Dynamic Mergers Effects on R&D Investments and Drug Development across Research Phases in the Pharmaceutical Industry

Ralph Siebert and Zhili Tian

No 8303, CESifo Working Paper Series from CESifo

Abstract: Pharmaceutical firms spend increasing amounts in mergers and acquisitions (M&As), which raises the question of whether sufficient investment is left after mergers to further develop firms’ internal drug development capability. We evaluate the effects of M&As on firms’ post-merger R&D investments and drug development capabilities across drug development phases. This study builds on a novel database that enables us to evaluate the post-merger effect at the research project level and across development phases. A further novel feature of the study is allowing measurement errors to enter firms’ R&D investments. Our study adopts a structural equation modeling approach, which is appropriate for evaluating a system of equations through which we examine the direct and indirect merger effects on R&D capabilities across development phases. We find that M&As have a strong effect on firms’ drug development at the late development phases through economies of scope. At the early development phases, M&As serve to replenish firms’ drug pipelines. The study shows that M&As have a direct and negative effect on firms’ R&D investments. However, the overall effect on R&D investments accounting for enhanced post-merger R&D capabilities and product approvals turns out to be positive. M&As can be an effective instrument for firms to acquire drug development knowledge and technology in late stages of the development process (Phases 3 clinical testing and regulatory filing). Our study provide empirical evidence that investments in M&As in late stage of drug development help firms’ growth and increase firms revenue.

Keywords: drug development phases; dynamics; innovation management; merger and acquisition; pharmaceutical drug development; R&D capabilities (search for similar items in EconPapers)
JEL-codes: L11 L13 L52 O31 O32 O38 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-com, nep-cse, nep-ind, nep-ino and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8303

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