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Dynamic Mergers Effects on R&D Investments and Drug Development across Research Phases in the Pharmaceutical Industry

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  • Ralph Siebert
  • Zhili Tian

Abstract

Pharmaceutical firms spend increasing amounts in mergers and acquisitions (M&As), which raises the question of whether sufficient investment is left after mergers to further develop firms’ internal drug development capability. We evaluate the effects of M&As on firms’ post-merger R&D investments and drug development capabilities across drug development phases. This study builds on a novel database that enables us to evaluate the post-merger effect at the research project level and across development phases. A further novel feature of the study is allowing measurement errors to enter firms’ R&D investments. Our study adopts a structural equation modeling approach, which is appropriate for evaluating a system of equations through which we examine the direct and indirect merger effects on R&D capabilities across development phases. We find that M&As have a strong effect on firms’ drug development at the late development phases through economies of scope. At the early development phases, M&As serve to replenish firms’ drug pipelines. The study shows that M&As have a direct and negative effect on firms’ R&D investments. However, the overall effect on R&D investments accounting for enhanced post-merger R&D capabilities and product approvals turns out to be positive. M&As can be an effective instrument for firms to acquire drug development knowledge and technology in late stages of the development process (Phases 3 clinical testing and regulatory filing). Our study provide empirical evidence that investments in M&As in late stage of drug development help firms’ growth and increase firms revenue.

Suggested Citation

  • Ralph Siebert & Zhili Tian, 2020. "Dynamic Mergers Effects on R&D Investments and Drug Development across Research Phases in the Pharmaceutical Industry," CESifo Working Paper Series 8303, CESifo.
  • Handle: RePEc:ces:ceswps:_8303
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    More about this item

    Keywords

    drug development phases; dynamics; innovation management; merger and acquisition; pharmaceutical drug development; R&D capabilities;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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