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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

Series:

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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A. Introduction

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Prescription drugs which represent approximately 90% of the total pharmaceutical market approach the one trillion USD sales mark until 2016 and bear an uniquely distinct value chain and market dynamics (IMS Health, 2011; Datamonitor, 2012 and EvaluatePharma, 2012). Just looking at its research and development demonstrates what makes it so special. The costs to develop a new drug have been growing to 1.2b USD compared to 320m USD in the mid-1980s whilst the underlying process is per se very complex and with a long distance run of between ten and fifteen years at very high risk: either the drug will be approved and may even become a blockbuster or not and may return a zero in sales and profit (DiMasi et al., 2003; Dickson and Gagnon, 2004; DiMasi and Grabowski, 2007; PhRMA, 2012).

The pharmaceutical industry is facing a paradigm shift driven by three critical challenges. First, the innovation crisis: Top pharmaceutical companies invested in R&D 40b USD in 2011 compared to 12b USD in 1995 meaning that the R&D efforts have more than tripled since then (respective annual reports; PhRMA, 2012). Albeit, the total number of new drugs have not been keeping pace with the higher investment levels: 35 in 2011 versus 30 in 1995 (Pammolli et al., 2011; Garnier et al., 2008; Anderson et al., 2012). Second, the patent cliff: Patent expiry and the subsequent loss of revenue due to generic competition is part of the natural course of pharmaceutical...

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