the confluence of shifting drug life-cycle dynamics, unintended consequences of patent laws, governmental interventions, and orphan drug programs have cultivated fertile ground for exorbitantly priced medications, highlighting the imperative for regulatory reforms to rein in costs and ensure equitable access to groundbreaking therapeutics.

Basil Achilladelis and Nicholas Antonakis (2001), this empirical and historical study delves into the dynamics of technological innovation (TI) within the pharmaceutical industry, tracing its evolution from the early 19th century to 1990. Based on the assessment of 1736 product innovations (new medicines) commercialized between 1800 and 1990, alongside economic data from pharmaceutical companies spanning 1950 to 1990, the study unfolds within the framework of established macroeconomic theory of technical change. Through empirical and historical evidence, the study identifies the technological, social, and economic drivers propelling TI, explores the relationship between originality and market performance of medicinal innovations, analyzes the diffusion mechanisms leading to the formation of five successive generations of drugs (long waves), delineates the structural transformations prompted by the introduction and advancement of each drug generation, and elucidates the concentration of the innovative segment within a handful of large pharmaceutical companies. These companies sustain robust growth and R&D expenditures through in-house innovation, technological specialization, therapeutic market focus, and strategic mergers and acquisitions both within and outside the pharmaceutical sector. Additionally, the study reveals that the concentration of innovative activity in the pharmaceutical industry is localized predominantly in the USA, UK, Germany, Switzerland, and France, owing to the influence of national environments on the intensity of driving forces for TI.

Consolidation Activity in the Indian Pharmaceutical Sector

The pharmaceutical industry has caught the attention of both policymakers and academics because it is so tied to healthcare and the lives of patients. With the return of the product patent system, rules and operations in the sector have changed a lot in the past few years. When the new patent system was put in place, it made people worry about a lot of important things, like whether or not medications would be affordable for the average person. Since the end of the 1990s, there has been a rush among firms in the sector to merge in order to deal with the problems caused by globalisation. Globally, the pharmaceutical industry has been one of the most concentrated industries. During the merger wave of 2004–2010, chemical sector firms, which include the pharmaceutical sector, accounted for approximately 11 percent of total cross-border sales and 9 percent of total cross-border purchases. In 2009, the respective percentages were 13 and 12 percent (Beena, S., 2013). It accounts for approximately 43 percent of total manufacturing sector sales and 77 percent of total manufacturing sector purchases. Several attempts have been made to quantify the extent of consolidation in the Indian pharmaceutical industry.

According to Basanth (2000), the pharmaceutical business in India was responsible for 5.2% of all mergers and 8.3% of all acquisitions in the industrial sector during the period of 1991–1999. According to Beena, PL (2008), a considerable number of mergers and acquisitions have taken place in the pharmaceutical and medical industries in India. A recent study that was conducted by Beena, S. (2013) found that between the years 2008 and 2009, roughly 9 percent of pharmaceutical industry enterprises went out of business solely as a result of mergers. If mergers and acquisitions had taken place at the same time, the total would have been far higher. The Competition Commission of India (2014) reports that there have been 27 mergers and acquisitions in the industry during the past few years. It is obvious that a great number of people have formed a mistrust for the increasing amount of consolidation activities in the business. This is primarily attributable to the possibility of monopoly formation and the consequently detrimental effect that this would have on the welfare of patients. Physicians make consumption decisions in the pharmaceutical industry, unlike other industries. Patients decide consumption in other industries.

This makes the demand less price-sensitive. It is common knowledge that the pharmaceutical industry consists of both inexpensive generic medications and expensive brand-name drugs, with wide price variations and a high degree of information asymmetry. In addition, it is essential to mention the unethical practises of physicians, chemists, hospitals, and pharmaceutical companies. All of this increases the significance of supply-side factors in determining consumption decisions. Given this scenario, mergers and acquisitions, particularly among the largest firms in the sector, strengthen the supply side further. Regarding the competition in the sector, the consensus is that it is not concentrated. The clearest evidence for this is the observation made by India's competition regulator, the Competition Commission of India (CCI), in regards to the proposed merger between Ranbaxy and Sun Pharma, that the pharmaceutical industry in India is not monopolised. The reason given is that the top ten firms in the industry, such as Abbot, Sun, and Cipla, hold market shares of only 6.43, 5.35, and 5%, respectively. It is essential to note that the pharmaceutical industry consists of numerous therapeutic categories and subgroups, such as molecules, that are not interchangeable.

Any evaluation of competition in the sector must account for product market consolidation. The ultimate consumption of medicines occurs at the product level, not at the broad level. Multiple therapeutic categories have been observed to be experiencing acute consolidation in the sector. Even though there are approximately 100 firms operating in the contact laxative market, the consolidation ratio for the top four firms is close to 90 percent. The first company controls more than sixty percent of the market share. This is true for numerous other classes of pharmaceuticals. In many instances, there are fewer than five or ten companies engaged in the production of particular types of medications. Therefore, the competition concerns in this sector as a result of consolidation activity should address these issues as well as the fact that policy decisions will impact the lives of millions of hard-working individuals ("Consolidation Activity in the Indian Pharmaceutical Sector," n.d.).

Effects of Patent Law Changes on Innovation

Recent modifications to patent law in India's pharmaceutical industry present opportunities to examine the impact of changes to the institutional and regulatory environment on innovation and social welfare in low-income markets. Under its process-patent regime, India's pharmaceutical industry evolved to become the fourth largest in the world between 1972 and 2004. Indian firms were becoming globally competitive in generics and clinical testing and were transitioning into product research and development. On these trends, researchers have debated the effects of India's new product-patent laws. The authors discuss India's pharmaceutical industry's domestic characteristics and international competitiveness. They compare (2001–2004) data on patents in India's process-patent regime with (2005–2008) preliminary data on patents in the country's new product-patent regime. They argue that Indian pharmaceutical companies have shifted from process research to product research in response to the modification of patent laws. However, preliminary findings suggest that these alterations may have negatively affected domestic innovation. The authors conclude with strategic implications for the Indian pharmaceutical industry and emphasise the need for research and public policy to determine optimal social returns from product-patent regimes (Haley &Haley, 2012).

Factors motivating consolidation

The pharmaceutical industry has undergone significant changes over the last few decades that have led to consolidation. These changes, described below, have reduced revenues and increased costs for pharmaceutical firms. As economic shocks have intensified, many firms have consolidated to cut costs or generate new income. Mergers and acquisitions have been a common strategy for offsetting market share losses and cutting costs. Many companies that were merging have benefited from consolidation since it has helped them streamline operations and get rid of excess capacity produced by quickly changing business conditions. Others have merged in order to enhance their revenues by enhancing their product portfolios, reducing the number of gaps in their pipelines, expanding into new therapeutic categories or markets, or acquiring innovative technology. Based on the findings of empirical studies, companies that have an ageing portfolio of patented medications are more inclined to merge in order to improve their revenue. Since the early 1980s, pharmaceutical firms have faced increasing competition from generic drugs, the growing authority of pharmacy benefit managers (PBMs), rising costs of research and development, and escalating risks of commercial failure. These pressures have forced pharmaceutical firms to drop prices despite rising costs. Consolidation has been a common response to these challenges, allowing firms to increase their scale and reduce costs while pursuing new revenue streams. Despite concerns about the impact of consolidation on innovation and patient welfare, consolidation has been an effective strategy for many pharmaceutical firms to navigate a rapidly changing industry landscape.

Increased Generic Competition:

First, brand-name firms have lost market share to generics, changing the pharmaceutical competition. After the 1984 Hatch-Waxman Act streamlined regulatory processes, generic drug firms exploded. Drug substitution laws in every state require pharmacists to automatically swap a generic equivalent for a brand-name drug when a patient shows a brand-name prescription. Generics have gained market share from brand-name firms due to regulatory changes. Generics now make up 88% of orders, up from 19% in 1984. Low costs make generic drugs successful. Generic drugs typically cost 50% less than brand-name drugs when their patents expire. As more generics join the market, the generic price drops to 80% of the pre-expiry brand drug. Due to lower development and marketing costs, generic drug firms can charge lower prices and make big profits. Brand companies spend $2.6 billion on mergers and acquisitions and FDA approval, while generic drug companies spend $1 to $2 million. Generic companies rely on automatic substitution laws for most of their sales, while brand companies spend millions on marketing to doctors and patients. Generic drugmakers can charge less and still make big gains due to their lower costs.

As generics join the market, many brand-drug customers switch to them due to their lower prices, eroding brand-drug market share. Generics now take over 70% of the name drug's market share within 3 months and over 80% within 12 months. After the "patent cliff" and generics joined the market, many brand-name pharmaceutical companies saw significant revenue declines. The U.S. Congressional Budget Office found that generic entry reduced new drug net earnings by 12% in the decade following the Hatch-Waxman Act. Generic entry after patent expirations will cost pharmaceutical firms nearly $150 billion between 2012 and 2018.

Increasing Influence of Pharmacy Benefit Managers

Second, pharmaceutical "payors" have gained power over brand firms. Pharmacy benefit managers, often known as PBMs, are in charge of providing prescription medication coverage for more than 95% of insured Americans. In order to bring down the cost of pharmaceuticals and direct patients towards less expensive options, PBMs have instituted new benefit adjustments and tools. By requiring clinically suitable generic substitutes for brand-name pharmaceuticals, pharmacy benefit managers (PBMs) have contributed to a reduction in overall drug spending. PBMs use tiered formularies to steer customers towards formulary drugs with incentives like lower co-payments. PBMs can negotiate large discounts from brand drug makers for formulary listings because formulary status affects drug sales. These and other inventive tools save Americans billions of dollars annually. They've also changed the pharmaceutical market by reducing drug firms' price control. In the 1970s, doctors ordered most prescription drugs, pharmacists filled them, and consumers or third-party payers paid for them.

Thus, drugmakers controlled the price. Today, PBMs and drug plans use the buying power of millions of consumers to negotiate lower prescription drug costs. PBMs and drug plans now determine consumers' drug costs, pharmacies, and medications. PBMs and drug plans now set prices instead of drug makers. PBMs are also controlling more prescription spending. Brand manufacturers currently earn 39% of drug spending. PBMs, health plans, and supply-chain entities like pharmacies and wholesalers take 42 percent of gross spending. PBMs and drug plans' buying power has grown, decreasing brand manufacturers' share of drug spending.

Product Development Costs and Risks Are Rising:

The pharmaceutical industry has been facing a multitude of challenges, including pressure from generics and pharmacy benefit managers (PBMs) to lower prices, increasing drug development costs, and rising risks of product failure. The FDA has raised drug approval standards since the 1962 Amendments to the Federal Food, Drug, and Cosmetic Act, resulting in stricter requirements for clinical trials. This has led to increased patient recruitment costs, clinical trial duration, and clinical test number and complexity, making drug research and FDA approval more costly and time-consuming. The current cost of developing and marketing a new drug is estimated to be $2.6 billion, compared to $179 million in the 1970s.

Despite massive research and development spending, drug approval rates have barely improved in recent decades. Additionally, pharmaceutical manufacturers frequently face patent challenges that limit drug commercial success after FDA approval. The Hatch-Waxman Act creates a pathway for generic companies to challenge brand-name patents, leading to high legal fees and commercial failure for pharmaceutical firms. The Leahy-Smith America Invents Act has given generics an administrative forum to challenge patents, inter-party review (IPR), which has a much higher patent invalidation rate than district court litigation.

Many pharmaceutical companies are experiencing financial strain as a result of the rising expenses associated with drug research as well as the increased risks associated with product failure. Only 20% of FDA-approved drugs generate enough revenue to cover R&D costs, and new drug lifetime earnings are at their lowest in 25 years. To cut costs and generate new income, many pharmaceutical firms have resorted to consolidation. By streamlining operations, removing excess capacity, and strengthening product portfolios, firms have been able to navigate the challenges presented by a rapidly changing industry landscape.

Concerns Regarding the Impact of Consolidation on Innovation

Consolidation in the pharmaceutical business has raised concerns as mergers and acquisition activity rises. Mergers can increase prices and limit product choices, so competition enforcers have typically scrutinised them. Researchers and regulatory agencies occasionally voice non-traditional innovation harm concerns. Mergers may disrupt "innovation markets," which are "the research and development directed to particular new or improved goods or processes and the close substitutes for that research and development." Pharmaceutical and high-tech sectors that value patented goods and rapid technological advancement have innovation markets. It is believed that the consolidation of competing businesses into a single entity will limit the incentives to produce new products. Recent academic studies suggest that pharmaceutical mergers and acquisitions may limit innovation. Pharmaceutical mergers have been shown to lower merger and acquisition spending in the consolidated firm compared to both firms before the merger or to other non-merging companies. Consolidation reduces mergers and acquisitions projects in the consolidated firm, according to reports.

The merged firm may also create fewer patents than the two separate firms did before the merger. The studies acknowledge that efficiency gains account for most of the reduction in mergers and acquisitions expenditures, projects in development, and patents in the newly consolidated firm. Mergers reduce costs and eliminate redundant projects and patents by streamlining operations, lowering capacity, and achieving economies of scale. Studies that compare the innovative activities of newly merged organisations to those of non-merging firms may also suffer from selection bias. This is due to the fact that businesses that are experiencing economic difficulty are more likely to merge.

In order to minimise these confounding variables and selection effects, a recent study investigated the impact of consolidation on innovation outside the organisation. The research hypothesised that a merger would reduce rival innovation incentives. According to the findings of the study, mergers result in decreased spending on mergers and acquisitions as well as a reduction in the number of patents filed by merging and competing organisations. As previously described, all companies, including consolidated corporations and rivals, have curtailed their operations involving internal mergers and acquisitions as they react to the new economic reality of the pharmaceutical industry, which makes external R&D more appealing than internal development. This is because the new economic reality of the pharmaceutical industry makes external R&D more lucrative than the previous one. It's possible that the consolidation of a competitor will compel companies to replace internal mergers and acquisitions with an even greater number than usual. In order to compete with the more efficient consolidated organisation, competing firms may increase the number of mergers and acquisitions they outsource and decrease the amount of innovation they conduct in-house. In addition to academic research, regulatory bodies have voiced their concern regarding the influence that market consolidation will have on innovation markets. The competition authorities did not challenge a merger on the basis that it would hurt innovation until the middle of the 1970s, and the FTC and DOJ did not routinely question the impact of mergers on innovation until the 1990s. Until that time, the competition agencies did not query the impact of mergers on innovation. In the case of pharmaceutical mergers, regulatory bodies frequently required the divestment of intellectual property or the issuance of forced licences in order to authorise mergers.

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