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Master's Thesis from the year 2013 in the subject Business economics - Miscellaneous, grade: 8,5 (NL, äquivalent zu 1,2), Utrecht University (Law, Economics and Governance), course: Mergers & Akquisitions, language: English, abstract: The number and volume of pharmaceutical companies’ mergers and acquisitions have reached exorbitant magnitudes in the last decade, with estimations of over 1,300 deals worth US$ 690 billion between 2000 and 2009.1 The biggest transaction, valued at US$ 66.7 billion2, occurred in 2009 when Pfizer bought Wyeth. The sheer dimension of transactions in this sector, being subject to significant public interest, poses questions about the motivations behind these deals, which are mostly believed to be countermeasures for patent expirations, as well as the impact on drug innovation. Even though, the regular object of interest regarding mergers is the shareholder value, in this specific case drug innovation is of particular interest as it does not only influence the future prospects of the pharmaceutical companies but also long term public health. Hence, the objective of this thesis is to discover what the impact of pharmaceutical mergers on R&D intensity and efficiency of the acquiring organization and on the pharmaceutical industry as a whole is.
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Table of Contents
Tables and Figures
Introduction
1. Theoretical Framework and industry
1.1. Overview of M&A Theory and the pharmaceutical industry
1.2. Review of R&D and the drug approval process
2. Empirical Analyses
2.1. Empirical specification and data
2.1.1. Empirical specification
2.1.2. Data
2.2. Results - Mergers & Acquisitions and R&D intensity
2.3. Mergers & Acquisitions and R&D efficiency
3. Small Acquisitions and their Impact on Industry Efficiency
4. Discussion, Limitations and food for thought
Appendix
Figure 1: Average R&D cost per pharmaceutical drug in 2005 US$
Figure 2: Development of R&D and M&A expenditures
Figure 3: The pharmaceutical research and development process
Figure 4: Number of mergers over US$ 500 million in the dataset
Table 1: Anticipated effects of M&As on R&D
Table 2: Regional differences in the drug approval process and regulation
Table 3: Impact of M&A on R&D intensity
Table 4: Impact of M&A on R&D intensity incl. Country Dummies
Table 5: Impact of M&A on R&D efficiency, time periods
Table 6: Summary of key variables
Table 7: List of all mergers in the Dataset
Table 8: Thomson Dataset - Number of Companies per country
Table 9: Dataset 2 (Thomson) - Impact of M&A on R&D intensity 1980 to 2012, no control variables
Table 10: Dataset 2 (Thomson) - Impact of M&A on R&D 1980 to 2012 with control variables, Full table
Table 11: Dataset 2 (Thomson) - Impact of M&A on R&D 1980 to 2012 incl. Country Dummies, full table
Table 12: Impact of M&A on R&D efficiency, full table
Table 13: Impact of M&A on R&D efficiency, time periods full table
The number and volume of pharmaceutical companies’ mergers and acquisitions have reached exorbitant magnitudes in the last decade, with estimations of over 1,300 deals worth US$ 690 billion between 2000 and 2009.[1] The biggest transaction, valued at US$ 66.7 billion[2], occurred in 2009 when Pfizer bought Wyeth. The sheer dimension of transactions in this sector, being subject to significant public interest, poses questions about the motivations behind these deals, which are mostly believed to be countermeasures for patent expirations, as well as the impact on drug innovation. Even though, the regular object of interest regarding mergers is the shareholder value, in this specific case drug innovation is of particular interest as it does not only influence the future prospects of the pharmaceutical companies but also long term public health. Hence, the objective of this thesis is to discover what the impact of pharmaceutical mergers on R&D intensity and efficiency of the acquiring organization and on the pharmaceutical industry as a whole is.
Accordingly, I present a short overview of general Mergers & Acquisitions (M&A) theory, the pharmaceutical industry and the historic development of M&A within the industry. Subsequently, I briefly explain and discuss R&D practices, drug approval processes and differences in regulation between selected countries. Afterwards, I present and analyze R&D spending and intensity of major pharmaceutical companies and its correlation with M&A’s. Additionally, I connect R&D spending to patent applications, controlling for real innovations and remakes as far as possible, in order to examine the effects on R&D efficiency more closely. The empirical analysis is constrained to major firms mainly due to data availability problems. The subsequent qualitative section however, will discuss smaller acquisitions, the research efficiency of small and mediums sized companies as well as their impact on the industry’s development efficiency. Major pharmaceutical players frequently buy start-ups or small, innovative research companies to refresh their patent portfolio or acquire promising intellectual property. I elaborate whether these deals increase overall drug innovation efficiency, by allowing research by potentially more efficient small companies with the prospect of a sell off. Finally, I expose limitations of the paper, recommendations for future research and food for thought about policy implications and behavior of pharmaceutical companies. The presented topic is not only relevant for pure academic purposes but also for policy makers and institutions involved in the pharmaceutical sector. If a significant part of mergers affects drug innovation, steps should be undertaken to prevent the negative effects or avert these mergers at all. It is of public interest that drug innovation is as efficient as possible and this should be prioritized over profits from a regulator’s perspective. Thus and because of little existing research on this topic, it is pertinent for a master thesis and adds to the existing academic literature.
In this section, I will give an overview of motivations for and performance of M&A in general and in the pharmaceutical industry especially. I present the main findings of recent literature and determine the avenue of my research in this paper. Additionally, I explain the characteristics of Research and Development (R&D) in the pharmaceutical industry, including regulations and processes regarding drug approval and patenting.