What Do Drug Company Mergers Mean? : Health care: Upjohn- Pharmacia deal is part of a trend that won’t necessarily hurt consumers.

It sounds like simple economics.

As drug companies continue their merger frenzy, there will be less competition, resulting in less innovation and higher prices for consumers, right?

Not necessarily, say industry watchers, who point out that other factors, such as the growth of health maintenance organizations and the public’s demand for more non-prescription medicines, continue to push prices downward.

Sunday’s $13-billion proposed linkup of Sweden’s Pharmacia and the United States’ Upjohn Co. shows the health care industry’s 2-year-old consolidation trend is still quite healthy.

Some questions and answers for drug customers trying to figure out what it means to them:

Q: Why are these companies merging?

A: Since the early 1990s, the nation’s employers--the biggest buyers of health care--have demanded an end to double-digit annual price increases by insurers and care providers. As a result, pharmaceutical companies, medical device makers, HMOs, hospitals, nursing homes and others have all been looking for ways to cut costs. Mergers, buyouts and partnership deals can do this and also allow them to tap into the best products and services of competitors.

The Upjohn-Pharmacia merger involves two second-tier players looking to catch up with the top companies, most of which have already made deals.

Q: What does this mean for drug prices?

A: Opinions vary. Industry critics such as Dr. Peter Arno, health economist at Montefiore Medical Center in New York, are pessimistic.

“Less consumer choice, less innovative research and development and higher prices,” said Arno, who believes wholesale drug prices are still rising much faster than inflation. Arno wants government price controls and a mandate that 15% to 20% of sales be funneled into research, not shareholder pockets.

But others say that even after hundreds of billions of dollars’ worth of mergers, the health care industry is highly fragmented. Even the top drug maker, Glaxo Wellcome, has just a 6% market share.

Domination by a handful of companies is “several years down the road,” said Casey Nolan, health care specialist with the management consultant Ernst & Young. “You really need to control a significant share of the market before you can exert that kind of power,” he said.

Q: Is there a benefit to size through consolidation?

A: Larger companies with more diverse skills are more efficient with lower costs, said John Cookson, health consultant with the consulting firm Milliman & Robertson. They will be better able to convert more high-priced priced prescription drugs to over-the-counter use, where they are much cheaper, he said.

Experts agree that HMOs, with their large patient bases, have successfully demanded big discounts from drug makers, cutting prices deeply for the one-fifth of the population they cover. But in recent months, the drug makers have gotten tougher, demanding guarantees of sales boosts before agreeing to keep their prices low. HMOs are, in turn, scrambling to cut costs by restricting services and are buying each other out to gain more patients and bargaining strength.

“It’s like a balancing act. Whoever grows the fastest, the HMOs or the drug companies, will have the power,” said Barry Goldstein, director of pharmacy services at New York University Medical Center.

Q: How will mergers affect drug research?

A: Several factors conflict, the experts say. Breakthrough drugs garnered from years of painstaking research can demand a high price, even from stingy HMOs, because an effective drug is almost always cheaper than surgery.

Without good research, drug makers are relegated to a bidding war over increasingly cheaper generic drugs, Goldstein said. “That’s not very profitable, so I think they will continue to do research,” he said.

But with fewer players, work on drugs for difficult or esoteric diseases that don’t afflict large numbers of people may decline.

“It will accelerate the trend to disease-specific, highly targeted research, and the serendipitous discoveries like penicillin will be less likely to occur,” said Ernst & Young’s Nolan.

Not so, said Nolan’s colleague Kenneth Lee Jr., an economist.

Small biotechnology companies researching drugs for obscure or difficult diseases such as cancer and Alzheimer’s disease have been snapped up in recent months by bigger drug makers searching for breakthroughs. These buyouts can mean big windfalls for the owners of fledgling companies, Lee said.

“I think this spurs on entrepreneurs and investors in these entrepreneurs in the process of advancing biotech and other younger companies,” he said.