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Pharma M&A versus alliances and its underlying value drivers

Are M&A or alliances the right therapy for an ailing pharmaceutical industry?- A capital market perspective


Heiko Schön

From a capital market perspective, the author analyzes Merger and Acquisitions transactions (M&A) and in-licensings in the pharmaceutical industry between 1998 and 2012. Utilizing the event study methodology, the volume shows that M&A experiences significant, negative cumulative average abnormal returns whereas in-licensings are able to create value. But what are the underlying value drivers which make a deal a success or a failure story? The author derives significant innovative determinants of success for both strategies.
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V.5.5 Financial deal components


The underlying nature of R&D cooperation within pharmaceutical in-licensing agreements varies: from funding only, to transfer of pipeline drugs in different phases from licensor to licensee, to factual co-development agreements (see chapter IV.2. for in-depth understanding of its mechanics). And in exchange for rights to develop and / or to market exclusively or non-exclusively promising new drugs, those contracts prototypically carry the following financial deal components: upfront payments that are made upon signing which can be both in cash and / or as an equity investment, event-depending milestone payments which can be both R&D (e.g. commencement of Phase 3 trials), and sales related (e.g. exceeding a threshold of 1b USD worldwide sales), sharing of R&D expenses and last but not least royalties and / or profit sharing schemes one the product is being sold.

There is no directly related literature available discussing the impact of licensing financial deal components on shareholders’ wealth effects. Only Gibson and Kim (2013) show, by investigating public announcements on technology transfer contracts in South Korea, that, firstly, licensee and licensor choose one of fixed or output-contingent payment based on their financial condition at the time of technology transfer agreement and that, secondly, only mixed payment derives a positive response of capital markets. Considering the reduction of total information asymmetry in innovation activities as one of most critical factors of value creation, they claim that mixed payment schemes can serve as an effective instrument to reduce...

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