Comparing Domestic and Cross-Border Mergers and Acquisitions in the Pharmaceutical Industry

By Banerjee, Tannista; Nayak, Arnab | Atlantic Economic Journal, December 2015 | Go to article overview

Comparing Domestic and Cross-Border Mergers and Acquisitions in the Pharmaceutical Industry


Banerjee, Tannista, Nayak, Arnab, Atlantic Economic Journal


Introduction

The pharmaceutical industry is characterized by high investments in research and development (R&D), which, in turn, yield high returns when a new drug is successfully introduced. Pharmaceutical companies remain competitive by expending significant resources to maintain their research pipeline in order to introduce new drugs to the market. In response to tough competition, the arduous Food and Drug Administration approval process, and the high cost of research, most pharmaceutical companies form deals with one another. Antitrust regulators give special scrutiny to pharmaceutical deals, specifically merger and acquisition (M&A) deals in the pharmaceutical industry. While in some industries, one may argue that the welfare effects of a merger outweigh the negative competition effects, it is difficult to determine the welfare effects of mergers in this industry. The effect of mergers on consumers is an important topic of research, because consumers will benefit when the merging firms enjoy R&D collaboration, control development costs, and are able to introduce new drugs more easily. However, when mergers reduce competition, increase market power, and increase prices, then consumers suffer the consequences.

In this paper, detailed M&A data from 1997 to 2007 are matched with R&D and chug approval data to compare the evolution of drug introductions between merged companies and non-merged companies. The analysis also compares the approval rate of new drug applications for domestic and cross-border merged firms. Domestic mergers involve two companies within the same country, while cross-border mergers (also referred to as international mergers) are made between two companies from different countries. This research will demonstrate the effects of mergers in the pharmaceutical industry and provide background for antitrust cases.

The academic literature focuses on various aspects of pharmaceutical mergers. Koenig and Elizabeth (2004), Omaghi (2009) and Danzon, et al. (2007) showed a weakly negative association of mergers and productivity in pharmaceutical companies. A new study by Grabowski and Kyle (2008), with detailed R&D project level data, shows a positive effect of mergers on R&D productivity, especially for small companies. (1) Our paper contributes to the literature by comparing domestic mergers and international mergers and by evaluating the effects of mergers on new drug applications.

Literature Review

Mergers and acquisitions (M&As) have regularly been observed in such different industries as pharmaceutical, semiconductor, and metals. Many experts argue that M&As are a robust solution to the declining productivity and problems of uncertain innovation. In the pharmaceutical and other innovative industries, several studies have shown that M&As do not affect R&D productivity in the same way for all organizations. For example, Munos (2009) analyzed the effect of mergers on small and large pharmaceutical companies and concluded that new drug approvals decline slightly following significant mergers for large firms, while small firms benefit from mergers and increase their new drug approvals following mergers.

Our study went beyond considering the effect of company size on M&As to exploring the differences in motivation and effects of domestic mergers compared with cross-border mergers. This surpasses previous studies by demonstrating the increase in international mergers within the pharmaceutical industry. Comanor and Scherer (2013) depicted that duplicative innovative projects are reduced for merged companies. Comanor and Scherer (2013) did not provide the motivation for R&D concentration, and the direction of causation is not clear. Our study provides the motivation for R&D collaboration and analyzes the correct causation of increasing R&D productivity after the collaboration.

Danzon et al. …

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