Research into the detrimental effects of mergers and acquisitions on innovation by Professor Carmine Ornaghi has contributed to merger enforcement policies of the European Commission, particularly in the pharmaceutical and chemical industries. This has led to the introduction of more stringent EC remedies in recent major merger cases.
The pharmaceutical and chemical industries are among the most research-intensive industries in the world, and over the last two decades they have been shaped by a substantial number of mergers and takeovers.
Indeed, many of the world’s biggest drug companies, such as Pfizer and GlaxoSmithKline, have been built through a succession of acquisitions.
The effects of these acquisition deals on the innovation of the firms – that is, the development new and better treatments – was previously an area that had received little attention by academics and competition authorities.
Starting in 2006, Dr Carmine Ornaghi investigated the effects of these acquisition deals on the innovation of pharmaceutical firms. The research involved matching financial data from large pharmaceutical firms with patent data to assess the causal effects of mergers on early-stage innovation.
Ornaghi’s work was among the first to provide compelling, and concerning, evidence that mergers may have a detrimental effect on incentives to innovate. The results suggested that mergers rarely generate the knowledge synergies that their proponents often claim.
Further findings showed that acquirers are more likely to target firms with similar technology or drug portfolios, which may lead to higher prices and less incentive to innovate. There is a negative relationship between the technology relatedness of merging firms and their post-merger performances.
The research represented an important step towards understanding why some mergers have a positive impact on innovative outcomes, and others do not.
Ornaghi’s findings were recognised by the European Commission (EC), with the Chief Economist of the Directorate-General for Competition describing his initial article as “one of the very few (if not the only) papers which were addressing the question of the effects of mergers on innovation”.
Subsequently, the EC has taken a more rigorous stance on assessing the effects of mergers on innovation, with their approach being shaped by the research. Most notably, the 2017 Dow/Dupont merger and the 2018 Bayer/Monsanto merger, two of the largest deals of the last decade, were cleared only after imposing remedies worth billions of Euros to remove problematic overlapping between the parties.
Based on his papers on mergers and innovation, which served to establish him as a leading expert on the subject, Ornaghi was asked by senior officials at the EC Directorate-General for Competition to act as an academic advisor for their 2017 feasibility study on the microeconomic impact of enforcement of competition policies on innovation. In this advisory capacity, Ornaghi worked with a selected small group of economists to define a sound empirical methodology to evaluate retrospectively the impact of mergers on innovation.
Ornaghi worked as academic advisor on a second EC research project, “Study on the impact of mergers and acquisitions in the Pharmaceutical Industry”, the outputs from which were circulated widely within the relevant Directorates-General within the EC.