The innovation impact of acquisitions of small targets with products close to launch by large product market incumbents is currently debated, weighing whether incumbents might preemptively terminate or “kill” the innovative projects of these targets. This paper provides empirical evidence on which M&A deals spur and which stifle innovation. To this end, we not only look at the product market position of the acquiring firm but additionally at the position of both parties in the technology space. Using the setting of antidiabetics, our granular dataset tracks life cycles and patenting for all antidiabetic drugs under development (“projects”) between 1997 and 2017. We show that most terminations of acquired projects occur while projects are still far from launch into the product market. Nevertheless, a set of these early-stage transactions yields a positive impact on innovation. These cases occur even when incumbents acquire projects which are close to their own in product markets, as long as these projects are also close in the technology space. In these deals, any potential “killing incentives” seem to be dwarfed by innovation benefits as witnessed by increased follow-up patenting, consistent with the exploitation of technology synergies. Our results hint at the crucial role of technology positions when assessing the innovation effects from pharma M&As.
(joint work with Jan Malek and Reinhilde Veugelers)