Common Ownership in the U.S. Pharmaceutical Industry: A Network Analysis

• Author: Melissa Newham,Jo Seldeslachts,Albert Banal-Estañol
• Published date: 01 March 2021
• DOI: 10.1177/0003603X20985796
• Date: 01 March 2021
• Subject Matter: Articles

Article

Common Ownership in the

U.S. Pharmaceutical Industry:

A Network Analysis

Albert Banal-Esta ˜

nol*

,

**, Melissa Newham***

,

****,

and Jo Seldeslachts***

,

****

Abstract

We investigate patterns in common ownership networks between firms that are active in the U.S.

pharmaceutical industry for the period 2004–2014. Our main findings are that “brand firms”—that is,

firms that have research and development capabilities and launch new drugs—exhibit relatively dense

common ownership networks with each other that further increase significantly in density over time,

whereas the network of “generic firms”—that is, firms that primarily specialize in developing and

launching generic drugs—is much sparser and stays that way over the span of our sample. Finally, when

considering the common ownership links between brands firms, on the one hand, and generic firms, on

the other, we find that brand firms have become more connected to generic firms over time. We

discuss the potential antitrust implications of these findings.

Keywords

common ownership networks, pharmaceutical companies, competition, innovation

Introduction

Investors’ holdings in multiple firms give rise to what is known as “common ownership.” Common

ownership is widespread in the U.S. pharmaceutical industry. In 2014, for instance, the largest investor

in the three largest pharmaceutical companies (Johnson & Johnson, Merck & Co, and Pfizer) was the

same (BlackRock). This is the rule, not the exception. These three pharmaceutical companies share

other large institutional investors and are thus connected to each other, as well as to numerous other

pharmaceutical companies, through the so-called common ownership links.

1

* Universitat Pompeu Fabra, Barcelona, Spain

** City University London, England

*** KU Leuven, Belgium

**** DIW Berlin, Germany

Corresponding Author:

Jo Seldeslachts, KU Leuven, Oude Markt 13, Leuven 3000, Belgium.

Email: jo.seldeslachts@kuleuven.be

1. Institutional investors manage other people’s money by buying equity in companies (such a pension funds, sovereign wealth

funds, insurance companies, and investment funds). They ty pically seek to build diversified portfolios by investing in

multiple companies, often within the same industry.

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2021, Vol. 66(1) 68–99

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Common ownership links between pharmaceutical companies might have important implications

for competition and innovation in thi s crucial industry. By bringing inn ovative treatments to the

market, or by making treatments more widely accessible, the pharmaceutical industry makes an

important contribution to global health and economic development. At the same time, the industry

often generates controversies related to pricing and product development. A well-functioning phar-

maceutical industry in general and the consequences of common ownership in particular are thus key

concerns for policymaking and antitrust.

In this article, we study the common ownership links between firms that are active in U.S. phar-

maceutical markets in the period 2004–2014 and discuss the implications of our findings for innova-

tion incentives, entry, pricing, and collusion. There is both anecdotal and empirical evidence, reported

further below, showing that large institutional investors weigh in on pharmaceutical companies’

strategic decision-making. Given that these investors are both influential and, as we will show, have

ownership stakes in multiple firms within the same market, the common ownership links between

pharmaceutical companies could have important implications for competition and innovation.

We make use of network analysis to describe the structure and characteristics of common owner-

ship networks and calculate how central, or influential, actors are in the network.

2

We make a

distinction between “brand firms,” that have research and development (R&D) capabilities and launch

new drugs on to the market, and “generic firms,” that produce bioequivalent replications of brand-

name drugs once these drugs come off patent. We study the evolution of common ownership networks

between brand firms and generic firms separately, as well as the (bipartite) network of brand firms on

the one hand and generic firms on the other. We make use of two common ownership measures, which

determine links on the basis of individual or joint levels of ownership by common investors. An

individual common ownership link between two companies occurs when there is at least one investor

in both companies with an ownership stake of more than 5%. A joint common ownership link occurs

when investors common to both firms collectively are the majority owners.

We find that, 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. This is

true for both measures of common ownership, although we observe a less dramatic change when using

the joint measure, in part because the network was already highly connected at the beginning of the

sample. If large institutional investors do exert influence, as the anecdotal evidence below indicates,

then this increasing connectivity may have a nonnegligible and increasing impact on innovation

incentives. If institutional investors effectively assert their power in pharmaceutical companies, this

increasingly dense network might further lead to a softening of competition between brand firms’

products. Furthermore, as the evolution of the network partly depends on the ownership measure used,

the effects of common ownership might depend on whether common investors exert individual or joint

influence.

Alongside higher levels of connectivity between brand firms, the average measure of centrality,

which indicates how influential individual firms are within the common ownership network, has risen.

Interestingly, at the beginning of the sample, the most central firms were not necessarily the largest

2. There are surpri singly few papers that make use of network analys is to study common ownership patterns. A notable

exception is Vitali, Glattfelder, and Battison, who use network analysis to study investor networks in a large sample of

transnational corporations. See Stefania Vitali et al., The Network of Global Corporate Control,10PLOSONE 6 (2011).

Network analysis has been applied to other settings in the academic literature, for example, networks in the venture capital

industry, see Yael V. Hochberg et al., Whom You Know Matters: Venture Capital Networks and Investment Performance,62

J. FIN. 251 (2007); interorganizational ties, see Mark S. Mizruchi & Joseph Galaskiewicz, Networks of Interorganizational

Relations,22S

OC.MET’D.&RES. 46 (1993); and networks between U.S. firms that advocate for free trade, see Michael

Dreiling & Derek Darves, Corporate Unity in American Trade Policy: A Network Analysis of Corporate-dyad Political

Action, 116 AM.J.SOC. 1514 (2011).

Banal-Esta˜nol et al. 69

(e.g., Biogen and Allergan). On the contrary, the most central firms toward the end of the sample are

also the largest (e.g., Johnson & Johnson).

The network of brand companies remains, even at the end of the sample, relatively asymmetric.

Indeed, some of the largest pharmaceutical companies, such as Sanofi, Novartis, and Roche, remain

without any strong links in 2014. This is in part because of the presence of large noncommon investors

in these companies. Although several brand companies, such as Johnson & Johnson and Pfizer, have a

large and similar centrality value in 2014, several others have low values (or even zero). Thus, brand

firm centrality has not only increased over time, as the common ownership network has become more

connected, but it has also become more dispersed. The combination of a rise in centrality for the most

connected companies and, at the same time, higher dispersion overall might result in these central

players becoming even more powerful.

In comparison to the brand network, the generic firm network is much sparser and it becomes less

connected over time. Further, as compared to brand companies, the size of the shareholdings of the top

common investors in generic companies—although larger in 2004—is smaller in 2014. Consequently,

the average level of centrality for generic firms is much lower than the average for brand firms at the

end of the sample. While this is unlikely to have an impact on innovation—generic companies mainly

imitate brand products—it indicates that competition between generics is less affected by common

ownership.

Finally, the number of common ownership links between brand companies, on the one hand, and

generic companies, on the other, has increased substantially over time. Most brand-generic pairs were

not connected at the beginning of the sample, and even some of the largest brands, such as Pfizer, had

zero connections with the generics. At the end of our sample, there are a number of strong connections

between brands and generics. Most of the large brands, such as Johnson & Johnson and Pfizer, have a

large number of links by 2014. Similarly, some of the generics, such as Impax and Perrigo, have a high

number of connections with brand firms, despite having limited links between each other, and with

other firms within the generic ownership network. The increased brand-generic connectivity seems to

have led to a decrease in generic entry, as common investors have both an incentive and the ability to

delay or block generics from entering the market of a brand.

3

This article is structured as follows: section 2 provides a background of the pharmaceutical industry

and provides anecdotal evidence of investors’ influence in the pharmaceutical industry. Section 3

presents our data and a descriptive analysis. Section 4 undertakes a network analysis of the common

ownership links in the pharmaceutical industry. Section 5 lays out the antitrust implications of com-

mon ownership in the pharmaceutical industry. Section 6 concludes.

Background

Before analyzing common ownership patterns and their implications, this section provides a brief

overview of the typical pharmaceutical “life cycle,” which is important for understanding how the

industry, and thus how competition and innovation therein, works.

4

We then provide a definition of

common ownership and a few examples. Finally, we report anecdotal and empirical evidence illus-

trating that common investors weigh in on pharmaceutical companies’ strategic decisions.

3. The impact of brand-generic links through common ownership on generic entry is confirmed in Newham et al. See Melissa

Newham et al., Common Ownership and Market Entry: Evidence from Pharmaceutical Industry (DIW Berlin Discussion

Paper No. 1738, 2018), http://ssrn.com/abstract¼3194394.

4. For a more detailed overview, see Darius N. Lakdawalla, Economics of the Pharmaceutical Industry, 56 J. ECON.LIT. 397

(2018).

70 The Antitrust Bulletin 66(1)