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Mergers and Innovation in the Pharmaceutical Market

  • Comanor, William S.

    (UCLA and University of CA, Santa Barbara)

  • Scherer, F. M.

    (Harvard University)

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    The U.S. pharmaceutical industry has experienced in recent years two dramatic changes: stagnation in the growth of new molecular entities approved for marketing, and a wave of mergers linking inter alia some of the largest companies. This paper explores possible links between these two phenomena and proposes alternative approach to merger policy. It points to the high degree of uncertainty encountered in the discovery and development of new pharmaceutical entities and shows how optimal strategies entail the pursue of parallel research and development paths. Uncertainties afflict both success rates and financial gains contingent upon success. A new model simulating optimal strategies given prevalent market uncertainties is presented. Parallelism can be sustained both within individual companies' R&D programs and across competing companies. The paper points to data showing little parallelism of programs within companies and argues that inter-company mergers jeopardize desirable parallelism across companies.

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    Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp11-043.

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    Date of creation: Nov 2011
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    Handle: RePEc:ecl:harjfk:rwp11-043
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