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

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Abstract

This paper considers the determinants and effects of domestic versus cross-border mergers and acquisitions (M&As) in the pharmaceutical industry. Results show that companies that have had large research and development (R&D) expenditures as a percentage of sales in the past, but which have not had a significant number of drug approvals in the previous five years, tend to merge with foreign firms. Domestic mergers are formed between two firms within the same country, which typically have lower R&D expenditures as a percentage of sales and drug approvals in the previous five years. In addition, results show that domestic mergers increase drug approvals in the short run, but the effect diminishes three years after an M&A is finalized. However, cross-border mergers, which occur between two companies from different countries, largely have long-lasting (five years or more) positive effects on new drug approvals.

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Notes

  1. Other studies include Dixit (1984), Barros and Cabral (1994), Long and Vousden (1995), Head and Ries (1997), Richardson (1999), Horn and Levinsohn (2001), Collie (2003).

  2. It is important to include target firms’ pre-merger R&D productivity in the counterfactual and compare the change in targets’ pre-merger R&D productivity after the merger. But for international mergers, targets’ pre-merger R&D productivity is not observable due to inaccessibility of appropriate data. The comparison of the acquiring companies’ R&D productivity captures how companies are able to obtain more NDA approvals after the merger. We thank an anonymous reviewer for this comment.

  3. The size of the target firm, the nature of the molecules (branded vs. generic, small molecule vs. large molecule) and target locations are not observable in the data. Our estimation technique controls for the level of the firm’s heterogeneity and controls for unobserved effects. For future studies, we plan to expand this analysis by including this information. We are thankful to an anonymous reviewer for these comments.

  4. See Griliches (1977), Brand and Xie (2010), Brand and Thomas (2013).

  5. As shown by Bertrand and Zuninga (2006), Bertrand (2009), and Ornaghi (2009), M&A decisions are an endogenous variable and the heterogenous treatment effect model corrects the endogenous nature and other selection problems.

  6. We repeated the second stage for domestic and international mergers in two separate analyses.

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Acknowledgments

We are thankful to our anonymous reviewer for these comments.

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Authors and Affiliations

  1. Department of Economics, Auburn University, 0324 Haley Center, Auburn, AL, 36849, USA

    Tannista Banerjee

  2. Stetson School of Business and Economics, Mercer University, 204 Business and Education Building, 3001 Mercer University Drive, Atlanta, GA, 30341, USA

    Arnab Nayak

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  1. Tannista Banerjee
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  2. Arnab Nayak
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Correspondence to Tannista Banerjee.

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Banerjee, T., Nayak, A. Comparing Domestic and Cross-Border Mergers and Acquisitions in the Pharmaceutical Industry. Atl Econ J 43, 489–499 (2015). https://doi.org/10.1007/s11293-015-9476-0

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