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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Value creation in the pharmaceutical industry through acquisitions of biotechnology firms and expansion in emerging markets
Organization Unit
Authors
  • Anna Rechkunova
Supervisors
  • Michel Habib
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 25
Date 2020
Abstract Text Mergers and acquisitions have long been viewed by companies as financial and strategic tool to grow, improve and transform business. The increasing complexity of the business environment and the slowdown in economic growth of the last two decades aided the explosion of M&A activity with its value reaching five trillion dollars globally in 2015 – five times the number observed at the turn of the century. Biopharmaceuticals is one of the leading industries by both M&A volume and value with over 1000 deals together valued at USD 400-500 billion made yearly. The majority of these deals in the last decade were sought after because of diminishing return on productivity which fell from 10.1% in 2010 to 1.9% in 2018 (Deloitte, 2018). Acquisitions are done by pharmaceutical companies seeking to gain access to products and technologies owned by established pharmaceutical and smaller biotech companies, as well as grow revenues by increasing their market share in the traditional markets and expanding their business into the high-growth market, particularly emerging markets where growing prosperity allows for higher sales at lower costs. Despite pharma’s active engagement in M&A, the trend is relatively new for the industry. Pharmaceuticals survived as a fragmented industry for almost a century, only joining for the fifth global M&A wave in 1980s. After having enjoyed decades of market power and stable growth in revenues, the industry was disrupted in 1984 with the introduction of Hatch-Waxman Act that gave easier market access to generic drugs. As those cheaper substitutes to the previously irreplaceable and highly lucrative blockbusters grew to occupy 88% of the market, pharmaceutical companies had to find new sources of revenue generation in their pipelines. However, as drug discovery process grew in its complexity, and increased demands from FDA for safety and efficacy increased the costs of R&D, innovation was also put under strain. As a response to the increasingly stringent conditions, large number of cash-rich pharmaceutical giants turned to mergers. Consolidation allowed companies to cut infrastructure costs, gain operational synergies and accelerate the pace of innovation through knowledge transfer. These mergers were also welcomed by the markets and brought shareholders additional value (Long and Ravencraft, 2001). As a result, by 2002 ten largest pharmaceutical companies that used to account for 20% of industry sales in 1985 grew to occupy 48% of the market (Danzon, Epstein, Nicholson, 2007). 4 The advantages these mergers offered, however, did not solve the fundamental problem – that of diminishing return to R&D. Back in 1970-80s, while pharma was enjoying its prosperity that serendipity research and small molecule products offered, a new field in the healthcare sector was emerging – biotechnology. University funding fostered research and rise of venture capital firms in the 1970s allowed scientists to take their ideas outside the lab and develop them into a viable product. This gave rise to biologics – a new type of drug that rapidly grew in popularity replacing the conventional chemical-based pharmaceutical products. To remain competitive, pharma started partnering up with these new research-intensive firms. Such collaborations were profitable for both parties: pharmaceutical companies could expand their traditional product portfolio and fresh-out-of-university biotechs received the necessary platform and resources to push their research beyond the scope of the lab. Innovation did not only shift between industry sectors, but also geography. More and more pharmaceutical companies acquire foreign targets to grow revenues and lower production costs. The past decade has seen pharmaceutical giants turning to the emerging markets. BRICS and MIST countries, while risky, provide pharmaceuticals with opportunity to lock in potentially large customers, as they are expected to generate 40% of global pharma sales in 2025 (EvaluatePharma, 2019). As pharmas’ M&A strategies has been adapting to the dynamic environment of the past decade, the question remains open whether these strategies pay off. This study builds on the prior research of value creation of M&A in the biopharmaceutical industry and aims to understand if acquision of small innovative biotechnology companies and expansion to the emerging markets create more value to pharma shareholders than acquisition of other traditional pharmaceutical companies in the developed markets. This paper is structured in the following way: first section describes the industry development and M&A trends, second section provides an overview of the existing literature, third section contains details about the data and methodology and the last section presents study results and their analysis.
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