Why are prescription drug prices so high in the U.S.? Pfizer’s attempt to acquire the giant British drug company AstraZeneca—which finally collapsed in late May—pinpoints several reasons in a nutshell. (Or should I say, in a once-a-day pill?)
Not by coincidence, this would-be merger also reveals some of the ways pharmaceutical companies bend their ethics.
Pfizer, which was already the largest drug maker on the planet, had hoped to puff itself up even more by buying AstraZeneca, which ranks Number 2 in the U.K. Even when the bid reached $119 billion, AZ’s board had the gumption to refuse, and Pfizer gave in.
Such an attempt is hardly new for either Pfizer or the pharma industry: Over the past 15 years, a lot of premier names in the business have disappeared, several of them swallowed by Pfizer.
(Try to find a phone number for Wyeth, Pharmacia, Warner-Lambert, Schering-Plough, Genzyme, Hoechst, Ciba-Geigy, Burroughs Welcome, Sandoz, or Searle.)
In any industry, this kind of bombs-away deal-making can lead to dangerous market concentration, where a few powerful leaders control pricing. That’s why government approval is needed for mega-mergers like that of Comcast and Time Warner.
But anti-competitive pricing is not the only problem with Pfizer’s ploy.
Pharma companies have been drawn to mergers because creating innovative new medicines has gotten harder and more expensive. With the easy connections between molecules and disease already discovered, the industry says that the cost to develop the average drug has risen from $800 million a decade ago to over $1 billion now. So lazy managements take the money they could have spent on their own research, and instead use it to buy another company’s research.
The net result is even worse than you might think. It’s not that there is now only one research lab (at the target company) instead of two (at the target and the acquirer). Actually, what remains is more like three-fourths of a lab. To pay for these $119 billion deals, the “successful” bidder has to cut operating costs, and inevitably that means less money for R&D.
Thus, mergers lead to fewer drugs and higher prices.
One could argue that producing fewer drugs is actually good for society, because we Americans rely too much on popping magic pills. True enough, but there are also many serious diseases—including Alzheimer’s and cancer—that desperately need more effective treatments.
Finally, Pfizer added one more nasty twist to this unhealthy M&A mix: a tax dodge. By pretending to relocate its headquarters to AstraZeneca’s British offices, it could have avoided the higher American corporate tax rate.
For now, this anti-consumer effort has failed. However, there will be more.
How sad that companies whose raison d’etre should be ethical—helping cure disease—rely on such unethical tactics.
Hear Fran Hawthorne talk more about health care costs, monopolies, business responsibility, and her award-winning book Ethical Chic: The Inside Story of the Companies We Think We Love on Patrick McCarty's Insight Radio. Skip to 35:15 for “Fran's Corner”:
Fran Hawthorne is the author of Ethical Chic: The Inside Story of the Companies We Think We Love. This post is adapted from Fran’s Corner, her weekly show on the global political-cultural talk show Insight Radio, available on the CNN Website at insighttalkradio.com.