Mergers and Acquisitions in the Pharmaceutical and Biotech Industries

46 Pages Posted: 17 Jun 2004 Last revised: 4 Nov 2012

See all articles by Patricia M. Danzon

Patricia M. Danzon

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

Andrew Joel Epstein

Yale University - School of Public Health

Sean Nicholson

Cornell University - Department of Policy Analysis & Management (PAM); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

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.

Suggested Citation

Danzon, Patricia M. and Epstein, Andrew Joel and Nicholson, Sean, Mergers and Acquisitions in the Pharmaceutical and Biotech Industries (June 2004). NBER Working Paper No. w10536. Available at SSRN: https://ssrn.com/abstract=556523

Patricia M. Danzon (Contact Author)

University of Pennsylvania - Health Care Systems Department ( email )

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National Bureau of Economic Research (NBER)

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Andrew Joel Epstein

Yale University - School of Public Health

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Sean Nicholson

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

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Ithaca, NY 14853
United States
607-254-6498 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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