To Sell or For Sale: Strategic Entry in Pharmaceutical Markets (joint with Zoey Chopra and Garth Strohbehn)

Increasing consolidation in the pharmaceutical industry has prompted antitrust concerns and calls for enhanced scrutiny and regulation surrounding M&A activity, particularly regarding acquisitions of small and innovative biotechs. Holding firm entry fixed, such policy should encourage competition and limit the ability of incumbent firms to acquire early-stage competitors. In resource-intensive industries such as pharmaceuticals, however, firms make entry decisions conditional upon eventual exit strategies. Limitations to M&A activity may reduce incentives for biotech entry, ultimately resulting in less innovation and welfare losses. Leveraging M&A and drug development data in oncology from 2006 to 2019 we document three facts: 1. Big pharmaceutical firms constitute the majority of controlling interest acquisitions; 2. The probability of acquisition is strongly associated with the entry choice of small biotech drugs but there is no association for big pharmaceutical drugs; and 3. The acquisition price for a drug increases when the acquiring firm has an overlapping development pipeline. These insights inform a structural model in which acquisitions are the result of a first-price sealed bid auction that informs a static firm entry and market choice decision for new drugs. We find that a counterfactual which restricts the ability of big pharma firms to acquire overlapping biotech drugs significantly changes the market choice of biotech drugs, but we do not find a significant change in overall biotech drug entry, suggesting such a policy would have minimal welfare costs.