Diverging from antitrust decks innovation and raises drug prices.

Regulators in both the United States and the European Union have expressed concerns about the effects of the surge in mergers and acquisitions, both broadly and in the pharmaceutical industry, on consumers.

Meanwhile, prior literature, theoretical and empirical, and industry experts give conflicting information about the impact of consolidation. In an effort to disentangle these opposing viewpoints, this study concurrently assess the effects increasing pharmaceutical consolidation has on innovation and prices.

My results indicate that pharmaceutical companies have a clear, post-M&A response on innovation and prices. While mergers and acquisitions result in no significant change to new drug discoveries or advancement through clinical trials, pharmaceutical firms do increase spending on research and development afterwards. I also find that firms post-M&A decrease the amount of patents filed. This means that consolidated firms file less patents compared to separated targets and acquirers pre-M&A. Further testing on types of patents, types of mergers and acquisitions, and characteristics of the firms involved conclude that 1) the decline of patents comes largely from primary patents 2) these patterns of an innovation response post-M&A are primarily among large pharmaceutical companies with large amounts of capital at their disposal and 3) these patterns stem from M&A of other pharmaceutical companies rather than biotech. Taken all together, these results suggest that larger pharmaceutical companies supplement their research and development through the procurement of other, smaller target companies' patents. They subsequently dedicate funds in an effort to move those molecules through FDA clinical trials. Despite the increase in R&D spending by almost $400 million dollars per year, those efforts do not lead to a change in the prospective molecules progress through FDA clinical trials. This raises questions of the pharmaceutical industry, who regularly cite innovation efficiency gains resulting from M&A as evidenceto convince regulators to allow consolidation that might otherwise be deemed anti-competitive, 15

Along with these effects on innovation, my results also show that non-generic, brand name drug prices increase by 19% after an M&A event. These price increases occur primarily in instances where

there are overlapping between a target and an acquirer. Upon further inspection of mergers of firms with non-overlapping portfolios, the results suggests that firms might have differing incentives to pursue consolidation. Some firms engage in mergers or acquisitions to reduce competitors and gain power in therapeutic markets, leading to price increases. Others, specifically larger megacompanies, use M&A to expand their product portfolio overall, increasing their negotiating power with insurance companies to lower rebates, increasing net price. These findings have implications for regulators and political leaders, who have made it a top priority in recent years to reign in high drug costs. The results on drug prices are also important for general public knowledge, as concern grows regarding prescription affordability.

Recent polling suggests 8 in 10 Americans believe the cost of prescription drugs is unreasonable while 1 in 4 Americans state they cannot afford their medications.