Acquisitions, inventors’ turnover, and innovation: Evidence from the pharmaceutical industry

This paper examines the relationship between the post-merger decline in patenting among pharmaceutical firms, as observed in previous firm-level studies, and the following individual-level dynamics: (i) the exit of inventors from the innovation market, (ii) the departure of inventors from target firms to other research labs, and (iii) a decline in the innovative output of inventors who remain within the acquired firms. Using a large sample of target companies, we estimate that acquisitions are associated with an increase in exit rates of inventors between 7.6 and 17.5 percentage points and of their departure rates ranging from 12.2 to18.9 percentage points. We find similar results are obtained for large and small deals and that top inventors of targets are also more likely to exit or to leave when an acquisition takes place. Our results show that, for each inventor that exits the innovation market, around 2 patents are foregone, representing more than 30 percent loss of the expected output these scientists could have produced over their careers. Inventors who relocate to a different lab also generate 2 fewer patents compared to similar control scientists, representing a 30 percent decrease in their productivity too. Finally, inventors that stay at the acquired targets also experience a decrease in output of nearly one fewer patent. These results point to a significant decline in both human capital and consumer welfare, which call for a closer scrutiny of M&As.