Competition in drugs

In his Washington Post business column today, Not What the Doctor Ordered, Steven Pearlstein raises concerns over the Pfizer-Wyeth. In the piece, he makes an important point about the drug industry:

Because the bulk of profits in the industry come from temporary monopolies -- government-granted patents -- the current marketplace is not where the important competition takes place. Rather, the real rivalry takes place "upstream," as companies compete to innovate, either by developing medicines in their labs or by buying up promising patents and biotech start-ups.

I agree, but wonder how this analysis would work. One of the growing key elements in the big pharma's innovation strategy is their form of "open innovation." As Pearlstein points out, they buy patents and start-ups. But, isn't the Pfizer-Wyeth deal a version of this? Pfizer needs new products and Wyeth has them.

If we are going to extend anti-trust analysis to the innovation side, doesn't that mean that we need to look at the issue of exclusive licenses - since that is the "anti-competitive" part of the equation?

FTC has done a fair amount of work recently on the nexus of patents and competition policy. That work should continue. But I'm not sure that would change the analysis of the Pfizer-Wyeth deal.

Much of Pearlstein's complaint in his column is about the generally anti-competitive stance of big pharma (using Ovation Pharmaceuticals as a poster child). His conclusions are of concern:

What we do know, however, is that because of the herd-like behavior of corporate titans and industry analysts, and the prodding of Wall Street's fee-grubbing investment bankers, the Pfizer-Wyeth deal will almost surely be followed by other mega-mergers. And we know that, in an industry with high barriers to new entrants, each of these mergers will result in one fewer company competing, or potentially competing, to develop new drugs.

I share that concern. But if the innovation is really coming from outside the system (patents and start-up), then I'm not sure innovation is the rallying cry. Seems to me the real problem with these mergers is the production and distribution end. And there, the market is pushed by the generics.

So I see this merger as less of a threat to innovation -- and more of a desperate strategy by an industry pushed at both ends.