Introduction

Preceding chapters have dealt with a common set of topics: horizontal consolidation, mergers and acquisitions, the advantages of size, economies of scale and scope, diversification, and industry concentration. These topics all inter-relate around the fundamental issue in industrial organization: how best to organize firms and markets in order to achieve optimal economic performance? For example, mergers and acquisitions lead to greater firm size and industry concentration, are often undertaken to achieve scale and scope economies, and can involve horizontal integration of similar firms, vertical integration of firms in adjacent stages in the chain of production, or diversification into related and unrelated industries. What is important for our purposes is that these topics all have implications for firm innovation and performance.

In this chapter we analyze the impact of these combinations on innovation and financial performance among pharmaceutical firms. Researchers are still unsure whether innovation leads to improved firm performance, or whether past performance fosters future innovation, or both. Thus, we examine the impact of industrial organization on both sets of measures. We specifically focus on mergers and acquisitions (M&As) due to the rich research literature here as well as the successive waves of M&As in the pharmaceutical sector during the past fifteen years.

Our analysis addresses several related questions. What is the value of size, scale, and M&As for pharmaceutical firms? Do such strategies help firms to develop new products? What are the challenges and opportunities created by M&As?