The pharma and biotech industry has faced major challenges in the previous years with respect to both the revenues and costs which led to a merger wave in this particular sector. Using standard event study methodology, this paper analyzes the success of the worldwide M&A (Mergers and Acquisitions) transactions in the pharma and biotech industry between 1996 and 2006. Overall, the combined entities show insignificant announcement effects, targets benefit from highly positive abnormal returns, whereas acquirers reduce their shareholder value. With regard to specific success factors, we find a strong evidence that focus on sales synergies is valued by the stock markets as a key success strategy for pharma and biotech M&A. Consequently, traditional pharma companies that still dispose of sufficient cash from their existing sales but face a dried-out product and patent pipeline should acquire innovative, but cash-poor biotech firms. The level of cost efficiency does not have a statistically significant impact on the abnormal returns. We interpret this finding as an indicator that the stock markets do not believe in cost synergies as a motivation for a successful transaction in the pharma and biotech industry.

In the early 1940s, a systematic pharmaceutical research was built up and continuously improved which led to the first archetypes of a modern pharmaceutical company. Protected by extensive patent regulations, the pharmaceutical industry could successfully expand in the 1960s and 1970s and the large-scale and capital-intensive company prevailed as the dominant organizational role model. At the beginning of the 1980s, the patent protection was partially reduced in order to sooner replace the original drugs by less expensive generics, since the rising costs of the healthcare system had become a pressing issue for many national economies. Today, generics suppliers constitute the fastest growing sector within the pharmaceutical industry. At the end of the 1980s, the biotechnology firms entered into the drug competition, building on the possibilities of the freshly evolving molecular biology and genetics, and financed by venture capital. Whereas, the traditional pharmaceutical companies cover most of the value chain of drug supply, starting from research over production to sales; the smaller and less capital-intensive biotech firms tend to focus on research and development in a clearly defined area (Holland, 2004).

Especially in the past decade, the pharmaceutical and biotechnological industry had to react to a large number of cost-driven challenges. Strategies to broaden the product portfolios was put under pressure since the innovation of blockbusters has turned out to become increasingly difficult. Additionally, regulatory authorities, alerted by many cases of underestimated significant side effects, worldwide sharpened the test and approval procedures, which also contributed to a slower and more cost-intensive product development.

The pharma and biotech sector has already an immanent tendency towards cooperation because of its particular strategic dynamics, claiming on the one hand to lower the research and marketing costs through economies of scale, and on the other hand to refill the product pipeline with innovative, cash flow-promising drugs. These sector-intrinsic forces towards cooperation have been fueled by both the cost constraints described above and the intensification of the research competition. Accordingly, any form of cooperation has always been prevalent in the pharmaceutical and biotechnological industry, a trend which has gained an even greater momentum in the recent past (Jarvis, 2005). The range of possible strategies reaches from clearly-defined strategic alliances over joint ventures to Mergers and Acquisitions (M&A). This study concentrates on the evaluation of M&A activity, since this cooperation model constitutes the most extensive option to generate synergies (Holland, 2004).

Business Strategy Journal, Mergers and Acquisitions, Biotechnological Industry, Pharmaceutical Industry, Biotech Sectors, Product Development, Equity Markets, European Pharma Sector, Financial Services Industry, Banking Industry, Multivariate Analysis, Corporate Finance Theory, Multiple Regression.