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The University of Southampton
Economic, Social and Political Sciences

Towards a healthy future

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. Their work is examining the role of mergers, acquisitions, advertising and competition as barriers to innovation, and also calls for better policies to sustain this thriving industry and deliver high-quality, affordable medicines.

Research challenge

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 drugs cost the country money too – in 2011 the NHS drug bill was more than £9bn. This puts the UK government under increasing pressure to sustain innovation and give patients affordable access to the best treatments.

Context

Economists in Southampton, led by Dr Carmine Ornaghi a Senior Lecturer in Economics, have been examining the effects of mergers and acquisitions on organisations’ research efforts and outputs and their results were among the first and most exhaustive analysis of their kind. They have also been investigating how quality differences in prescription drugs can shape advertising and the effects generic medicines can have on the price and advertising strategies of branded drugs.

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. The researchers also developed a theoretical method to illustrate that firms with lower quality drugs benefit more from advertising and this advertising can increase the price of the drugs. They say that advertising can act as a barrier to innovation and if advertising expenditure was greater controlled it may free up funds for research and to reduce the NHS’ drug bill. Finally, their latest research shows that while laws have increased the speed that generic medicines can enter the market, aggressive advertising strategies mean that consumers will often still favour the branded equivalent.

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 were used by Professor George Siotis, a former advisor to the European Union Competition Commission’s Chief Competition Economist, in a talk he delivered to the EU think tank Bruegel, in Brussels. Carmine’s findings have also informed a paper by the Organisation for Economic Co-operation and Development (OECD), in the US his research has been cited by several economists working for the Antitrust Division of the US Department of Justice. He has also been invited by the Department of Health of Cataluna, in Spain, to discuss how to reform the finance and access of new prescription drugs by reconciling innovation with controlling expenditure.

Delivering high quality, affordable medicine
Delivering high quality medicine

Economists in Southampton have been examining the effects of mergers and acquisitions on organisations’ research efforts and outputs in the UK pharmaceutical industry

Dr Carmine Ornaghi - Senior Lecturer in Economics

Key Publications

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