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The University of Southampton
Economic, Social and Political Sciences

Informing innovation in the pharmaceutical industry

Research into innovation and competition in the pharmaceutical industry by economists at Southampton is making an important contribution to the policy debate in Europe and the US. By examining the effects of mergers & acquisitions on innovation and the role of advertising as a barrier to the generic drugs, their work calls for better policies to sustain innovation in this thriving industry while ensuring that patients have access to high-quality, affordable medicines.

 

The UK pharmaceutical industry is a commercial success story employing more than 70,000 people. According to the Department for Business Innovation and Skills more leading medicines are developed here than in any other country outside the US. But new advances in pharmaceutical therapies require large investments in R&D and this means that some new treatments, such as new immunotherapies, may have a price tag of more than £100,000 per patient per year. This puts the UK government in front of a delicate conundrum: on one side, there is the temptation to introduce price caps to contain costs and ensure that patients can have access to the best treatments; on the other side, introducing price controls will limit the possibility of innovators to recover their costs and will therefore reduce the amount of pharmaceutical innovation in the long-run. 

Context

Economists in Southampton, led by Dr Carmine Ornaghi an Associate Professor in Economics, have been examining how to reconcile the incentives to innovate with controlling expenditure. Carmine’s research on the effects of mergers and acquisitions on organisations’ research efforts and innovation output were among the first and most exhaustive analysis of their kind. His more recent work on price and advertising competition in the pharmaceutical industry helps explaining why molecules that lose patent protection often experience a decrease in the quantity market share, in spite of the fact that generic versions of these molecules are available at a fraction of the original price.  

Our solution

The team’s results suggested that mergers were rarely as successful as anticipated and generally the effect on research is negative because companies may look to acquire firms with similar technology and drug portfolios leading to higher prices and less incentive to innovate. While the merger can have a positive effects on product development, it can also have a negative effect on technology. In a related work, the researchers also developed a theoretical method to show that generics drug sold at much reduced price may end up selling less, simply because the originator firm hit by stiffer competition stops promoting the branded version. Their model helps explaining why market penetration of generics has often fallen short of expectations in controlling governments’ expenditure on medications. 

What was the impact?

Carmine’s work has added an important new perspective to policy debate on both sides of the Atlantic and has been referenced by some of the most influential figures in the field. His studies have informed and influenced several notable policy makers and antitrust authorities. Key insights and results from his work have been cited in white papers published by the European Directorate General for Competition (DG Comp) and European Directorate for Research and Innovation (DG Research). In the US, Carmine’s finding has been cited by several economists working for the Antitrust Division of the US Department of Justice. Carmine’s findings have also informed a paper by the Organisation for Economic Co-operation and Development (OECD).

 

Key Publications

List of all staff members in
Staff MemberPrimary Position
Carmine OrnaghiAssociate Professor in Economics
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