Determinants and effects of mergers and acquisitions on innovation: Evidence from drug projects in the pharmaceutical industry

Innovation is essential for progress, long-term growth, and consumer welfare. As such, there is almost a universal consensus among economists that innovation must be not only protected but promoted. However, research remains unclear as regards the role competition plays in pursuing this goal. The relationship between competition and innovation is complex and ambiguous (Aghion et al., 2005; Shapiro, 2011). Discussions are thus still ongoing regarding policies that policy makers and competition authorities should adopt to spur innovation. Using the setting of one of the most important and innovative sectors -the pharmaceutical industry and R&D for the treatment of diabetes in particular - this dissertation deepens our understanding and brings important empirical insights to these academic and policy debates by focusing on two specific topics.

The first topic, covering two chapters, studies how changes in the competitive landscape through mergers and acquisitions (M&As) affect innovation. The chapters show that the so far unexplored technological uncertainty (early stages) and technological characteristics of projects are an essential part of the changing-of-ownership stories. Market power, dominating all ongoing debates, is only a small part of what is ongoing in pharmaceutical M&As. The key to uncover richer patterns and obtain a much more comprehensive understanding of the implications of M&As for innovation in the pharma sector hinges on considering technological uncertainty, presence and closeness between the merging parties in both product and technology markets. From the policy perspective, the presented empirical evidence calls for several modification to the current antitrust framework. First, revenue thresholds should not limit the scope antitrust scrutiny when innovation is of interest. Second, the merger review focus should not be limited to later stages only. Third, the enforcement framework aimed at innovation concerns should routinely involve an assessment of technological as well as product market closeness between assets of the merging parties.

The second topic (and the last chapter) then departs from the M&A topic. Rather than measuring how changes in competitive landscape impact innovation, the primary objective of this chapter is to understand how venture capital investments shape the direction of innovation, depending on competition and market power of the competitors they face. The chapter finds that venture capital funds actively steer the direction of early stage innovation in their backed startups to avoid the “defeat zone” - an area where big incumbent firms are present and where it is not worth competing. VC backed firms specifically do not pursue projects in product markets, R&D spaces, and technology spaces where big incumbents operate; instead they pursue breakthrough projects in markets without product competition. From the policy perspective, this chapter presents important consideration in the current discussions on market power of “superstar” firms.

Jointly, these chapters advance the literature and highlight important yet so far omitted considerations that need to be taken into account to better understand the complex and ambiguous relationship between innovation and competition. The findings also serve as a basis for several concrete policy recommendations.