TY - JOUR AU - Danzon,Patricia M. AU - Epstein,Andrew AU - Nicholson,Sean TI - Mergers and Acquisitions in the Pharmaceutical and Biotech Industries JF - National Bureau of Economic Research Working Paper Series VL - No. 10536 PY - 2004 Y2 - June 2004 UR - http://www.nber.org/papers/w10536 L1 - http://www.nber.org/papers/w10536.pdf N1 - Author contact info: Patricia M. Danzon Health Care Management Department The Wharton School University of Pennsylvania 3641 Locust Walk Philadelphia, PA 19104 Tel: 215/898-0694 Fax: 215/573-2157 E-Mail: danzon@wharton.upenn.edu Andrew Epstein Division of General Internal Medicine University of Pennsylvania School of Medicine 423 Guardian Dr 1001 Blockley Hall Philadelphia, PA 19104 Tel: 215-746-7992 E-Mail: eandrew@mail.med.upenn.edu Sean Nicholson Professor Department of Policy Analysis and Management Cornell University 102 Martha Van Rensselaer Hall Ithaca, NY 14853 Tel: 607/254-6498 Fax: 607/255-4071 E-Mail: sn243@cornell.edu AB - This paper examines the determinants of M&A activity in the pharmaceutical-biotechnology industry and the effects of mergers using propensity scores to control for merger endogeneity. Among large firms, we find that mergers are a response to excess capacity due to anticipated patent expirations and gaps in a company's product pipeline. For small firms, mergers are primarily an exit strategy for firms in financial trouble, as indicated by low Tobin's q, few marketed products, and low cash-sales ratios. We find that it is important to control for a firm's prior propensity to merge. Firms with relatively high propensity scores experienced slower growth of sales, employees and R&D regardless of whether they actually merged, which is consistent with mergers being a response to distress. Controlling for a firm's merger propensity, large firms that merged experienced similar changes in enterprise value, sales, employees, and R&D relative to similar firms that did not merge. Merged firms had slower growth in operating profit in the third year following a merger. Thus mergers may be a response to trouble, but they are not an effective solution for large firms. Neither mergers nor propensity scores have any effect on subsequent growth in enterprise value. This confirms that market valuations on average yield unbiased predictions of the effects of mergers. Small firms that merged experienced slower R&D growth relative to similar firms that did not merge, suggesting that post-merger integration may divert cash from R&D. ER -