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Mergers and Acquisitions in the Pharmaceutical and Biotech Industries

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Author Info
Patricia M. Danzon
Andrew Epstein
Sean Nicholson

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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.

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

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Date of creation: Jun 2004
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Handle: RePEc:nbr:nberwo:10536

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Find related papers by JEL classification:
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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References listed on IDEAS
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Cited by:
(explanations, 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.)

  1. 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. [Downloadable!]
  2. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2006. "EEAG European Economic Advisory Group at CESifo: Report on the European Economy 2006," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 1-120, 03. [Downloadable!]
    Other versions:
  3. Sorisio, Enrico & Strøm, Steinar, 2006. "Innovation and market dynamics in the EPO market," Memorandum 12/2006, Oslo University, Department of Economics. [Downloadable!]
    Other versions:
  4. 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. [Downloadable!]
  5. Panayotis Dessyllas & Alan Hughes, 2005. "The Revealed Preferences of High Technology Acquirers: An Analysis of the Characteristics of their Targets," Industrial Organization 0507009, EconWPA. [Downloadable!]
  6. Ornaghi, Carmine, . "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. [Downloadable!]
  7. Yukako Murakami & Kyoji Fukao, 2006. "Inward Foreign Direct Investments and Productivity Growth in Japan," Hi-Stat Discussion Paper Series d05-143, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  8. 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. [Downloadable!]
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