Large pharmaceutical firms retain their dominance through size-related advantages in three areas: contracting, marketing and selling, and financing. When reviewing pharmaceutical mergers, the Federal Trade Commission should consider effects of size in addition to its typical analysis of individual markets.

Politicians and experts in the US have recently expressed concern about the consolidation of pharmaceutical companies. The companies promise that their mergers will increase efficiency and innovation. Yet the evidence is to the contrary: ever-increasing drug prices, which some attribute to the mergers, and innovation coming not from the merged companies but primarily from smaller firms.

The five Commissioners leading the government agency responsible for drug issues, the Federal Trade Commission (FTC), are at loggerheads on the topic. On other issues, such as “pay for delay” settlements, “product hopping,” citizen petitions filed with the FDA, and the denials of samples needed by generics, the Commissioners are unified. 

But mergers are a different story. In the past several years, the Commission has split, with the three Republican Commissioners applying the standard market-by-market analysis, requiring divestitures in markets where there are overlapping products. In contrast, the two Democratic Commissioners have highlighted more far-reaching concerns that mergers may contribute to problems in the industry and have advocated for more expansive merger scrutiny.

Is common ground possible? Yes. In a forthcoming essay in the Antitrust Law Journal, we suggest that the FTC look beyond particular markets to consider the overall size of the merging firms in their analysis, explaining large firms’ advantages and suggesting a framework to apply to drug mergers.

The Persistence of Large Firms

The first indication of an unhealthy situation is the stable identity of the largest drug firms. As shown below, the top 10 firms (ranked by global sales) in 2019 are very similar to the top 10 a decade earlier, with modest shifts in rankings driven primarily by acquisitions.

Company2009 RankCompany2019 Rank
Novartis4Johnson & Johnson4
AstraZeneca5Merck & Co.5
Johnson & Johnson7Abbott Labs/AbbVie7
Eli Lilly9Takeda9
Bristol Myers Squibb10Bristol Myers Squibb10

This stability cannot be explained by innovation. If the competitive advantage of individual drugs determined success, we would expect to see a continual turnover of leading firms. That is not the case. Large firms’ share of New Active Substances (NAS) submitted each year to the FDA declined from 30 percent in 2009 to roughly 20 percent in 2018. By contrast, the share of NAS originated by very small “emerging” firms increased to roughly 70 percent. Nor does the empirical evidence show that mergers improve large firms’ research and development (R&D) through economies of scale or scope.

We contend that large firms retain their dominance through size-related advantages in three areas: contracting, marketing and selling, and financing.


The first advantage comes from contracting with insurers—a key function in health care. Because patients do not pay directly for health care, they are insensitive to price, which creates incentives for higher prices. In the United States, drug companies set their list prices freely. Private and public payers (insurers, employers, Medicare, and Medicaid) then use pharmacy benefit managers (PBMs) to negotiate rebates off list prices in return for preferred placement on their formularies of covered drugs. Preferred drugs benefit from lower co-payments, which lead to higher market share.

A company with a large portfolio of products, including blockbuster drugs (having high sales and rebate revenues), has more leverage in negotiating with PBMs than a company with fewer or smaller products. The large firm can use a bundled rebate strategy to leverage its blockbuster, requiring preferred coverage for all of its drugs or even exclusivity on the preferred tier for some drugs. These strategies can impede competitor drugs, even those offering therapeutic advantages or lower prices. For example, a group of unions and consumer and public interest organizations worried that 

“combining AbbVie’s blockbuster drugs with Allergan’s is likely to exacerbate . . . anticompetitive conduct, because the merged firm will have an increased ability to bundle rebates across its enlarged drug portfolio in order to keep competing branded drugs, generics, and biosimilars off of PBMs’ and insurers’ preferred position on their drug formularies.”

Marketing and Selling

A second benefit of size occurs in marketing and selling to doctors. The primary marketing tool used to persuade doctors to prescribe drugs is detailing—sending knowledgeable representatives to doctors’ offices to provide information and free samples and to build relationships. Frequency and scope of contact are crucial to building the desired relationships, but doctors are very busy and access to them is increasingly restricted. 

In this context, a large, multi-product company can promote two or more drugs on the same visit, justify more frequent visits, and increase value for the company and the doctor, compared to a smaller company with only one product relevant for a particular doctor’s specialty. For example, a large firm with a broad portfolio of drugs to treat multiple cancers can disadvantage a smaller company with only one or two products for breast cancer, even if the small company offers lower prices on its few drugs.

Large firms also enjoy size-related economies in contracting and selling to multi-specialty groups of doctors who dispense infused and injectable drugs (including many cancer drugs). A large firm can leverage its portfolio in contracting and offer one-stop-shopping convenience, blocking the entry of a smaller company with only one or two products, even one offering lower prices. 


The third advantage of size derives from the revenue flows enjoyed by large firms with portfolios of marketed drugs. These funds can be used to finance their marketing, in-house R&D, and acquisitions. Large companies use external capital markets only if additional funding is needed (for example, for the largest acquisitions). By contrast, smaller firms with few or no marketed products must raise external capital to fund costly pre-clinical and clinical trials, develop in-house marketing and sales capabilities, and pursue even small acquisitions. This lower cost of capital from retained earnings enables large firms to pursue the acquisitions that maintain their market dominance. 

Antitrust Framework

When reviewing pharmaceutical mergers, we suggest that the FTC, in addition to its typical analysis of individual markets, consider the effects of size outlined here. Our approach fits comfortably in the antitrust agencies’ recognition of harms from unilateral effects. Unlike coordinated effects (in which mergers facilitate collusion by the remaining firms), the agencies have explained that “[t]he elimination of competition between two firms that results from their merger may alone constitute a substantial lessening of competition.” By “eliminating competition,” a merger “gives the merged firm incentives different from those of the merging firms.”

The FTC has used the concept of bargaining leverage in settings as varied as hospitals, pharmacy chains, insurers, and broadband. As we discuss above, mergers between large drug companies enhance their leverage with PBMs and in direct selling to doctors—potentially harming competitors through their restrictive or exclusionary contract terms with these customers.

“When two large drug firms merge, the FTC should apply a presumption that the merger harms competition. When mergers involve mid-size firms, the agency should carefully scrutinize effects outside the overlapping markets. And when a small firm is involved, the FTC will typically be able to rely on the market-by-market approach.”

Mergers Between Large Firms

The most significant concern of anticompetitive conduct applies to mergers between two large drug companies. As a first approximation, we recommend that this category include the top 10 firms, ranked by global sales.

We suggest that these mergers be presumed to harm competition. Large firms possess not only efficiencies related to size, but also the potentially anticompetitive advantages detailed above. Since the anticompetitive concerns increase with the number and value of products in a firm’s portfolio, they are magnified when two large firms merge. The harms to competition can include bundled or restrictive contracting by which a larger firm uses its bargaining leverage to bundle inclusion of its products or exclude competitor products from a formulary. 

These risks are greatest when a large firm possesses at least one “must have” blockbuster product that it can leverage to gain advantage for its products in other classes where rival products might otherwise be preferred.

It will be difficult for the merging firms to rebut the presumption of harm because any claimed efficiency savings are unlikely to be passed on to consumers as lower prices. One possible exception could apply if the firms show synergies from cross-national complementarity of assets with minimal risk of increased market power.

Mergers Involving Mid-Size Firms

Mergers involving a large and a mid-size firm also warrant careful scrutiny, albeit not rising to the level of a presumption of harm to competition. Firms that are mid-size by revenues and number of marketed products (roughly, those ranked 11 through 20, with consideration also of blockbuster products) play an important role in the industry, serving as viable market competitors for the largest firms and as potential acquirers of smaller firms.

These mid-size firms typically have proven their competence with in-house drug discovery and development, marketing and sales, and partnerships with or acquisitions of smaller companies. Mid-size firms are attractive acquisition targets for larger firms, as their products can fill gaps in the large firm’s pipeline. Mergers involving mid-size firms also remove a potential acquirer for smaller firms and competitor for the largest firms. Large firms’ acquisitions of mid-size firms assure their continued market dominance while eliminating a viable competitor and offering no obvious efficiency savings.

The likelihood of the FTC’s challenging a merger between large and mid-size firms should increase based on the combined entity’s product portfolio and presence of must-have blockbuster products with large sales and few substitutes that PBMs cannot exclude from their formularies. One recent example of potential concern is AbbVie’s acquisition of Allergan, approved in 2020, which combined AbbVie’s Humira with Allergan’s Botox, both blockbuster products with multiple indications, which increases the combined company’s leverage to tie preferential treatment of its other products.

Mergers Involving Small Firms

In general, mergers involving small firms do not require heightened scrutiny beyond the traditional concerns with overlapping products in specific markets. Market-by-market analysis is still important in these settings to determine whether a small company’s product could compete with one owned by the large firm or create excessive concentration in individual markets due to related products.

Large firms’ acquisitions of small firms can provide important efficiencies. As discussed above, large firms provide a lower-cost source of financing for the small firm, compared to private or public equity, and an exit for early investors. Further, acquisition by a larger firm with established marketing experience eliminates the need for the small firm to develop its own marketing and sales capabilities. 

In contexts in which the large firm already has a licensing agreement with the small firm for either sole or shared development and marketing of the small firm’s lead product, the large firm’s acquisition of the smaller firm can eliminate costly coordination and duplication of functions. Empirical evidence for efficiencies is strongest in cases where a prior licensing relationship exists between the acquirer and the target, as mergers in such contexts eliminate the duplication of marketing and other functions.


In analyzing mergers in the pharmaceutical industry, the FTC has followed an analysis that focuses narrowly on overlapping products in specific markets. We suggest that, in addition to this standard analysis, the agency should also consider the critical factor of firm size and how it offers advantages in several key functions related to contracting, marketing, and selling drugs. 

When two large drug firms merge, the FTC should apply a presumption that the merger harms competition. When mergers involve mid-size firms, the agency should carefully scrutinize effects outside the overlapping markets. And when a small firm is involved, the FTC will typically be able to rely on the market-by-market approach. Such a framework is more consistent with the realities of the pharmaceutical industry than the approach applied today and would ensure a vital, pro-competitive role for antitrust merger enforcement.