Recent Research: Growing ownership concentration in the pharmaceutical industry

The early days of vaccinating against the coronavirus might not be the most receptive time to raise issues of antitrust in the U.S. pharmaceutical industry, but a November 2020 Barcelona GSW Working Paper raises several concerns about the degree and effect of common ownership within big pharma. Does this explain the resistance of drug prices to fall? Should Congress take on the likes of brand firms Johnson & Johnson, Merck and Pfizer, in addition to already challenging the tech giants, in 2021?

European scholars Albert Banal-Estanol, Melissa Newham and Jo Seldeslachts found the common ownership linkages between the three largest U.S. pharmaceutical companies mentioned above, already dense at the beginning stage of their research in 2004, increased sharply in density by 2014. Generic firms, in contrast, maintained sparse ownership linkages throughout the study period.

Of antitrust concern to the authors was the increasing degree of connections the three brand firms developed with generic firms over time. They argue that this interconnectivity between brands and generics “seems to have led to a decrease in generic entry,” which may negatively impact the competitiveness of drug pricing. The entry of a single generic to the market can lower prices by 39 percent on average, while six or more competitors can create price differentials as low as one-twentieth of pre-competition brand pricing, according to the U.S. Food & Drug Administration.

The evidence of concern presented in Common Ownership in the US Pharmaceutical Industry: A Network Analysis documents the cases of shared ownership among the largest firms. For instance, BlackRock was the largest investor in all three of the brand firms, with a stake ranging between 5-7 percent in 2014. In fact, the researchers found Blackrock was the largest single investor in 14 pharmaceutical companies by 2014. (The 2009 merger of Barclays into Blackrock may have had a role in the growth). Vanguard and State Street owned comparable-sized shares of all three firms as well. Several other institutional investors also were found to be in common across two of the three, to the degree that the authors contend “although brand companies are already fairly well connected at the start of our sample, they become almost fully connected through common ownership links at the end of the sample.” [emphasis added.]

Connection links are defined as having “at least one common investor with more than 5 percent in both firms.” By 2014, at least eight of the top 20 brand companies had common linkages with at least 13 others in the group. [Note: the network mapping depicting the change in relationships in 2004 and 2014 between the top 20 brand firms and between brand firms and top 20 generic firms seemed quite compelling to this reader.]

Banal-Estanol, et al., recognize the percentage shares seem low, but contend, mostly through anecdotal evidence and references to other research, that these common owners were actively involved with the company boards and management they owned on issues such as “defending their pricing” and in their engagement with the broader pharmaceutical industry. State Street’s 2019 annual report during one year of the study is cited as claiming to be engaged with 64 pharmaceutical companies.

Maximizing shareholder/investor value provides the motive and the network analysis presented in the paper reveals the opportunity, but has big pharma committed the crime of collusion and antitrust? In their conclusions, the authors acknowledge “there is little direct evidence yet how these common ownership networks might impact competition and innovation in pharmaceutical markets.” The rapid growth in the connections, however, gives them and other interested scholars fodder for further research.

Common Ownership in the US Pharmaceutical Industry: A Network Analysis is available for download here.