Advanced Search
MyIDEAS: Login

Mergers and Acquisitions in the Pharmaceutical and Biotech Industries

Contents:

Author Info

  • Patricia M. Danzon
  • Andrew Epstein
  • Sean Nicholson

Abstract

This paper examines the determinants of M&A activity in the pharmaceutical-biotechnology industry and the effects of mergers using propensity scores to control for merger endogeneity. Among large firms, we find that mergers are a response to excess capacity due to anticipated patent expirations and gaps in a company's product pipeline. For small firms, mergers are primarily an exit strategy for firms in financial trouble, as indicated by low Tobin's q, few marketed products, and low cash-sales ratios. We find that it is important to control for a firm's prior propensity to merge. Firms with relatively high propensity scores experienced slower growth of sales, employees and R&D regardless of whether they actually merged, which is consistent with mergers being a response to distress. Controlling for a firm's merger propensity, large firms that merged experienced similar changes in enterprise value, sales, employees, and R&D relative to similar firms that did not merge. Merged firms had slower growth in operating profit in the third year following a merger. Thus mergers may be a response to trouble, but they are not an effective solution for large firms. Neither mergers nor propensity scores have any effect on subsequent growth in enterprise value. This confirms that market valuations on average yield unbiased predictions of the effects of mergers. Small firms that merged experienced slower R&D growth relative to similar firms that did not merge, suggesting that post-merger integration may divert cash from R&D.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w10536.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10536.

as in new window
Length:
Date of creation: Jun 2004
Date of revision:
Publication status: published as Patricia M. Danzon & Andrew Epstein & Sean Nicholson, 2007. "Mergers and acquisitions in the pharmaceutical and biotech industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 307-328.
Handle: RePEc:nbr:nberwo:10536

Note: CF HE IO
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Bronwyn H. Hall, 1987. "The Effect of Takeover Activity on Corporate Research and Development," NBER Working Papers 2191, National Bureau of Economic Research, Inc.
  2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  3. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
  4. Amy Finkelstein, 2003. "Health Policy and Technological Change: Evidence from the Vaccine Industry," NBER Working Papers 9460, National Bureau of Economic Research, Inc.
  5. Rajeev H. Dehejia & Sadek Wahba, 2002. "Propensity Score-Matching Methods For Nonexperimental Causal Studies," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 151-161, February.
  6. MING DONG & David Hirshleifer & SCOTT RICHARSON & Siew Hong Teoh, 2004. "Does Investor Misvaluation Drive the Takeover Market?," Finance 0412002, EconWPA.
  7. John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16.
  8. Keisuke Hirano & Guido W. Imbens & Geert Ridder, 2003. "Efficient Estimation of Average Treatment Effects Using the Estimated Propensity Score," Econometrica, Econometric Society, vol. 71(4), pages 1161-1189, 07.
  9. Dranove, David & Lindrooth, Richard, 2003. "Hospital consolidation and costs: another look at the evidence," Journal of Health Economics, Elsevier, vol. 22(6), pages 983-997, November.
  10. Sean Nicholson & Patricia M. Danzon & Jeffrey S. McCullough, 2002. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," NBER Working Papers 9007, National Bureau of Economic Research, Inc.
  11. Jose Manuel Campa & Simi Kedia, 2002. "Explaining the Diversification Discount," Journal of Finance, American Finance Association, vol. 57(4), pages 1731-1762, 08.
  12. David J. Ravenscraft & William F. Long, 2000. "Paths to Creating Value in Pharmaceutical Mergers," NBER Chapters, in: Mergers and Productivity, pages 287-326 National Bureau of Economic Research, Inc.
  13. Sara B. Moeller & Frederik P. Schlingemann & Rene M. Stulz, 2003. "Do shareholders of acquiring firms gain from acquisitions?," NBER Working Papers 9523, National Bureau of Economic Research, Inc.
  14. Guido W. Imbens, 2004. "Nonparametric Estimation of Average Treatment Effects Under Exogeneity: A Review," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 4-29, February.
  15. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  16. Conyon, Martin J. & Girma, Sourafel & Thompson, Steve & Wright, Peter W., 2002. "The impact of mergers and acquisitions on company employment in the United Kingdom," European Economic Review, Elsevier, vol. 46(1), pages 31-49, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Panayotis Dessyllas & Alan Hughes, 2005. "The revealed preferences of high technology acquirers: an analysis of the characteristics of their targets," ESRC Centre for Business Research - Working Papers wp306, ESRC Centre for Business Research.
  2. Schön, Benjamin & Pyka, Andreas, 2013. "The success factors of technology-sourcing through mergers & acquisitions: An intuitive meta-analysis," FZID Discussion Papers 78-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  3. Panos Desyllas, 2009. "Improving performance through vertical disintegration: evidence from UK manufacturing firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(5), pages 307-324.
  4. Ornaghi, Carmine, 2006. "Mergers and innovation: the case of the pharmaceutical industry," Discussion Paper Series In Economics And Econometrics 0605, Economics Division, School of Social Sciences, University of Southampton.
  5. Ornaghi, Carmine, 2009. "Mergers and innovation in big pharma," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 70-79, January.
  6. Sorisio, Enrico & Strøm, Steinar, 2009. "Innovation and market dynamics in the EPO market," HERO On line Working Paper Series 2006:3, Oslo University, Health Economics Research Programme.
  7. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
  8. Lo Nigro, Giovanna & Perrone, Giovanni & Chiapparrone, Silvia, 2012. "Governance forms drivers in bio-pharmaceutical inter-firm relationships," International Journal of Production Economics, Elsevier, vol. 140(2), pages 604-613.
  9. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & Gilles Saint-Paul & Hans-Werner Sinn & John Kay & Jan-Egbert Sturm & Xavier Vives, 2006. "Chapter 5: Mergers and Competition Policy in Europe," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 101-116, 03.
  10. Panayotis Dessyllas & Alan Hughes, 2005. "The Revealed Preferences of High Technology Acquirers: An Analysis of the Characteristics of their Targets," Industrial Organization 0507009, EconWPA.
  11. Desyllas, Panos & Hughes, Alan, 2010. "Do high technology acquirers become more innovative?," Research Policy, Elsevier, vol. 39(8), pages 1105-1121, October.
  12. Tjandrawinata, Raymond R. & Simanjuntak, Destrina Grace, 2012. "Factors affecting productivity of research-based pharmaceutical companies following mergers and acquisitions," MPRA Paper 42514, University Library of Munich, Germany.
  13. Stiebale, Joel & Haucap, Justus, 2013. "How Mergers A ffect Innovation: Theory and Evidence," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79831, Verein für Socialpolitik / German Economic Association.
  14. Christopher Paul Adams & Van Vu Brantner, 2010. "Spending on new drug development," Health Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 130-141.
  15. Ozmel, Umit & Robinson, David T. & Stuart, Toby E., 2013. "Strategic alliances, venture capital, and exit decisions in early stage high-tech firms," Journal of Financial Economics, Elsevier, vol. 107(3), pages 655-670.
  16. Williams, David R., 2013. "Human and financial capital as determinants of biopharmaceutical IPO de-listings," Journal of Business Research, Elsevier, vol. 66(12), pages 2612-2618.
  17. Walter Park & Ralph Sonenshine, 2012. "Impact of Horizontal Mergers on Research & Development and Patenting: Evidence from Merger Challenges in the U.S," Journal of Industry, Competition and Trade, Springer, vol. 12(1), pages 143-167, March.
  18. Morgan, Steve & Grootendorst, Paul & Lexchin, Joel & Cunningham, Colleen & Greyson, Devon, 2011. "The cost of drug development: A systematic review," Health Policy, Elsevier, vol. 100(1), pages 4-17, April.
  19. Magazzini Laura & Fabio Pammolli, 2013. "R&D, Within and Between Patent Competition in the Pharmaceutical Industry," Working Papers 3/2013, IMT Institute for Advanced Studies Lucca, revised Jul 2013.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10536. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.