The Impact of Patent Cliffs on Acquisition Activity: An Empirical Investigation Within the Pharmaceutical and Biotechnology Industries
Purpose: The purpose of this paper was to examine merger and acquisition activities in the pharmaceutical and biotechnology industries. The study was used to empirically investigate antecedents of acquisition premiums including “patent cliffs ” the number of patents expiring and dollar amounts of sales covered by them. The study was used to empirically examine the likelihood that a company will engage in an acquisition as it approaches the patent cliffs and the impact on acquisition premiums.
Design/methodology/approach: This study empirically examines the impact of patent cliff pressure on M&A in the pharmaceutical and biotechnology industries. Patent cliff pressure is measured in terms of both the number of patents expiring within 3 years and the dollar value of the drugs whose patents expire within 3 years. Patent cliff pressure-number of a firm represents the number of patents covering the drug sold by a firm expiring. Patent cliff pressure-dollar of a firm represents the dollar value of sales as a proportion of total sales of the drugs whose patents expire. Both the propensity to merge and the premiums paid for M&A are studied in relation to the patent cliff pressure.
Originality/value: The main contribution of this thesis is the development of a framework and criteria for assessing the reasons for acquisitions and acquisition premiums. The unique aspect of this research was a new theoretical perspective and empirical study of M&A in the pharmaceutical industry.
Findings: The analysis showed that the relationship between a company's proximity to significant patent cliffs, and the likelihood that the company will engage in an acquisition, is statistically significant. The relationship between the premium paid for the acquisition and the proximity to significant patent cliffs was also found to be statistically significant.