Abnormal Returns and Cash Flows in Pharmaceutical M&A PDF

ECON 3012: Dissertation
Abnormal Returns and Cash Flows in

Pharmaceutical Mergers and Acquisitions
Z0917956
21/03/2014
11499 Words
Abstract
This dissertation investigates Mergers and Acquisitions (M&A) activity in the pharmaceuticals
industry from 2000 to 2009. On average, mergers have generated insignificant negative stock
price returns for combined firms. By contrast, post-merger changes in cash flow have been, on
average, positive. It further finds that, whilst markets react favourably to acquisitions driven by
R&D and pipeline concerns, these do not, on average, generate positive changes in subsequent
cash flows. This, it is suggested, is due firstly to risks and uncertainties related to such mergers,
and secondly, due to the financial crisis. By contrast, mergers not driven by pressing R&D
concerns are found to generate positive subsequent cash flows. This, it is suggested, is driven by
economies of scale and synergies. It further finds some support to suggest that in instances where
the acquirer is in a healthier position, the market reacts more favourably to acquisitions of
weaker firms, using a merger as an exit strategy. This study also investigates M&A activity in the
emerging markets, acknowledged to be an expanding segment of the industry, with the potential
for large-scale value generation. However, the pharmerging markets are heterogeneous, and
pose challenges, such as weak intellectual property rights, and difficult regulatory environments.
Contents
1. Introduction ............................................................................................................................................... 3
2. Literature Review...................................................................................................................................... 6
2.1 General M&A Activity ........................................................................................................................ 6
2.2 Pharmaceutical Merger Literature ..................................................................................................... 8
2.3 Role of Innovation and R&D .............................................................................................................. 9
2.4 Pharmerging Markets .................................................................................................................... 12
3. Data & Methodology .............................................................................................................................. 15
3.1 Data .................................................................................................................................................. 15
3.2 Methodology ..................................................................................................................................... 15
3.2.1 Event Study ........................................................................................................................... 15
3.2.2 Post-Merger Performance .................................................................................................... 17
3.2.3 Excess Capacity .................................................................................................................... 18
3.2.4 Subsamples............................................................................................................................ 19
3.2.5 Pharmerging Acquisitions .................................................................................................. 19
3.2.5 Interviews .............................................................................................................................. 20
4. Data Presentation .................................................................................................................................... 21
4.1 Overall Sample.................................................................................................................................. 21
4.2 Subsamples........................................................................................................................................ 24
4.2.1 Subsample (TQAcq size) ......................................................................................................... 24
4.2.2 Subsample (Deal Purpose) ................................................................................................... 24
4.3 Pharmerging Acquisitions ................................................................................................................ 25
5. Discussion ............................................................................................................................................... 31
5.1 Asymmetric Information, Alliances and Portfolio Complementarity ................................................ 31
5.2 Synergies and Economies of Scale and Scope .................................................................................. 32
5.3 The Financial Crisis ......................................................................................................................... 33
5.4 Nature of the Target .......................................................................................................................... 34
5.5 Absorption Capacity ......................................................................................................................... 34
5.6 Pharmerging Acquisitions ................................................................................................................ 35
5.7 Limitations ........................................................................................................................................ 37
5.7.1 Use of Tobins Q ................................................................................................................... 37
5.7.2 Centrality of R&D ................................................................................................................. 37
5.7.3 Multiple Mergers and an ever-moving Industry ................................................................... 38
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5.7.4 Partial Mergers and Alliances .............................................................................................. 38
5.7.5 Other Limitations .................................................................................................................. 39
6. Conclusions ............................................................................................................................................. 41
6.1 Three Imperatives for Action ............................................................................................................ 42
6.2 Further Study .................................................................................................................................... 43
6.3 The Future of the Industry ................................................................................................................ 44
6.4 Some Final Comments ...................................................................................................................... 45
Bibliography ............................................................................................................................................... 46
Appendices.................................................................................................................................................. 52
Appendix I: List of Mergers ................................................................................................................... 52
Appendix II: List of Mergers (Pharmerging) .......................................................................................... 55
Appendix III: Interviews ......................................................................................................................... 57
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1. Introduction
This dissertation will be investigating mergers and acquisitions (M&A) activity in the
pharmaceuticals industry, from 2000 to 2009, and attempting to determine whether they have
been value creating. This will be gauged by investigating abnormal returns on stock price at the
time of merger announcement, and a measure of post-merger return, as determined by changes in
scaled cash flow.
It will also be seeking to find some insights into sources of value creation. Grabowski & Kyle
(2012) note that one possible driver of pharmaceutical M&A is industry specific shocks, which
in pharmaceuticals may be represented by R&D and pipeline problems. In addition, economies
of scale and synergies provide a proactive cause for merger. They also suggest that mergers may
occur due to a desire to expand into foreign markets.Throughout the last five years, there has
been a shift of focus to a series of pharmaceutical emerging markets, termed the pharmerging
markets. (Hill & Chui, 2009) Increasingly, growth in pharmaceuticals is not coming from the
traditional major markets, but from these markets. This study will also provide some preliminary
investigation into the success of M&A in these markets. It is amongst the first studies to
empirically investigate mergers in this ever-growing segment of the pharmaceutical industry.
In 2008, GlaxoSmithKline announced that it was to acquire Sirtris Pharmaceuticals, a firm
investigating compounds that stave of age-related diseases, for $720 million. (Ledford, 2008;
Ledford, 2013)Whilst there have been many larger acquisitions, the GSK acquisition of Sirtris
Pharmaceuticals represented much more than just another R&D related acquisition. For many in
the pharmaceutical industry, this acquisition represented a fundamental shift in the mentality of
firms with regard to their R&D. It represented a loss of trust in internal research and a shift to
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external acquisitions. As Behner et al. (2009, p. 6) suggested, pharmaceutical companies have to
turn the tide on their failures to discover and develop new high-value and innovative products to
replace drugs going off patent. One way that they have been seeking to do this is via external
acquisition. Internal R&D schemes can be economically inefficient, and outsourcing can be
viewed as a drive to reduce some of this inefficiency (Ravenscraft & Long, 2000).
This study finds that on average, whilst targets generated very significant positive returns and
acquirers significant negative returns, stock price returns to the combined firm are insignificantly
negative. When investigating subsamples however, evidence is found to suggest that the most
value creating mergers were not those in which acquiring firms were in a poor condition prior to
merger (as measured by Tobins Q), driven by R&D/pipeline concerns, even though market
reaction was positive in these cases. By contrast, those firms which were healthiest prior to
merger did better. Two primary reasons for these findings are suggested. Firstly, these are likely
mergers which were driven by synergy desires, and economies of scope and scale. Secondly,
prior studies have not often had to contend with the effects of the financial crisis. Whilst the
pharmaceuticals industry is in some ways resilient to the financial crisis, it has affected the
ability to finance costly R&D initiatives, both internally and externally. Furthermore, it also
notes that abnormal returns are strongly negatively correlated with target Tobins Q for mergers
of healthier acquirers not driven by direct pipeline concerns. One possible explanation
suggested is that, in these instances, targets may view mergers as an exit strategy. In these
instances, the market reacts more positively to the announcement of a merger. This study also
finds evidence to suggest that pharmerging deals have the potential to create value to the
acquirer. However, it also notes that these new territories present novel problems to the
pharmaceuticals industry that will have to be tackled in moving forwards.
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This dissertation is subsequently organised as follows: section 2 will provide a summary of
relevant literature, section 3 covers data selection and methodology, section 4 provides results,
with section 5 providing some discussion. Section 6 provides some closing conclusions, and
suggestions for future study and the future direction of the pharmaceuticals industry.
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2. Literature Review
2.1 General M&A Activity
An early paper reviewing M&A activity found little evidence to suggest that mergers were a
good investment. (Hogarty, 1970) Since then however, studies of mergers have been numerous,
with various methods of analysis used.
The literature is consistent across the board in noting that target shareholders benefit highly from
merger announcement. Jensen & Ruback (1983), for example, found evidence to suggest that
tender offer targets realised returns of 30%, whilst merger targets realised returns of 20%.
Bradley et al. (1988), looking at merger activity from 1963 to 1984, find significant evidence that
targets make abnormal returns, over an eleven day window surrounding merger, of 31.77%.
Andrade et al. (2001) concur, finding that for mergers in the period 1973 1998, 3-day stock
price returns to targets were significantly positive, at 16%. Harford et al. (2011), investigating
mergers from 1984 to 2006, find that 3-day returns to targets were 19%.
In contrast, the literature with respect to acquirer returns is far less consistent. On average,
Martynova & Renneboog (2008) suggest that, acquirers realised abnormal returns that were
statistically indistinguishable from zero.Whilst Jensen & Ruback (1983) documented a return of
4% for tender offer bidders and 0% for merger bidders, and Bradley et al. (1988) documented
significant returns of 0.97%, more recently, Andrade et al. (2001) found that acquirers show
insignificant negative returns of -0.7% around merger announcement. Interestingly, Moeller et al.
(2003) found evidence to suggest that acquirers make significant losses of -1.02% when
purchasing public targets, but signficant positive returns of 1.496% when purchasing private
targets. Harford et al. (2011) found that acquirers made 3-day returns of -1.3%. They do not,
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however, report significance levels. As Martynova & Renneboog (2008) posit, it seems that gains
to acquirers are declining over time. Netter et al. (2011) corroborate this, investigating over
300,000 mergers from 1992 to 2009, finding that acquirers have gained on average, but that there
has been a substantial decline in acquirer abnormal returns over time.
Overall, the picture is rather mixed. Bradley et al. (1988) document significant abnormal returns
of 7.43% for the combined firm, over eleven days, whilst Andrade et al. (2001), more recently,
suggested that 3-day returns to combined firms from 1990 1998, whilst still significantly
positive, were only 1.2%. Harford et al. (2011) suggest that average synergies of 1.9% can be
found. However, Moeller et al. (2005), investigating dollar returns from 1991 to 2001, found
evidence to suggest that combined dollar gains were significantly negative, and additionally, that
these firms were characterised by high Tobins Q values. In contrast, Fich et al. (2013),
investiging dollar gains from 1995 to 2010, conclude that the largest gain deals are those
associated with higher Tobins Q values.
Subsequent long-term returns on merger have also been documented. Loughran & Vijh (1997)
investigate whether long-term shareholders benefit from takeovers. They find, however, that
those who held the stocks of acquiring firms for a 5-year period post-merger were liable to suffer
significant losses of -15.9%. Andr et al. (2004) considered mergers in Canada, and concluded
that acquirers significantly underperformed in a three year post-event period, by -0.523%.
However, as Martynova & Renneboog (2008) note, long term stock price measures are less
accurate, with difficulties in isolating the impact of individual mergers. Some studies have
therefore investigated post-merger performance with more direct metrics, such as cash flow and
earnings performance. Healy et al. (1992) examined 50 mergers from 1979 to mid-1984 using
pretax operating cash flows, scaled by the market value of assets. They observed that, in contrast
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to studies measuring long-term stock price returns, firms made significant improvements in asset
productivty post-merger.
2.2 Pharmaceutical Merger Literature
Whilst studies of merger activity specifically in the pharmaceuticals industry are somewhat
limited, one of the earliest papers to directly investigate M&A activity in the pharmaceuticals
industry was Ravenscraft & Long (2000). They found that targets and acquirers made significant
returns of 13.31% and -2.12% respectively. Whilst not significant, they also reported that
combined dyads made positive returns of 0.59%. Higgins & Rodriguez (2006) considered 160
pharmaceutical acquisitions from 1994 to 2001, and documented significant positive returns to
the acuirer of 3.91%. DeGraaff (2006), investigating mergers in the medical devices industry,
from 1984 to 1999, found significant evidence that over a 3-day announcement window, targets,
acquirers and the combined dyad made returns of 8.65%, 0.896% and 1.02% respectively. He
also documented significant post-merger changes in cash flow, of 5.83% for 2-year post
acquisition period, rising to 6.23% four years after acquisition. In addition, DeGraaff (2006)
noted that there existed a significant positive correlation between announcement abnormal
returns, and subsequent cash flows, but that this weakened with longer event windows and post-
merger periods. MacDonald (2010) found that DeGraaffs (2006) findings held for the
pharmaceutical industry. Investigating a longer time horizon, Hassan et al. (2007) found that for
the period 1981-2004, significant 3 day returns of 1.81% for the combined firm dyad were
generated. They also investigated post merger windows, finding positive signficance for the post
merger window [1, 30]. However, this value was eroded in the longer term, with insignificant
negative returns being found for the window [31, 250]. When taken in conjunction with their
findings regarding post-merger operating cash flows, there is evidence to say that pharmaceutical
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M&A creates positive expected returns (as measured by market reaction) which are realised in
the year post-merger. However, on longer horizons, this association disappears.
2.3 Role of Innovation and R&D
The afore-mentioned findings give an indication as to how successful pharmaceutical M&A has
been. However, of equal, if not greater importance, is understanding sources of possible value
generation. Whilst various sources have been considered, such as cash flow improvements, tax
breaks and increases in market power, Devos et al. (2009) find that greatest value gain is
generated from economies of scope and scale. In the pharmaceuticals industry, this is most
clearly realised with relation to innovation and R&D, the lifeblood of the industry. Nevertheless,
whilst it is the cornerstone of long term growth (Deutsche Bank, 2012), it is also an extremely
time and resource intensive pursuit. Current average development times are approximately 15
years (Figure 1). In addition, the likelihood of a drug candidate that has entered clinical trials
subsequently reaching FDA approval is only 15.3% (Hay, et al., 2014)1.
Figure 1, (PhRMA, 2012)
1
Hay et al. (2014) investigate drug data from 2003 to 2011. The figure reported is for a drug, having entered phase I,
reaching approval. Another recent study suggests a success rate of 19%, for drugs that entered clinical testing from
1993-2004, through to June 2009. (DiMasi, et al., 2010)
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Furthermore, as documented by Mestre-Ferrandiz et al. (2012), costs of R&D have been
consistently rising as well. The cost of developing a drug now exceeds $1.2 billion, with some,
such as Paul et al. (2010), suggesting that figures in excess of $1.8 billion may be more accurate.
Figure 2, (PhRMA, 2013)
One should also note the impact of regulation on the industry. This is due partially to the inherent
characteristics of pharmaceuticals products with significant possible benefits to health, but with
large risks as well (Danzon & Keuffel, 2013). As documented by Rawlins (2012), there are at
least four hurdles that new drugs need to cross in order to gain approval safety, efficacy,
quality and cost-effectiveness. These exacting standards only increase the pressures faced by
R&D teams.
In addition, whilst spending on R&D has increased, productivity seems to have been declining
whilst in 1997, 46 NMEs (New Molecular Entities) were brought onto the market, by 2003, this
declined to 26. (Walker, 2004) This declining trend carried on until 2010, when just 21 NMEs
were launched. Nevertheless, by 2012, 26 NMEs made it onto the global market. Whilst the
CMR Institute also reports a slight decline in the length of drug development time, it also notes
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that this may be associated with changes in R&D portfolio profiles, as opposed to a fundamental
increase in efficiency (CMR Institute, 2013).
With figures such as this, one can see the rationale of firms choosing to acquire new technologies
and capabilities as opposed to relying on internal development (Ranft & Lord, 2002). In addition,
as Saftlas (1997) suggested, M&A in the pharmaceuticals industry may often be stimulated by
loss of patent protection. Furthermore, as noted by Ravenscraft & Long (2000), amongst these
firms, there would likely be highly cash-rich firms, that could feasibly purchase products by
taking over other companies cheaper and faster than through internal R&D. Higgins &
Rodriguez (2006) construct a desperation index to determine the status of a firms internal
productivity. This takes into account a firms product pipeline, as well as information about
exclusivity horizons. They found significant evidence to suggest that, in the period 1994-2001,
firms which were experiencing the greatest pipeline deterioration and declining sales were more
likely to enter into an acquisition. Furthermore, 71% of firms either maintained or improved on
their level of desperation post-merger, suggesting that firms that have aging product portfolios
are able to turn their fortunes around, by engaging in M&A. By contrast, Ornaghi (2009),
investigating mergers from 1988 to 2004, found evidence to suggest that innovation performance
of merged firms, as measured by number of post-merger patents issued, was worse, compared to
a control group, for the post-merger period.
Danzon et al. (2007) present a thorough investigation of transforming mergers those with
transaction values greater than $500 million from 1988 to 2001. They find evidence to suggest
that, for large firms, as measured by lower Tobins Q values, mergers were partly driven by
expectations of excess capacity, with declining product portfolios. This reaffirms the findings of
Higgins & Rodriguez (2006). By contrast, Andrade & Stafford (2004) suggest that firms with
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high Tobins Q values were more likely to engage in mergers and non-merger investment as
well. Danzon et al. (2007) also note that, for small firms, mergers were more likely to be used as
an exit strategy. They also investigate post-merger performance, and conclude that, after
controlling for merger propensity, there is no evidence of improved performance.
However, this is still an incomplete picture of pharmaceutical M&A activity. As noted above,
R&D is the lifeblood of the industry, and R&D cost-saving will likely be a component of
mergers driven by synergy and cost-saving as well. As Henderson & Cockburn (1996) and
Cockburn & Henderson (2001) note, research productivity benefits significantly from economies
of scope and scale. Additionally, as Cohen & Levinthal (1989) and Chesbrough (2006) suggest,
for a research-led acquisition to be successful, acquiring firms need a certain capacity of
absorption to make full use of acquired R&D. One can, perhaps, suggest that there exists a
careful balance to be struck between the desperation of an acquiring firm, and a subsequent
ability to actually make full use of potential gains from merger. Furthermore, in any acquisition
driven by R&D, Puranam & Srikanth (2007) note that it is important to consider how firms
leverage any new knowledge, and what their motive for merger was; distinguishing between
mergers driven by what the target knows versus what the target does. They suggest that
integration may help the acquiriers own innovation, by using acquired knowledge as an
additional input in the research process. However, they also note that it will likely hinder the
ability of the target to innovate itself what it does. Given that in some acquisitions, the target
carries on existing as a subsidiary, their concern is a valid one.
2.4 Pharmerging Markets
Grabowski & Kyle (2012) note that another driver of pharmaceutical M&A is the desire to
expand into foreign markets, and thus broaden sales base. Cross-border mergers have been
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documented to add shareholder value in the pharmaceuticals industry. Ravenscraft & Long
(2000) find evidence that positive abnormal returns of 4.25%, 6.4% and 3.53%, for acquirers,
targets and combined firms respectively, were generated, when investigating M&A from 1985 to
1996. Nevertheless, Belcher & Nail (2000, p.230) caution that difficulties surrounding
integration may arise in the aftermath of cross-border mergers, as firms must consider not only
operating issues, but corporate culture issues as well which may be significantly different from
the United States to Europe, or Japan. Hassan et al. (2007) support this contention, finding that
for the cross-border mergers in their sample, cumulative abnormal returns (CARs) are negative,
as are post-merger cash flows for time periods longer than a year.
Recently, cross-border mergers in the pharmaceuticals industry have shifted focus from those
within major markets to those involving the emerging markets. In 2009, IMS Health released a
document examining the future direction of pharmaceutical activity in the world. Particularly
noted was the expected dramatic shift from growth based in the major markets North
America, Western Europe and Japan to a group of seven emerging markets, titled the
pharmerging countries. (Hill & Chui, 2009) This list was subsequently re-classified in a second
study (Campbell & Chui, 2010), which redefined seventeen countries, stratified into three tiers,
as the global pharmerging market. (Figure 3)
With growth continuously slowing in the developed markets, particularly in light of the financial
crisis, this shift is only likely to continue. Indeed, the pharmerging markets are predicted to grow
by between $150-165 billion over the period 2012 to 2016. (IMS Institute, 2012) As they become
more affluent, they are predicted to double spending, despite downward pricing pressure, driven
by rising incomes. In addition, their populations will also likely succumb to diseases associated
with prosperity such as obesity and cancer (Freshfields Bruckhaus Deringer, 2012). As a way to
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Figure 3, (Campbell & Chui, 2010, p. 3)
offset economic difficulties in major markets, pharmaceutical firms are seeking to enter into
these markets early, as they come into their own in the next decade.
Nevertheless, whilst they present significant growth opportunities, they also present substantial
challenges. Differences of culture, as well as regulatory difficulties and the dominance of generic
products, to name a few, will likely magnify problems noted by Belcher & Nail (2000) in
traditional cross-border mergers. The pharmerging markets are also characterised by downward
pricing pressures, with pricing levels being lower than for the major markets. Not only do
problems of culture exist between the major markets and the pharmerging markets, but there also
exists substantial differentiation between each of the pharmerging nations, each requiring
bespoke, targeted strategies (Buente, et al., 2013).
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3. Data & Methodology
3.1 Data
The study investigates merger activity for the years 2000 to 2009. The pharmaceuticals industry is
to be defined as any companies that have a NAICS code of 325412. Merger transactions in the time
frame are gathered from Thomson Financials Securities and Data Corporation (SDC) Worldwide
Mergers and Acquisitions database. Selection criteria are as follows:
i) Target or Acquirer NAICS code of 325412.
ii) Merger Announcement Date from 1st January 2000 to December 31st 2009.
iii) 100% of shares owned at completion, with >51% acquired in transaction.
iv) Transaction value is greater than $500 million.
v) Both companies are public.
This selection process leaves a universe of 77 mergers. The criterion of transaction value is imposed
because, as Danzon et al. (2007, p. 313) note, such mergers are transforming and their impact
can be easily economically measured.
Data is acquired from Standard & Poors Compustat Index and from Thomson Reuters DataStream.
This study acknowledges that the precise methods used by Compustat and by DataStream in
determining some of the data used in this experiment, such as Operating Income figures, may
slightly differ. However, we assume this difference is not significant.
3.2 Methodology
3.2.1 Event Study
The Primary tool of analysis for this study is the event study methodology. Based on the Efficient
Markets Hypothesis, the market will efficiently process information regarding the announcement of
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a merger, and the impact will be displayed in stock price changes. By isolating the change
attributable to the event, as opposed to random fluctuations and noise, one can deduce abnormal
returns, and get an indication of the value creating potential of the merger.
The estimation window will run for 180 days, prior to three event windows (3, 5, 11 days), centred
on merger announcement at 0 . Using the effective merger date as 0 may make it difficult to
identify changes in stock price due to merger alone. (Jensen & Ruback, 1983) To calculate
abnormal returns, (, ) for firm i at time t a measure of the expected return of the asset,
conditional on the event not having occurred (, ), is first required. Using the market model and
regression analysis of prior data, estimates for the coefficient sizes and can be derived. From
this, normal returns can be projected, according to the formula:
, = + , + , (1)
where , is the return on the market at time t, and , is a zero-mean disturbance term.
(Campbell, et al., 1997). Abnormal returns can then be calculated for the duration of the event
window, by subtracting expected returns from actual realised returns:
, = , , (2)
Finally, abnormal returns during the event window are aggregated, so as to generate a cumulative
abnormal return (CAR) for each merger, for the windows (-1, 1), (-2, 2) and (-5, 5), shown here for
the eleven day window:
+5
= , (3)
5
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By considering cumulative abnormal returns for the entire sample, evidence can be gained as to the
perceived value creating ability of mergers during the time period under investigation, both to the
acquirer and the target firms. Furthermore, one can also create a combined abnormal return for the
acquirer-target combination (DeGraaff, 2006) as follows:
,6 + ,6 (4)
=
,6 + ,6
where CARA and CART is the cumulative abnormal return to the acquirer and target respectively,
and MVE is the market value of equity for the acquirer and target respectively, equal to the number
of shares outstanding, multiplied by the closing share price on trading day -6. This is standardised
to United States Dollars where needed, using historical daily mid-market rates from Compustat.
A two-tailed t-test can then be used to measure whether CAR means are significantly different from
zero using the following test-statistic:
0
=
1 2 (5)
2 =1( )
Where is the Cumulative Average Abnormal Return:

1
= (6)

=1
3.2.2 Post-Merger Performance
Post-merger performance, indicated by summed changes in pretax operating cash flow return on
sales (POCFROS) in years two, three and four post acquisition for the combined firm will be
analysed, compared to preacquisiton POCFROS. Following the method of DeGraaff, (2006),
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POCFROS is calculated as pretax operating cash flow, scaled by net sales as follows (shown for the
four year post-acquisiton period):
+4
=+1 , ,1 + ,1 (7)
= [ +4 ] [ ]
=+1 , ,1 + ,1
Where POCFA,t and POCFT,t is the pretax operating cash flow of the acquirer and target at time t
respectively, and NSA,t and NST,t is net sales of the acquirer and target at time t respectively. This
study also notes that cash flow and net sales figures are reported in the local currency of the firm in
question. Where both acquirer and target are located in the same currency, this poses no problem.
However, where cross-border transactions occur, the cash flow and net sales figures of the target are
converted into the primary currency of the acquirer, using annual average exchange rate data.
The Pearson Product Moment Correlation against combined dyad CARs is then determined to
compare whether announced mergers viewed to generate value do indeed generate this value. The
significance of the correlation coefficient is subsequently determined according to the test statistic:
2
= ~ 2 (8)
1 2
where r is the correlation coefficient and n is the sample size.
3.2.3 Excess Capacity
As the literature suggests, mergers in the pharmaceuticals industry are often motivated by excess
capacity, as a result of perceived gaps in the product pipeline in the near future, due to imminent
patent expiry. A possible measure of this is a firms (lagged) Tobins Q (TQ), a ratio between the
total market value of a firm, and the replacement costs of the assets of the firm. This is calculated
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both for the acquirer and target as follows, for the full fiscal year prior to acquisition
announcement: (Chung & Pruitt, 1994; Broussard, et al., 2004)
EMV + LVPS + TLD + NSD

TQ = (9)
TA
Where EMV is Equity Market Value, LVPS is the Liquidating Value of Preferred Stock, TLD is
Total Long Debt, and NSD is Net Short Term Debt. This is divided by Total Assets. Danzon et al
(2007) suggest that, as TQ is sensitive to fluctuations in the value of intangible assets (such as R&D
productivity), firms with low TQ values are likely to have mature product portfolios, and so, will be
seeking to acquire new products. This study acknowledges that TQ is but one possible measure of
gauging excess capacity, with actual drug development data another indicator. However, whilst this
information is readily available for firms based in the United States, it is more difficult to acquire
such information on firms based in other nations. The Pearson Product Moment Correlation
coefficient between merger CARs and Tobins Q will be determined, as well as between
and Tobins Q. In doing so, we can get an indication of what impact firm health has on
value creation.
3.2.4 Subsamples
Statistics will also be presented for two sets of subsamples. Firstly, data will be split into two
subsamples at median acquirer TQ magnitude. Secondly, the dataset will be split into mergers
where the Deal Purpose field on Thomson One is R&D or pipeline related. This is contrasted with
a non-R&D subsample.
3.2.5 Pharmerging Acquisitions
Event study methodology will also be employed to determine abnormal returns on acquisitions of
firms based in pharmerging economies. Data selection uses the SDC Mergers and Acquisitions
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database, with a criterion of cross-border acquisitions, where the target nation is based in one of the
seventeen tier 1-3 pharmerging nations (Campbell & Chui, 2010) and the acquirer nation in one of
the major markets. As the move to emerging markets is driven through relatively small
acquisitions of local firms (Freshfields Bruckhaus Deringer, 2012), imposing a criterion of
transaction value of greater than $500 million reduces the sample to four firms. The results of the
pharmerging specification leave 56 mergers to be investigated. In addition, as most of the target
firms are small, private companies, measuring the impact of acquisition on target stock price is not
possible. This event study will only consider changes to acquirer stock price.
Furthermore, as these markets are still nascent, the time period for this study will consider merger
activity from 1st January 2008 to 31st December 2013, for the purposes of determining if these
mergers are value creating, with the dispersion of published information increasingly
acknowledging the significant role to be played by pharmerging markets in the coming decade (see
Campbell & Chui, 2010; Deutsche Bank: Markets Research, 2012).
3.2.5 Interviews
As part of the preparation for this experiment, two interviews were conducted, with Luc Vermeesch,
of UCB SA, and David Milton, of Takeda Pharmaceuticals. The proceedings of these interviews
will be referred to in subsequent discussion, and summary transcripts available in an appendix.
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4. Data Presentation
Data from the study, both for the overall merger sample, for the two sets of subsamples, and
for the pharmerging acquisitions, are presented as follows:
1. Overall Sample
2. Subsamples
1. Acquirer TQ conditioned
2. Deal Purpose conditioned
3. Pharmerging acquisitions
4.1 Overall Sample
For acquiring firms, average CARs are negative across all event windows, and this is
significant at a 1% level. By contrast, targets on average see a positive return of over 30%,
with extremely high significance. When taken on the whole however, as measured by
abnormal return, returns on combined firms are not significantly different from zero.
Nevertheless, about half of all combined returns are positive. Post-merger performance is
insignificant, between 4% and 5%, as time horizon lengthens. Evidence of correlation
between CARs and POCFROS is extremely weak for the overall sample.
As Campbell et al. (1997, p. 166) note, where clustering occurs, when firm event windows
overlap in calendar time, the assumption that cross-sectional abnormal returns on firms are
uncorrelated, falters. One way to handle clustering is to analyse abnormal returns without
aggregation across securities. Given that some clustering does occur in the dataset used,
summary statistics for individual firm time-series significance are presented as well.
For both acquirer and target TQ, there exists a negative relationship between CARs /
POCFROS. However, this is only significant for acquirer statistics. In addition, average
acquirer TQ is lower than target TQ, 2.6 compared to 2.9.
21
Overall Sample
Table 1: Mean CARs and POCFROS Table 2: Correlation between CARs and POCFROS
Standard %
N Mean T* p-Value N Correlation T* p-Value
Deviation Positive
Acquirer CAR -1, 1 74 -0.0283 0.0740 -3.2868 0.16%*** 36.49% CAR -1, 1 / 2 YEAR 58 -0.0294 -0.2202 82.65%
CAR -2, 2 / 2 YEAR 58 -0.0392 -0.2932 77.04%
Target CAR -1, 1 74 0.3158 0.2851 9.5283 0.00%*** 95.95% CAR -2, 2 / 3 YEAR 58 -0.0362 -0.2714 78.71%
Target CAR -2, 2 74 0.3175 0.2985 9.1503 0.00%*** 93.24% CAR -2, 2 / 4 YEAR 57 -0.0290 -0.2149 83.06%
Target CAR -5, 5 74 0.3247 0.3040 9.1866 0.00%*** 95.95% CAR -5, 5 / 2 YEAR 58 0.0819 0.6150 54.11%
CAR -5, 5 / 3 YEAR 58 0.0830 0.6233 53.56%
Combined CAR -1, 1 72 -0.0007 0.0636 -0.0896 92.89% 52.78% CAR -5, 5 / 4 YEAR 57 0.0839 0.6242 53.50%
Combined CAR -2, 2 72 0.0014 0.0714 0.1627 87.12% 52.78%
Combined CAR -5, 5 72 -0.0002 0.0748 -0.0214 98.30% 47.22% Table 3: Time Series Significance for Acquirers / Targets
Positive Negative
Significant at:
POCFROS 2 YEARS 58 0.0396 0.2930 1.0302 30.73% 68.97% 1% 5% 10% 1% 5% 10%
POCFROS 3 YEARS 58 0.0503 0.3550 1.0792 28.51% 67.24% Acquirer CAR -1, 1 1 0 0 5 3 8
POCFROS 4 YEARS 57 0.0553 0.3783 1.1029 27.48% 66.67% Acquirer CAR -2, 2 3 2 1 6 5 4
Acquirer CAR -5, 5 2 0 3 3 3 4
Target CAR -1, 1 57 7 0 1 0 0

Target CAR -2, 2 54 4 1 1 1 0
Target CAR -5, 5 38 8 7 0 0 0
22
Table 4: Correlation with TQAcq Table 5: Correlation with TQTgt
N Correlation T* p-Value N Correlation T* p-Value
CAR -1, 1 / TQ 58 -0.2304 -1.7720 8.18%* CAR -1, 1 / TQ 58 -0.1190 -0.8965 37.38%
CAR -2, 2 / TQ 58 -0.1308 -0.9872 32.78% CAR -2, 2 / TQ 58 -0.1367 -1.0326 30.62%
CAR -5, 5 / TQ 58 -0.2493 -1.9263 5.92%* CAR -5, 5 / TQ 58 -0.1211 -0.9129 36.52%
POCFROS 2 YEARS / TQ 58 0.2425 1.8709 6.66%* POCFROS 2 YEARS / 58 0.0831 0.6241 53.51%
POCFROS 3 YEARS / TQ 58 0.2661 2.0659 4.35%** TQ
POCFROS 3 YEARS / 58 0.0918 0.6901 49.30%
POCFROS 4 YEARS / TQ 57 0.2903 2.2500 2.85%** TQ
POCFROS 4 YEARS / 57 0.0894 0.6659 50.83%
Average TQAcq: 2.5960 TQ
Average TQTgt: 2.9412
Note: Missing data for targets (where effective acquisition was more than a year after the end of the last financial year) means that the sample for POCFROS is smaller than
for abnormal stock returns. In addition, data is not presented for two acquisitions by lan. Soon after their mergers, they were embroiled in a severe accounting scandal that
saw their shares and revenues plummet. (Securities and Exchange Commission, 2005)
23
4.2 Subsamples
4.2.1 Subsample (TQAcq size)
CARs and POCFROS are insignificantly positive for the smaller TQ sample (S1). By
contrast, for the larger sample (S2), whilst still insignifcant, CARs are negative, and
POCFROS is larger, up to 10.3% in the fourth year. Weak positive correlation is seen
between CARs and POCFROS for S1, whilst for S2, it is predominantly negative, apart from
11-day correlations, where it is between 0.19-0.20.
As with the overall sample, correlation between TQAcq and CAR / POCFROS is
predominantly negative.The correlation is stronger for S2 however.In contrast, there is a
positive correlation between TQTgt and both CARs and POCFROS for S1. The effect is more
marked for POCFROS in years 3 and 4, with a correlation of close to 0.29. Average TQAcq
and TQTgt are 1.36 and 2.75 respectively. On the other hand, whilst correlation is highly
negative and significant between CARs and TQTgt for S2, between POCFROS and TQTgt
there is a weak positive correlation. Average TQAcq and TQTgt are 3.83 and 3.13 respectively.
4.2.2 Subsample (Deal Purpose)
For mergers with a deal purpose of R&D, whilst CARs are insignificantly positive, post-
merger cash flows are negative. In contrast, mergers with a non-R&D deal purpose have
negative CARs on average, but have insignifcant positive POCFROS, of between 10.2%-
13%. Strong positive correlation is seen between CARs and POCFROS for the R&D
subsample, with significance over the 3-day window. This strength of relationship is not seen
for the non-R&D subsample.
Correlation between TQAcq and both CAR / POCFROS is negative and predominantly
significant for the R&D subsample. By contrast, whilst correlation is negative between TQAcq
and CARs for the non-R&D subsample, there is significant positive correlation (>0.4)
24
between TQAcq and subsequent cash flows. Correlations between TQTgt and CARs are weakly
positive, apart from the longest event window, for the R&D subsample, but significant and
negative for the non-R&D subsample. Subsequent cash flow correlations are both positive
and insignificant, but substantially larger for the non-R&D subsample. Average TQAcq is
smaller than average TQTgt for the R&D subsample, whilst the opposite holds true for the
non-R&D subsample.
4.3 Pharmerging Acquisitions
For the overall sample, cumulative abnormal returns are positive for the shorter three and five
day windows. However, over the eleven day window, a negative average abnormal return is
found. None are significant. By comparison, for acquirers located in Western Europe,
stronger positive returns are seen across the three event windows, with the three day return
being significantly positive at the 10% level. However, as event window length increases, this
return decreases in size, but remains positive. Meanwhile, for firms located in the United
States and Canada, whilst positive returns are also seen for the three day window, they are of
a far smaller, insignificant magnitude. Once again, for the longer windows, returns are
smaller, and indeed fall negative, significantly so for the five day window. This pattern, of
falling returns as the event window increases in length, is once again repeated in the Tier
One/Two subsample.
25
Subsamples based on TQAcq Size
Table 6a: Mean CARs and POCFROS Table 7a: Correlation between CARs and POCFROS
Standard %
S1 (TQAcq < Median) N Mean T* p-Value S1 N Correlation T* p-Value
Deviation Positive
CAR -1, 1 29 0.0047 0.0579 0.4376 66.50% 60.71% CAR -1, 1 / 2 YEAR 29 0.0902 0.4706 64.17%
CAR -2, 2 29 0.0047 0.0573 0.4462 65.89% 60.71% CAR -1, 1 / 3 YEAR 28 0.1003 0.5141 61.15%
CAR -5, 5 29 0.0162 0.0695 1.2523 22.08% 53.57% CAR -1, 1 / 4 YEAR 26 0.0959 0.4721 64.11%
CAR -2, 2 / 2 YEAR 29 0.0565 0.2939 77.11%
POCFROS 2 YEARS 29 0.0073 0.0511 0.7643 45.11% 64.29% CAR -2, 2 / 3 YEAR 28 0.0651 0.3324 74.22%
CAR -5, 5 / 3 YEAR 28 0.0149 0.0760 94.00%
CAR -5, 5 / 4 YEAR 26 0.0478 0.2346 81.65%
Table 6b: Mean CARs and POCFROS Table 7b: Correlation between CARs and POCFROS
Standard %
S2 (TQAcq > Median) N Mean T* p-Value S2 N Correlation T* p-Value
Deviation Positive
CAR -1, 1 29 -0.0150 0.0677 -1.1938 24.26% 43.33% CAR -1, 1 / 2 YEAR 29 0.0088 0.0460 96.37%
CAR -2, 2 29 -0.0114 0.0751 -0.8175 42.06% 43.33% CAR -1, 1 / 3 YEAR 29 -0.0046 -0.0240 98.10%
CAR -5, 5 29 -0.0182 0.0631 -1.5569 13.07% 40.00% CAR -1, 1 / 4 YEAR 29 -0.0056 -0.0291 97.70%
CAR -2, 2 / 2 YEAR 29 -0.0120 -0.0625 95.06%
POCFROS 2 YEARS 29 0.0720 0.4124 0.9406 35.50% 73.33% CAR -2, 2 / 3 YEAR 29 -0.0208 -0.1079 91.49%
CAR -5, 5 / 3 YEAR 29 0.1899 1.0051 32.38%
CAR -5, 5 / 4 YEAR 29 0.1856 0.9812 33.52%
26
Table 8a: Correlation with TQAcq Table 9a: Correlation with TQTgt
S1 N Correlation T* p-Value S1 N Correlation T* p-Value
CAR -1, 1 / TQ 29 -0.0342 -0.1778 86.02% CAR -1, 1 / TQ 29 0.1072 0.5602 57.99%
CAR -2, 2 / TQ 29 0.0790 0.4118 68.37% CAR -2, 2 / TQ 29 0.0738 0.3844 70.37%
CAR -5, 5 / TQ 29 -0.1026 -0.5361 59.63% CAR -5, 5 / TQ 29 0.0464 0.2414 81.11%
POCFROS 2 YEARS / TQ 29 0.1014 0.5295 60.08% POCFROS 2 YEARS / TQ 29 0.2163 1.1514 25.97%
Average TQAcq: 1.3594 Average TQTgt: 2.7513
Table 8b: Correlation with TQAcq Table 9b: Correlation with TQTgt
S2 N Correlation T* p-Value S2 N Correlation T* p-Value
CAR -1, 1 / TQ 29 -0.2273 -1.2127 23.57% CAR -1, 1 / TQ 29 -0.4617 -2.7048 1.17%**
CAR -2, 2 / TQ 29 -0.0986 -0.5149 61.08% CAR -2, 2 / TQ 29 -0.4371 -2.5250 1.77%**
CAR -5, 5 / TQ 29 -0.1108 -0.5793 56.72% CAR -5, 5 / TQ 29 -0.4157 -2.3752 2.49%**
Average TQAcq: 3.8327 Average TQTgt: 3.1311
27
Subsamples conditioned on Deal Purpose: R&D / Non-R&D
Table 10a: Mean CARs and POCFROS Table 11a: Correlation between CARs and POCFROS
Standard %
R&D N Mean T* p-Value R&D N Correlation T* p-Value
Deviation Positive
CAR -1, 1 31 0.0039 0.0360 0.6043 55.02% 58.06% CAR -1, 1 / 2 YEAR 31 0.3973 2.3317 2.69%**
CAR -2, 2 31 0.0044 0.0426 0.5690 57.36% 54.84% CAR -1, 1 / 3 YEAR 31 0.3938 2.3070 2.84%**
CAR -5, 5 31 0.0026 0.0545 0.2619 79.52% 48.39% CAR -1, 1 / 4 YEAR 30 0.3851 2.2079 3.56%**
CAR -2, 2 / 2 YEAR 31 0.2111 1.1629 25.43%
POCFROS 2 YEARS 31 -0.0145 0.1630 -0.4936 62.52% 67.74% CAR -2, 2 / 3 YEAR 31 0.2105 1.1594 25.58%
CAR -5, 5 / 3 YEAR 31 0.2897 1.6301 11.39%
CAR -5, 5 / 4 YEAR 30 0.2880 1.5914 12.27%
Table 10b: Mean CARs and POCFROS Table 11b: Correlation between CARs and POCFROS
Standard %
Non-R&D N Mean T* p-Value Non-R&D N Correlation T* p-Value
Deviation Positive
CAR -1, 1 27 -0.0156 0.0841 -0.9623 34.48% 44.44% CAR -1, 1 / 2 YEAR 27 -0.0490 -0.2453 80.82%
CAR -2, 2 27 -0.0122 0.0867 -0.7289 47.26% 48.15% CAR -1, 1 / 3 YEAR 27 -0.0497 -0.2488 80.55%
CAR -5, 5 27 -0.0052 0.0817 -0.3291 74.47% 44.44% CAR -1, 1 / 4 YEAR 27 -0.0412 -0.2061 83.84%
CAR -2, 2 / 2 YEAR 27 -0.0427 -0.2139 83.24%
CAR -5, 5 / 3 YEAR 27 0.0620 0.3104 75.89%
CAR -5, 5 / 4 YEAR 27 0.0677 0.3393 73.72%
28
Table 12a: Correlation with TQAcq Table 13a: Correlation with TQTgt
R&D N Correlation T* p-Value R&D N Correlation T* p-Value
CAR -1, 1 / TQ 31 -0.4709 -2.8748 0.75%*** CAR -1, 1 / TQ 31 0.0733 0.3957 69.53%
CAR -2, 2 / TQ 31 -0.2561 -1.4268 16.43% CAR -2, 2 / TQ 31 0.0068 0.0367 97.10%
CAR -5, 5 / TQ 31 -0.3214 -1.8277 7.79%* CAR -5, 5 / TQ 31 -0.0141 -0.0760 93.99%
POCFROS 2 YEARS / TQ 31 -0.3694 -2.1405 4.09%** POCFROS 2 YEARS / 31 0.0643 0.3472 73.09%
POCFROS 3 YEARS / TQ 31 -0.3493 -2.0077 5.41%* TQ/
POCFROS 3 YEARS 31 0.0820 0.4433 66.08%
POCFROS 4 YEARS / TQ 30 -0.3096 -1.7232 9.59%* TQ/
POCFROS 4 YEARS 30 0.0906 0.4815 63.39%
Average TQAcq: 2.4303 Average TQTQ
Tgt: 3.4193
Table 12b: Correlation with TQAcq Table 13b: Correlation with TQTgt
Non-R&D N Correlation T* p-Value Non-R&D N Correlation T* p-Value
CAR -1, 1 / TQ 27 -0.1361 -0.6870 49.84% CAR -1, 1 / TQ 27 -0.4410 -2.4570 2.13%**
CAR -2, 2 / TQ 27 -0.0662 -0.3319 74.28% CAR -2, 2 / TQ 27 -0.4201 -2.3148 2.91%**
CAR -5, 5 / TQ 27 -0.2034 -1.0385 30.90% CAR -5, 5 / TQ 27 -0.3451 -1.8385 7.79%*
POCFROS 2 YEARS / TQ 27 0.4414 2.4596 2.12%** POCFROS 2 YEARS / 27 0.2567 1.3282 19.61%
POCFROS 3 YEARS / TQ 27 0.4352 2.4172 2.33%** TQ/
POCFROS 3 YEARS 27 0.2635 1.3657 18.42%
POCFROS 4 YEARS / TQ 27 0.4347 2.4131 2.35%** TQ/
POCFROS 4 YEARS 27 0.2590 1.3407 19.21%
Average TQAcq: 2.7863 Average TQTQ
Tgt: 2.3924
29
Table 14: CARs for Pharmerging Acquirers
Standard %
N Mean T* P-values
Deviation Positive
Overall Acquirer CAR -1, 1 52 0.0133 0.0609 1.5789 12.05% 65.38%
Acquirer CAR -2, 2 52 0.0017 0.0487 0.2477 80.53% 51.92%
Acquirer CAR -5, 5 52 -0.0005 0.0801 -0.0427 96.61% 59.62%
Western Acquirer CAR -1, 1 25 0.0195 0.0493 1.9750 5.99%* 68.00%
Europe Acquirer CAR -2, 2 25 0.0177 0.0548 1.6136 11.97% 68.00%
Acquirer CAR -5, 5 25 0.0130 0.0552 1.1779 25.04% 68.00%
United Acquirer CAR -1, 1 27 0.0076 0.0704 0.5636 57.78% 62.96%
States & Acquirer CAR -2, 2 27 -0.0132 0.0375 -1.8259 7.94%* 37.04%
Canada Acquirer CAR -5, 5 27 -0.0130 0.0971 -0.6934 49.42% 51.85%
Tier One Acquirer CAR -1, 1 33 0.0205 0.0704 1.6726 10.42% 72.73%
& Two Acquirer CAR -2, 2 33 0.0070 0.0523 0.7718 44.59% 57.58%
Acquirer CAR -5, 5 33 -0.0015 0.0879 -0.0975 92.30% 63.64%
Note: Missing data means that whilst the sample criteria provided 56 mergers to investigate, only 52 have available data.
30
5. Discussion
This study finds that, on average, cumulative abnormal returns (CARs) for acquirers are
significantly negative, whilst for targets, large highly significant positive returns are seen, and
that on average, returns on the combined firm are not significantly different from zero, which
reaffirms previous findings such as those of Ravenscraft & Long (2000) and Martynova &
Renneboog (2008). In contrast to DeGraaff (2006), there is little correlation between CARs
and subsequent realised financial performance. Betzer & Goergen (2011) find significant
evidence to suggest that this empirical puzzle (Fridolfsson & Stennek, 2005), may be
explained by differences in merger motive. Indeed, when one considers the correlation
between CAR and POCFROS for the R&D-driven subsample, a stronger correlation is found,
significant for the 3-day windows.
5.1 Asymmetric Information, Alliances and Portfolio Complementarity
Whilst average changes in post-merger cash flow for the R&D subsample are negative, a
majority of individual firm results are positive. This suggests that a minority of R&D-driven
mergers fail catastrophically. One possible explanation for this rests in the unpredictable
nature of R&D acquisitions and information asymmetry. (Pisano, 1997). Despite performing
due diligence, acquiring firms may lack the information to fully comprehend the drug profile
of a potential target. This risk is increased if the target is a small biotechnology firm.
However, as a way to mitigate this risk, firms may try to enter into pre-merger alliances and
agreements. Indeed, Higgins & Rodriguez (2006) document that pre-merger alliances may
reduce information asymmetries, and thus increase the value of M&A driven by
R&D/pipeline concerns. Furthermore, as noted by MacDonald (2010) and Montgomery &
Singh (1987), returns on mergers are higher in cases where portfolio complementarity was
31
greater. By reducing information asymmetries, an acquirer would be able to better determine
the health of a potential target pipeline, and whether it would integrate well with their own.
5.2 Synergies and Economies of Scale and Scope
As noted by Grabowski & Kyle (2012), whilst mergers can be a response to shocks, such as
pipeline expiration, they may also be used as a proactive driver to benefit from synergies.
When a firm is in a less defensive position, not fearing imminent patent expirations, it is
likely that mergers may be driven by desires to benefit from such synergies. For the non-
R&D subsample, this study finds significant positive correlation between TQAcq and
subsequent changes in cash flow, with average cash flow changes of between 10-13%. These
findings are found again for the overall sample, and for the higher TQAcq subsample. This is
consistent with the findings of Fich et al. (2013), who found that greatest value is created by
acquirers with high TQ values. Given that in these mergers, imminent pipeline concerns are
less of an issue, this value could, perhaps, be as a result of synergy benefits. Whilst some
mergers occurred for purposes of territorial expansion, such as Fresenius acquisition of App
Pharmaceuticals, many, such as the Pfizer acquisition of Pharmacia or Mercks acquisition of
Schering-Plough, contain economies of scale as a primary driver. This supports the findings
of Devos et al. (2009), who suggested that operating synergies create the most value. These
mergers often bring with them R&D related benefits anyway. As documented by Burns et al.
(2005), synergy driven mergers in the pharmaceutical industry have also helped firms
diversify into new therapeutic areas. Indeed, particularly in light of the financial crisis, firms
such as Johnson & Johnson, and Abbott Laboratories performed better than firms undertaking
purely R&D driven mergers, as a result of diversification, both into new therapeutic areas,
but also into medical devices and consumer-health products (Rockoff, 2009). Nevertheless,
these mergers were also documented to have negative CARs, and a negative correlation
between TQAcq and CARs. As pointed out by Comanor & Scherer (2009), such mergers
32
reduce competition in the innovation market, and damage independent, smaller biotechnology
progress. Markets, it seems, acknowlege the potential detrimental impacts of these mergers.
5.3 The Financial Crisis
One important possible explanation for some of the findings of this experiment may rest in its
chosen time frame vis--vis the financial crisis. Whilst a thorough investigation into the
impacts of the crisis is beyond the scope of this paper, a brief discussion may offer some
insights. That financial shocks have an impact on merger trends is not a new concept. (Gort,
1969) Whilst one might initially suggest that the financial crisis hasnt affected the
pharmaceutical industry particularly significantly, as people continue to become ill and still
need treatment, irrespective of global economic forces (Behner, et al., 2009, p. 2), closer
investigation reveals a murkier picture.
One likely problem, which would particularly affect R&D productivity, is the drying up of
traditional sources of financing, especially credit (Behner, et al., 2009). On average, whilst
markets reacted favourably to the announcement of a merger driven by R&D, subsequent
changes in cash flow were negative, by between -1.24% and -1.45%. One explanation for this
finding is due to information asymmetries. However, another may be the timing of the
financial crisis. This paper has investigated acquisitions with a deal purpose of R&D.
However, it has not accounted for differences in the nature of these acquisitions be they
late-stage products that would perhaps be ready for marketing in the following year, or be
they promising early candidates that would still require significant amounts of investment for
a number of years. Nevertheless, one can hypothesise, given that the correlation between
CARs, POCFROS and TQAcq are significantly negative (Table 12a), that the highest market
returns and subsequent cash flows were generated for firms that were the most desperate.
These firms may well have acquired late-stage candidates from targets, and managed to
reverse their fortunes. However, relatively healthier firms, still motivated by R&D concerns,
33
may have tended to bring in mid-stage products that still required appreciable investment,
which was harder to come by due to the financial crisis. This hypothesis would require
additional testing, and a direct investigation into the nature of drug candidates acquired.
One can further comment that the financial crisis may lend further support to the idea that
synergy driven consolidation mergers have a higher likelihood of being accretive. Hornke &
Mandewirth (2010) suggest that the financial crisis has forced pharmaceutical firms across
the entire industry to become more efficient, and it has also increased consolidation pressure
on the industry.
5.4 Nature of the Target
In both the low TQAcq sample and the R&D subsample, a positive correlation is seen
between TQTgt and CARs and POCFROS (Table 9a & 13a). Furthermore, average TQAcq is
lower than that of the target. Indeed, when one considers the difference between acquirer and
target pairs, in both cases, the difference is significant. This could suggest that acquirers who
are seeking to merge, find, on average, targets who have a healthier pipeline than they do.
By contrast, for the high TQAcq sample, and for mergers not driven by R&D, there is
significant negative correlation between announcement abnormal returns and target Tobins
Q. This suggests that for targets in these mergers, particularly in the financial crisis, mergers
may represent an exit strategy (Danzon, et al., 2007). However, further details would be
required to test the robustness of this hypothesis here. Notwithstanding, it is also noted that
cash flow generation is positively correlated with TQTgt, as it is with TQAcq for both the high
TQAcq and non-merger subsamples.
5.5 Absorption Capacity
In contrast to the significant negative correlation between TQAcq and CARs / POCFROS for
the R&D subsample, the low TQAcq sample is characterised by mixed correlation between
34
TQAcq and CARs. However, correlation with POCFROS is insignificantly positive. Whilst it
was suggested that value is higher for the most desperate firms motivated by R&D concerns,
here, there is weak evidence to suggest that post-merger cash flows are higher for acquirers
with higher TQAcq. One possible explanation could lie in the existence of a certain absorption
capacity, as described by Chesbrough (2006) and Higgins & Rodriguez (2006). They suggest
that an acquiring firm, motivated to a pipeline-driven acquisition, as a result of excess
capacity, requires a basic absorptive capacity in place already some existing level of
internal pipeline security to best benefit from such a merger. Thus, for healthier firms in the
low subsample, deals where the acquirer has a stronger grounding prior to merger lead to
greater value creation post-merger.
5.6 Pharmerging Acquisitions
This study found that over 3-day windows surrounding the announcement of a pharmerging
acquisition, acquirers experienced an insignificant positive return of 1.33%, on average.
However, as event window increased, returns declined, falling negative for an 11-day
window. These findings lend credence to Campbell & Chuis (2010) assertion that the
pharmerging nations are fraught with hurdles. As Belcher & Nail (2000) suggested, cross-
border acquisitions have the potential to be very productive, and offer a widened sales base to
the successful firm. However, there are a variety of problems that may plague them. These
are exacerbated in the emerging markets. Not only are there substantial differences between
the major markets and the emerging markets, but they also exist between and within the
emerging markets as well. For example, Campbell & Chui (2010) note that whilst in Poland,
public health insurance is the norm, in Argentina, patients and employers bear the brunt of
healthcare costs. On the other hand, whilst Argentina processes drug approvals extremely
quickly, in Thailand, it may take several years. As Luc Vermeesch explained (Appendix III),
35
the decision to enter an emerging market will be independent of entry into any other market.
This is driven by the highly varied profiles of the many pharmerging nations.
Evidence is also found to support the claims of Campbell & Chui (2010), that European
based acquirers have generally fared better than American firms. Indeed, over a 3-day
window, European acquirers generate significant positive returns of 1.95%, compared to
0.76% for American firms. Furthermore, whilst a decline in CARs is still experienced,
European firms generated positive returns of 1.3%, compared to -1.3%, for the longest event
window. A possible explanation is provided by David Milton (Appendix III), who suggested
that the move towards emerging markets is easier for European based firms, as, having faced
smaller existing domestic markets, these firms were forced to adapt and internationalise
earlier on.
The situation doesnt seem to be much different in the four largest Tier one and two
pharmerging markets. Whilst there is greater initial positive return, of 2.05%, all of this return
is negated across the longer windows. This suggests that the difficulties in these markets are
all the greater. For example, whilst they are powerhouses of growth, China and India both
suffer from weak controls on intellectual property. Without a more robust regulatory
environment, it does not make financial sense for major market firms to invest at risk in these
countries.
Currently, these acquisitions are not value creating to the pharmaceuticals industry. Many of
these markets are dominated by local generic firms. Furthermore, regulatory systems in the
emerging markets, even when robust, are often protectionist. Major-market firms have to be
able to operate on a similar level, from within such a system. Thus, current acquisitions are
sometimes aimed only at establishing a foothold. The evidence presented implies that
36
markets have acknowledged the value-creating potential of mergers in these new markets.
However, they also recognise the substantial risks and volatility that these markets contain.
5.7 Limitations
5.7.1 Use of Tobins Q
As acknowledged in the methodology, along with deal purpose announcements, the only
drug metric this study has used is Tobins Q. The motivation for choosing Tobins Q comes
from Danzon et al. (2007). However, this metric was used alongside three other indicators,
that of a lagged percentage change in sales, the percentage of a firms marketed drugs that are
old and likely soon to lose patent protection, and finally the percentage change in operating
expenses in the years leading up to merger. More accurate data would likely result from using
a multi-variable metric for R&D accounting. However, accurate data about R&D
productivity, particularly with regard to future pipelines, is difficult to obtain, and much of it
can be proprietary. In addition, whilst Tobins Q may reflect changes in intangibles, these are
not exclusively pipeline driven. It also serves to reflect changes in the market valuation of a
firm that might not necessarily be as a result of changes in pipeline, such as corporate
leadership, or emerging disease awareness.
5.7.2 Centrality of R&D
Whilst this study divided the sample into two groups based on whether pipeline concerns and
a desire to acquire R&D were an explicitly stated merger purpose, this is highly subjective.
As R&D is the lifeblood of the industry, it is prevalent, in some capacity, in nearly all
pharmaceutical mergers. Thus, this author raises concerns as to the division of the sample
into R&D and non-R&D driven mergers. By way of example, the acquisition of Pharmion by
Celgene was viewed as a non-R&D merger, with stated purpose revolving around becoming a
global leader in the oncology field. However, the transaction also helped bring several
significant products to Celgene, such as Vidaza (Pollack, 2007). This study thus
37
acknowledges that there exists a certain amount of subjectivity in its choice of firms for
sample division. As Danzon et al. (2007) noted, the notion of excess capacity as a merger
driver, and the notion of economies of scale are not mutually exclusive, and may well be
complementary.
5.7.3 Multiple Mergers and an ever-moving Industry
The pharmaceutical industry is one that is constantly moving, and newsflow concerning drug
discoveries, regulatory changes and new alliances to name a few, punctuates the financial
cycles (Ravenscraft & Long, 2000). As a result, it is one where methodological problems of
independence are likely to arise, both in the short and long term. (Mitchell & Stafford, 2000;
Brav, 2000) Of particular importance in this study is the ability to isolate individual merger
effect on stock price and post-merger cash flows. Several firms in the sample identified
undertook multiple mergers in the time period considered. Indeed,whilst the specification
criteria generated 77 mergers, there are only 50 unique acquirers. Thus, there is a likelihood
that some firms data are conflated with the impact of other mergers and firm announcements.
5.7.4 Partial Mergers and Alliances
By design, only mergers where 100% of the target was owned by the acquirer at the end of
acquisition, having acquired more than 51% of ownership in the transaction were
investigated2. As a result, deals such as UCBs acquisition of 88% of shares in Schwarz
Pharma for $5.6 billion, or Novartis acquiring Alcon, which occurred in several individual
phases3, do not form part of the sample analysed. UCB in this instance stated that this
transaction would help bring in a series of late stage potential products. As previously noted,
alliances can function as complements to mergers. They can also, however, be substitutes for
2
Indeed, replacing the criteria of 51-100% acquired in transaction and 100% owned after transaction with one
criterion of post-merger ownership of >51% of shares would increase the sample size to 96 mergers.
3
See Urquhart (2006) and Simonian (2010). The acquisition of Alcon occurred in several stages, with an initial
purchase of 25% of Alcon, from Nestl. The remaining 52% of shares owned by Nestl were subsequently
acquired, before further negotiation regarding the interests of minority shareholders.
38
potentially costly mergers. Given that larger firms are increasingly looking to alliances and
partnerships with smaller biotechnology firms as the source of new products (Grabowski &
Kyle, 2012, p. 567) and the rise of forms of collaboration that are short of takeovers, driven
by ideas such as research without walls as pioneered by Eli Lilly (Owen, et al., 2008), the
analysis conducted here is unlikely to present a full picture of R&D activity. Indeed, Danzon
et al. (2005) found evidence to suggest that drug products developed in alliances had a higher
probability of success.
5.7.5 Other Limitations
This study has not sought to investigate different types of mergers, and sources of funding.
Andrade et al. (2001) document clear differences between stock and cash funded mergers.
Loughran & Vijh (1997) also documented that this division impacted on post-merger returns
as well. In addition, Fich et al. (2013) found evidence to suggest that the relative size and
health of acquirer and target is a key driver of value creation. This study has not investigated
the effect that relative firm size and health has had, which would likely play an important role
in merger valuation.
Furthermore, event windows used were 3, 5 and 11 days, surrounding merger announcement.
Whilst this is able to reflect market sentiment, one cannot assume accuracy. Indeed, Mitchell
et al. (2004) suggested that nearly half of the negative abnormal return to acquirers at merger
announcement is driven by arbitrage short-selling. They also noted, however, that these
tended to be short-run deviations. Hassan et al. (2007) investigated a longer event window,
(+1, +30) and found significant positive abnormal returns to acquirers. Whilst longer-term
effects present difficulties of isolating announcement impact, they can present an advantage,
in that the impact of speculative trading by merger arbitrageurs may be reduced.
39
In addition, this study has assumed that information leakage does not occur. In an industry
such as pharmaceuticals, where, as mentioned above, new information is constantly
generated, it is likely that in some instances, information about a potential merger will
already have been documented prior to formal announcement (Schipper & Thompson, 1983;
Sun et al., 2010).
40
6. Conclusions
As was mentioned at the start of this dissertation, in 2008, GSK acquired Sirtris, a highly
promising, but highly controversial acquisition, as it suggested a loss of trust in internal
development processes. Having spent $720 million on this acquisition, GSK shut down the
unit in 2013. (Ledford, 2013) Furthermore, not only do these mergers have a questionable
rate of success, they have a damaging impact on internal development as well. As Stephen
Frye, a former senior researcher at GSK, opined, the spate of mergers was interrupting the
flow of research at the firmit was a futile cycle of constant restructuring. (cited in
Ledford, 2008). A similar situation can be seen with the Merck acquisition of Sirna, for $1.1
billion, in 2006. This unit was recently sold off for $175 million (Carroll, 2014). Interestingly,
in both of these cases, the acquisitions were undertaken not to leverage target knowledge, but
to leverage what they do, which, as Puranam & Srikanth (2007) suggest, is damaging, post-
merger. Whilst two firms divesting units bought in the drive for external innovation hardly
warrants a failure of external R&D, this study provides some empirical grounding for such a
conclusion. However, as acknowledged, difficulties in determining which acquisitions are
pipeline driven mean that a clear answer cannot be provided.
Given that R&D acquisitions seem, on balance, to have led to negative post-merger cash
flows, as well as being acknowledged by some to be damaging for internal development, one
might wonder why pharmaceutical firms engage in external R&D acquisitions. The financial
crisis has certainly impacted on the profitability of such tactics. Furthermore, as hypothesised
earlier, the precise nature of the acquisition needs to be known for further clarity on this
point. Significant negative correlation was found between acquirer Tobins Q and subsequent
changes in cash flow, in cases where R&D was presented as the motive for merger. This
suggests that, perhaps, in mergers where the acquirer is truly desperate, value has been
41
created in R&D-driven mergers. In addition, where due diligence on a target has been carried
out, as represented by attempts to minimise asymmetric information, evidence suggests that
R&D-driven acquisitions can be successful. Without this, however, external R&D mergers
are risky, and may not provide benefit to the acquirer.
As reported by Hassan et al. (2007), internal and external R&D growth can function both as
complements and substitutes. Grabowski & Kyle (2012) posit that firms need to understand
the balance of impacts between internally and externally driven R&D projects. This author
believes that pharmaceutical firms should endaevour to appreciate the value of the two ideas
as complements both internally and externally driven growth can fail, and in mitigating the
dangers of this occuring, firms have to understand the role for both working together.
Furthermore, external projects are not solely acquired in cases of desperation as suggested,
even in cases of synergy and economies of scale, these may well derive from savings in
R&D, as it underpins nearly everything that the industry does. In all mergers, pharmaceutical
firms have to be wary of the effects that a takeover may have on productivity, sourced both
internally and externally.
6.1 Three Imperatives for Action
The pharmerging markets show a lot of potential and promise, and this is acknowledged by
investors. However, there are also many uncertainties that need to be accounted for in moving
forwards. Without focussed attention, operations in the emerging markets could prove to be
disastrous, as reported in The Economist (2014). With growing exposure to the emerging
markets, any errors in judgement could prove to be highly costly. Campbell & Chui (2010)
proposed three recommendations for mitigating challenges and best ensuring success:
Acknowledge and address the urgency. The earlier that a firm is able to get into an
emerging market, the better the platform it will be able to establish.
42
Understand and embrace the complexity. These markets are highly volatile and
present multitudinous and varied challenges for the industry. Only by appreciating the
uniqueness that each country possesses will success be possible.
Adapt and tailor your strategy. To survive in such a diversified array of markets,
companies will either have to focus specifically on one, or be flexible and understand
that in different emerging markets, different tactics will be required.
6.2 Further Study
As was previously discussed, this experiment only considered Tobins Q as a measure of
innovation. Other information, regarding patent profiles, whilst more difficult to acquire, is
likely to result in more accurate information, regarding the success of R&D and pipeline
driven mergers. Further study is thus warranted. This study also found evidence that mergers
driven by economies of scale and synergy, add value. Furthermore, as acknowledged, this
author believes that the financial crisis may explain some of the less intuitive results that
were found, particularly with respect to post-merger scaled cash flows. Closer investigation
into the true effects of the financial crisis on pharmaceutical M&A would be warranted.
Only mergers which were listed on Thomson One as occurring in one stage, with 100% of
shares owned at completion of the deal were investigated. Given the multiple forms of
cooperation and agreement that exist, as well as multi-stage transactions, such as Novartis
acquisition of Alcon, and non-merger strategic partnerships, such as alliances and joint utility
operations4, there exists a frutiful area for future research.
This study also conducted a preliminary investigation into pharmerging M&A, considering
changes in acquirer stock price at the time of merger announcement. With regard to
pharmerging M&A, the limited scope of analysis, in this respect, was driven by the lack of
4
See Behner et al. (2009) and Grabowski & Kyle (2012)
43
complete information regarding these mergers. As the pharmerging sector continues to grow,
M&A activity will likely become more transparent, and information on target firms will
become more readily available. In addition, as this segment is highly nascent, it is difficult to
examine the ex post effect of these mergers. Given time, it will be possible to investigate
whether these mergers have, in fact, realised value.
6.3 The Future of the Industry
The pharmaceuticals industry cannot afford to sit still and will continue to change. Some
brief suggestions for the future of the industry follow.
This author concurs with David Milton, who suggested that there is likely to be some
fundamental changes to drug profiles, with the rise of ever-personalised medicine, targeted
specifically at individuals. There will likely be a move to innovative solutions in areas such
as oncology and Alzheimers care. (IMS Institute, 2012) Furthermore, there may be a move
towards further merging of technologies, such as with communications and telemedicine.
From an economic, acquisitory perspective, one can perhaps see mergers with medical
diagnostics and devices firms (DeGraaff, 2006) as devices such as iPads become ever more
sophisticated and valuable to the medical industry5.
Whilst developed markets will carry on having the highest spending per person, at an
expected average per capita spend of $609, on average, the shift towards pharmerging
markets will only accelerate, and with this will come increased transparency. Moreover, there
will be a shift from basic healthcare provisions to more advanced medical care as the
general profile of individual healthcare improves (David Milton, Appendix III). Not only are
the pharmerging markets different in terms of culture to the major markets, they also
represent a seismic shift in the rate of change. Whilst growth will carry on in pharmerging
5
Indeed, there are already a range of medical diagnostics applications available for iPads, such as glucose
sensors and ultrasound imaging (Matlack, 2012; Berger, 2010). More recently; there has also been a growing
interest in technologies such as 3D bioprinting. (The Economist, 2014)
44
markets, it will be a period of fast change. At the moment, generics are important, generating
downward pricing pressure, however, in a very short space of time, more advanced drugs
with improved efficacy, safety and pharmacoeconomic benefit will take their place, and may
reverse this downward pricing trend.
6.4 Some Final Comments
The pharmaceutical industry is a highly innovative one that is a constantly evolving story
(Campbell & Chui, 2010, p. 8), with new challenges and changes always apparent. As the
world continues to develop and expand, the highly complex pharmaceutical industry will
continue to adapt and develop, and will always provide a wealth of opportunities for further
study and investigation.
45
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The Economist, 2014. Printing a Bit of Me. The Economist: Technology Quarterly, 8 March,
pp. 15-18.
Urquhart, L., 2006. UCB to buy Schwarz Pharma for 4.4bn. [Online]
Available at: http://www.novartis.com/newsroom/media-releases/en/2010/1440394.shtml
Walker, S., 2004. Factors that Impede or Assist True Global Development in the ICH
Regions. Tokyo, CMR International Institute Workshop on Global Drug Development.
51
Appendices
Appendix I: List of Mergers
Date Date Enterprise Value at Equity Value at

Announced Effective Acquirer Name Target Name Announcement ($ mil) Announcement ($ mil)
12/21/2009 02/09/2010 Sanofi-Aventis SA Chattem Inc 2,107 1,780.74
10/15/2009 02/23/2010 Shanghai Pharm Co Ltd Shanghai Indl Pharm Invest Co 826 1,056.66
07/22/2009 09/01/2009 Bristol-Myers Squibb Co Medarex Inc 1,925 2,247.40
05/21/2009 07/09/2009 Johnson & Johnson Cougar Biotechnology Inc 912 988.22
03/09/2009 11/03/2009 Merck & Co Inc Schering-Plough Corp 45,913 38,615.03
01/26/2009 10/15/2009 Pfizer Inc Wyeth 64,479 67,285.36
01/12/2009 02/24/2009 Abbott Laboratories Advanced Medical Optics Inc 2,740 1,377.74
01/05/2009 03/23/2009 Endo Pharmaceuticals Holdings Indevus Pharmaceuticals Inc 404 358.93
12/01/2008 01/23/2009 Johnson & Johnson Mentor Corp 1,114 1,060.72
10/06/2008 11/21/2008 Eli Lilly & Co ImClone Systems Inc 6,076 6,497.47
09/01/2008 10/09/2008 Shionogi & Co Ltd Sciele Pharma Inc 1,247 1,023.32
08/22/2008 12/30/2008 King Pharmaceuticals Inc Alpharma Inc 1,316 1,616.49
07/18/2008 12/23/2008 Teva Pharmaceutical Industries Barr Pharmaceuticals Inc 8,767 7,310.26
07/15/2008 10/21/2008 ViroPharma Inc Lev Pharmaceuticals Inc 446 440.89
07/07/2008 09/10/2008 Fresenius SE APP Pharmaceuticals Inc 4,642 3,717.97
04/22/2008 06/02/2008 GlaxoSmithKline PLC Sirtris Pharmaceuticals Inc 617 715.58
12/10/2007 01/30/2008 Reckitt Benckiser Group PLC Adams Respiratory Therapeutics 2,414 2,447.16
11/18/2007 03/07/2008 Celgene Corp Pharmion Corp 2,879 3,127.40
10/17/2007 01/03/2008 Galenica AG Aspreva Pharmaceuticals Corp 573 934.32
09/06/2007 03/27/2008 Primary Health Care Ltd Symbion Health Ltd 2,834 2,458.79
08/28/2007 10/31/2007 Medco Health Solutions Inc PolyMedica Corp 1,507 1,279.17
06/25/2007 02/15/2008 Roche Holding AG Ventana Medical Systems Inc 3,625 3,665.41
04/23/2007 06/18/2007 AstraZeneca PLC MedImmune Inc 16,248 16,121.78
02/20/2007 04/17/2007 Shire PLC New River Pharmaceuticals Inc 2,745 2,754.19
11/16/2006 02/01/2007 Johnson & Johnson Conor Medsystems Inc 1,326 1,458.78
52
11/09/2006 08/02/2007 Genentech Inc Tanox Inc 757 921.56
11/05/2006 12/15/2006 Abbott Laboratories Kos Pharmaceuticals Inc 3,979 4,146.17
10/30/2006 12/29/2006 Merck & Co Inc Sirna Therapeutics Inc 1,049 1,132.28
10/16/2006 01/29/2007 Eli Lilly & Co ICOS Corp 2,443 2,271.12
10/09/2006 12/19/2006 GlaxoSmithKline PLC CNS Inc 502 562.53
10/02/2006 11/17/2006 Gilead Sciences Inc Myogen Inc 2,297 2,473.63
09/20/2006 02/01/2007 Hospira Inc Mayne Pharma Ltd 1,901 1,976.06
08/30/2006 11/07/2006 Genzyme Corp AnorMED Inc 571 604.29
07/14/2006 09/08/2006 STADA Arzneimittel AG Hemofarm AD 595 580.93
05/15/2006 08/22/2006 AstraZeneca PLC Cambridge Antibody Tech Grp 1,017 1,319.89
03/13/2006 11/06/2006 Watson Pharmaceuticals Inc Andrx Corp 1,582 1,864.11
12/16/2005 02/17/2006 Johnson & Johnson Animas Corp 489 536.04
11/14/2005 03/24/2006 Allergan Inc Inamed Corp 3,092 3,261.49
10/03/2005 07/31/2006 Boots Group PLC Alliance UniChem PLC 7,480 5,404.93
09/07/2005 12/08/2005 GlaxoSmithKline PLC ID Biomedical Corp 1,388 1,360.69
09/01/2005 04/20/2006 Novartis AG Chiron Corp 9,678 9,266.97
08/22/2005 12/02/2005 Sigma Co Ltd Arrow Pharmaceuticals Ltd 513 502.49
08/21/2005 11/14/2005 OSI Pharmaceuticals Inc Eyetech Pharmaceuticals Inc 690 952.16
07/25/2005 01/26/2006 Teva Pharmaceutical Industries IVAX Corp 8,366 7,366.40
06/16/2005 09/14/2005 Pfizer Inc Vicuron Pharmaceuticals Inc 1,791 1,916.40
05/04/2005 07/01/2005 Genzyme Corp Bone Care Intl Inc 595 713.55
04/21/2005 07/28/2005 Shire Pharmaceuticals Grp PLC Transkaryotic Therapies Inc 1,347 1,383.24
02/25/2005 09/28/2005 Sankyo Co Ltd Daiichi Pharmaceutical Co Ltd 5,763 7,027.48
11/15/2004 03/17/2005 Perrigo Co Agis Industries(1983)Ltd 925 891.11
07/01/2004 10/20/2004 Charles River Labs Intl Inc Inveresk Research Group Inc 1,556 1,522.48
05/18/2004 07/09/2004 UCB SA Celltech Group PLC 2,473 2,747.18
03/29/2004 08/13/2004 Amgen Inc Tularik Inc 1,642 1,813.59
02/26/2004 12/21/2004 Genzyme Corp ILEX Oncology Inc 949 1,049.98
02/24/2004 04/01/2005 Yamanouchi Pharmaceutical Co Fujisawa Pharmaceutical Co Ltd 15,119 7,940.09
01/13/2004 04/06/2004 Abbott Laboratories TheraSense Inc 1,170 1,242.54
12/19/2003 02/11/2004 Pfizer Inc Esperion Therapeutics Inc 1,198 1,281.13
10/31/2003 01/22/2004 Teva Pharmaceutical Industries SICOR Inc 3,165 3,400.89
53
08/21/2003 08/12/2004 Cephalon Inc CIMA Labs Inc 430 511.01
08/04/2003 09/15/2003 Genzyme Corp SangStat Medical Corp 535 614.07
07/24/2003 02/13/2004 Roche Holding AG IGEN International Inc 1,254 1,176.15
05/20/2003 09/29/2003 Fukujin Co Ltd Azwell Inc 281 511.95
02/10/2003 04/29/2003 Johnson & Johnson Scios Inc 2,449 2,323.21
07/15/2002 04/15/2003 Pfizer Inc Pharmacia Corp 60,704 59,515.01
12/06/2001 02/12/2002 Millennium Pharmaceuticals Inc COR Therapeutics Inc 2,174 2,416.84
06/29/2001 10/24/2001 Barr Laboratories Inc Duramed Pharmaceuticals Inc 638 594.44
05/31/2001 09/28/2001 Mayne Nickless Ltd FH Faulding & Co Ltd 1,364 1,218.12
05/11/2001 07/19/2001 Merck & Co Inc Rosetta Inpharmatics Inc 461 615.62
04/29/2001 07/18/2001 Vertex Pharmaceuticals Inc Aurora Biosciences Corp 556 554.26
03/27/2001 06/22/2001 Johnson & Johnson ALZA Corp 10,213 11,070.23
12/11/2000 05/11/2001 Shire Pharmaceuticals Grp PLC BioChem Pharma Inc 3,782 3,747.56
09/11/2000 11/10/2000 Elan Corp PLC Dura Pharmaceuticals Inc 1,860 1,707.85
07/13/2000 08/31/2000 King Pharmaceuticals Inc Jones Pharmaceutical Inc 3,363 3,523.47
05/25/2000 08/28/2000 Watson Pharmaceuticals Inc Schein Pharmaceutical Inc 870 667.38
05/05/2000 09/28/2000 Galen Holdings PLC Warner Chilcott PLC 445 293.94
05/01/2000 07/10/2000 Koninklijke Numico NV Rexall Sundown Inc 1,747 1,653.70
03/06/2000 05/15/2000 Elan Corp PLC Liposome Co Inc 557 623.75
01/17/2000 12/27/2000 Glaxo Wellcome PLC SmithKline Beecham PLC 78,770 75,955.93
54
Appendix II: List of Mergers (Pharmerging)
Date Date Enterprise Value at Equity Value at

Announced Effective Acquirer Name Target Name Announcement ($mil) Announcement ($mil)
11/07/2013 11/07/2013 Arseus NV Alternate Sistemas - -
09/13/2013 09/13/2013 Paladin Labs Inc Biodene Distribuicao - -
02/27/2013 12/04/2013 Mylan Inc Agila Specialties Pvt Ltd 1,850 1,850.00
02/15/2013 10/25/2013 Mylan Inc Unichem Laboratories Ltd-Drug - -
02/12/2013 05/20/2013 Reckitt Benckiser Group PLC Bristol-Myers Squibb-Brands - -
01/25/2013 01/25/2013 Johnson & Johnson Shanghai Elsker Mother & Baby - -
01/09/2013 01/31/2013 Hikma Pharmaceuticals PLC Egyptian Co for Pharm&Chemical - -
12/26/2012 02/15/2013 OPKO Health Inc Silcon Comercio Importacao - -
10/16/2012 11/16/2012 Recordati SpA Akvion-Pharm Brands(5) - -
08/07/2012 08/07/2012 Abbott Laboratories 3A Nutrition (Viet Nam) Co Ltd - -
08/02/2012 08/23/2012 Recordati SpA Farma-Projekt Sp zoo 21 21.04
03/26/2012 02/01/2013 Valeant Pharm Intl Inc Natur Produkt International - -
02/01/2012 02/01/2012 Valeant Pharm Intl Inc Probiotica Laboratorios Ltda - -
01/17/2012 01/17/2012 Xenetic Biosciences Plc Symbiotec Pharmalab Ltd - -
Pharma Cosmetic K.M.
12/27/2011 03/01/2012 Arseus NV Adamowicz - -
12/08/2011 03/31/2012 AstraZeneca PLC Guangdong Beikang Pharm - -
08/18/2011 08/18/2011 Atrium Innovations Inc Enzimas SA - -
07/01/2011 09/13/2011 Recordati SpA Dr F Frik Ilac Sanayive 130 130.00
06/07/2011 06/07/2011 Vetoquinol SA Farmagricola SA - -
05/23/2011 02/20/2012 Par Pharmaceutical Cos Inc Edict Pharmaceuticals Pvt Ltd - -
SMSA Treemont Acquisition
05/13/2011 05/13/2011 Corp Xiangrui Pharm Intl Ltd - -
05/12/2011 01/31/2012 STADA Arzneimittel AG Gruenenthal GmbH-Portfolio - -
04/19/2011 04/19/2011 SciClone Pharmaceuticals Inc NovaMed Pharmaceuticals Inc 105 104.64
04/08/2011 04/08/2011 Amgen Inc Laboratorio Quimico - -
04/07/2011 11/23/2011 SOHM Inc Nova Trend Medicament Pvt Ltd - -
01/05/2011 01/05/2011 Merck KGaA Beijing Skywing Technology 18 18.13
12/21/2010 05/26/2011 Brookwater Ventures Inc Agua Grande Exploracao 8 8.40
55
12/07/2010 01/19/2011 GlaxoSmithKline PLC Nanjing MeiRui Pharma Co Ltd 70 70.00
06/18/2010 08/16/2010 BioPharm Asia Inc ZHRK 0 0.35
06/10/2010 06/10/2010 GlaxoSmithKline PLC Laboratorios Phoenix SACyF 253 253.00
06/08/2010 06/08/2010 Recordati SpA Artmed International SRL - -
05/21/2010 09/08/2010 Abbott Laboratories Piramal Healthcare Ltd- - -
04/20/2010 04/20/2010 Valeant Pharm Intl Inc Bunker Industria Farmeceutica - -
03/19/2010 04/20/2010 Valeant Pharm Intl Inc Undisclosed Manufacturing Plan - -
03/19/2010 04/20/2010 Valeant Pharm Intl Inc Undisclosed Private Branded - -
02/18/2010 02/18/2010 OPKO Health Inc Pharmacos Exakta SA de CV - -
12/15/2009 03/30/2010 Hospira Inc Orchid Chem-Injectable Bus - -
10/29/2009 07/01/2010 A&D Pharma Holdings NV A&D Pharma Holdings SRL - -
09/09/2009 09/09/2009 Merck KGaA Suzhou Taizhu Tech Dvlp 41 40.79
09/04/2009 09/08/2009 PerkinElmer Inc SYM-BIO Lifescience Co Ltd - -
07/28/2009 09/10/2009 Abbott Laboratories Carol Info Svcs-Nutrition Bus - -
06/29/2009 08/20/2009 Vetoquinol SA Wockhardt-Animal Health Bus - -
05/08/2009 05/08/2009 Valeant Pharm Intl Inc EMO-FARM Sp zoo - -
05/05/2009 05/05/2009 Changyu Medtech Ltd Asia Oriental Investment Ltd 1 1.19
04/28/2009 06/08/2009 Pfizer Inc RFCL-Vetnex Animal Health Unit - -
02/24/2009 02/24/2009 Omega Pharma NV SC Hipocrate 2000 SRL - -
01/23/2009 03/31/2009 GlaxoSmithKline PLC UCB-Commercial Op - -
01/12/2009 04/02/2009 Sanofi-Aventis SA Kendrick Farmaceutica - -
12/22/2008 07/02/2009 GlaxoSmithKline PLC Bristol-Myers Squibb Pakistan - -
11/03/2008 11/13/2009 NeoStem Inc China Biopharm Hldgs Inc 14 13.94
10/29/2008 12/23/2008 Recordati SpA Yeni Ilac ve Hammaddeleri AS - -
10/06/2008 10/06/2008 Perrigo Co Laboratorios Diba SA de CV - -
06/11/2008 09/05/2008 China Sky One Medical Inc Peng Lai Jin Chuang Co 7 7.10
04/24/2008 04/24/2008 China Sky One Medical Inc Heilongjiang Haina Pharm Inc 0 0.43
04/04/2008 04/04/2008 Abraxis BioScience Inc Shimoda Biotech (Pty) Ltd 15 15.00
03/27/2008 07/31/2008 Johnson & Johnson Beijing Dabao Cosmetics Co Ltd 328 327.78
56
Appendix III: Interviews
Luc Vermeesch, UCB SA
Im writing a dissertation on M&A in the pharmaceuticals industry. Im investigating two aspects why they
occur, and how successful they are:
Why do companies do it There are different scales of interest; high level financial strategic considerations, for
example. The pharmaceutical industry in particular has a lot of merger activity going on because of interest in
creating pipeline, research and acquisition of research components. This is certainly a key consideration of the
pharmaceutical industry, more so than in others, where you would see considerations of territorial expansion or
market position. Many of the acquisitions in the last 20 years have something to do with innovation pipeline.
From the literature that I have looked at, many mergers tend to occur as patents come to expiry:
When you go off patent, you have a financial risk as well you cannot always plan from your own organic
growth how you deal with that risk, because research has a serendipity to it, and from time to time you need to
fuel your innovation with external innovation. Whilst not exclusively so, I think that its particularly true in the
pharmaceutical industry.
There are also more practical and tactical considerations. Meizler-UCB in Brazil for example, was really about
UCB having no operations in an important growing market with strategic interests. Brazil is likely to be number
four in two years time. Why would you not want to be in the fourth most important market? Its a tactical
consideration How can I get a foot on the ground in an important market where I am not today? You have at
least two options either start to build some operation from zero, or buy your way into it. Its not to do with
research or pipeline, but with territorial extension in this case.
People buy a company or make an alliance with a company because it has a complementary effect on the
portfolio products that they can have. There are macroeconomic considerations as well, with regard to the
sustainability of a company, pipeline acquisition, innovation and so forth.
Was there some consideration of portfolio at least synergy whilst you do say with Meizler it wasnt research
driven, there does seem to be some alignment of products
UCB did two acquisitions which belong in the more macro portion of the discussion; in 2004, we acquired
Celltech, a UK biotech, as we had no biotech capabilities knew it was important. Subsequently, in 2006, we had
a portfolio acquisition, which was Schwarz Pharma.
Does the Meizler acquisition have a fundamental bearing on the portfolio? Not really. We needed a platform.
Building something from zero is difficult, costly, and requires years of effort. With an acquisition, you acquire
capabilities, expertise and an operational team. Sometimes you may acquire products that are interesting,
strategically and tactically. In the case of Meizler, the portfolio itself has a few overlaps, but nothing really
fundamental. We needed feet on the ground and an established operational end. There is a lot of interaction with
regulatory bodies in the pharmaceuticals industry. Regulators in the country Ministry of Health All of these
contacts and relationships, you acquire them at the same time when you acquire a company. That was the
fundamental reason.
UCB owns 51% of the shares (of Meizler). Would a clear success in Brazil in the next few years suggest that
youd acquire the rest of the shares?
Yes you provide for further transaction modalities within a certain timeframe. There are reasons why you
dont do that from the beginning. Sometimes you buy right out, sometimes you keep the existing shareholders
involved, as its a way to keep them interested in the business, and a guarantee that the business stays sound.
Businesses rely on relationships and people, including the shareholders. So yes, the purpose is to pre-establish
the conditions.
How long do you think it will be before a significant impact is made in Brazil? Are UCB products from the get-
go being sold via your link, or will this be occurring in a years time, or two years time?
57
All of the above. Its a long process. So, in this case, when you enter a territory where you have no operations,
the purpose is to acquire existing business and bring in your own products. Typically, in our industry, this takes
years. Youre talking two to three years probably. How fast it grows depends on how good we are!
Has UCB considered any other potential markets where you dont have an established ground, and are there
analogue companies which youre considering acquiring or partially acquiring in a similar way with Meizler
and Brazil?
Yes. We do consider markets which we want to enter and are not in today. Its a matter of how critical a country
is to the success of a company. From a financial point of view, Brazil was key. There are other markets like
Taiwan, South Africa and Columbia that are of interest to us in establishing operations over time.
And would you consider how successful Brazil is before making further decisions, or is it all concurrent?
No. Success in Brazil will depend on Brazil and our operations in Brazil, and will not change our vision for
Columbia or Taiwan, for example. Those decisions are very largely independent. The way we go about it would
largely depend on country. South Africa, for instance, would probably be very difficult to start a Greenfield, due
to the inherent organisation of business in that country. Taiwan might be much easier, its a country where
enterprises are established and quickly built up, without much red tape. Its very different from country to
country. Now, if there are opportunities for acquisition, we definitely would look at them. But the difference
between the hurdles to go on your own from zero, and building it up will depend on how a country behaves in
terms of entrepreneurial set-up, and there are big differences between countries.
UCBs financial outlook was revised up in August from $3.1bn to $3.2bn. Was that partly driven by Brazil?
I dont think so. The Brazilian business would not reflect any financial impact for this year. It was strategically
welcomed, but it has no value as of today. The impact you might have seen is linked to products today. One key
driver has been the performance of Keppra, which was better than initially expected, even with generic erosion;
and the success in some markets where it is still actively promoted, even protected, like in Japan. That we were
going to Brazil was welcomed, as was the announcement of a distribution deal in the Middle East. It was
welcomed, but had no financial impact.
Do you think that it will have a greater impact in a years time, three years time?
Latin American will contribute substantially in the next five to ten years, so yes, it will have an impact, but it
cant be isolated today.
So do you think in a consideration of M&A activity in the pharmaceuticals industry, it is equally important to
consider the pipeline expansion, the portfolio expansion; and accessing new markets in different scenarios, mid-
term when there are no patents imminently expiring, then acquisitions in the directions of new markets is more
prevalent than during end of cycle?
Obviously, a company that has no products has a problem, regardless of the number of markets its working in.
So in order of priority, you would go there. Then, there are strategic markets where you want to be, and that
depends on how much your company can handle, as going into more markets rapidly increases complexity for
an organization. The key markets of Europe and the US are relatively transparent, with known operating models.
When one considers more remote markets even if theyre big the hurdles to do business increase, complexity
for the organization increases. Today, if we are not operating directly in a country, we try to find local or
international partners that can access those markets, which is complementing our own footprint. If you were to
look at UCBs footprint directly, versus what we do with partnerships, there are quite a lot of partnerships in the
entire Middle East region, Africa, a lot of the countries in Latin America and in the Asian-Pacific region. Many
are actually serviced through partners that deal, distribute and promote our products, so patients at least have
access to that. From a companys point of view, that is a very important objective. Determining if its better to
be directly in the country or not is strategically considered in terms of how the market evolves and how
sophisticated it is. Sometimes its realistic to be in certain markets, sometimes its not. Some markets dont
operate on their own easily, so it will always be a balance.
Trying to look into the future for the industry, how do you think that M&A activity will pan out over the next
decade or so?
58
This is speculation of course. Again, youre going to need to segment and differentiate between the big pipeline
driven acquisitions. Big mergers youve seen like Pfizer/Pharmacia tend to be proven to be value destructive
now. Strategically they were probably the right moves. Value-wise, they might not have been the right moves.
Pipeline driven acquisition will happen, but I think there will be increasingly smaller companies involved. Im
not so sure what will happen at the top of the pyramid in terms of the size of companies. Knowing that there are
lots of smaller companies that are in between start-ups, biotechs whatever you want to call them that have
knowledge, products or to-be products, I think there is a genuine underestimation of what it takes to go from a
concept to a product on the market. I think that part still belongs to the more accomplished companies, and I
think that hurdle is so big, not only financially, but also expertise wise, so I think youll see attrition of the
smaller companies into larger companies; midsize and bigger companies.
I think there will be consolidation into larger entities in international markets, such as China and India also.
Many of these companies have no pipeline but have commercial capabilities in their own countries. In China,
there are potentially thousands of local companies with relatively small, local, regional reach into the market.
These companies will likely merge, creating more regional, larger, more professional organisations. I dont think
that will lead to more research, as they are very commercial companies. They will consolidate and potentially
reach out more effectively to patients and populations. However, the research driven merger will be limited to
those countries that have research Japan, Korea, Western Europe and the US. Thats it. China, for example,
has no fundamental research and innovation today. Theyll get there, but in many other countries, there is
nothing happening in terms of innovation, so nothing will happen there except footprint consolidation. The
pharmaceuticals industry, though over seventy years old, is still highly deconcentrated, with no firm having
more than 10% market share.
There was, nevertheless a significant amount of consolidation at the turn of the century
Yes, its still not a hugely consolidated industry. Its difficult to tell what will happen five years down the line.
Are these big companies going to survive under their current form? I dont know. Theyre under pressure for
many reasons. We should come and have another interview in five years! Its a difficult question.
If you look at China, with the multitude of companies that are there, there really is little activity happening!
Theyre overvalued, because there are high expectations that they are generating large multiples, and thats not
the case. Theres a lack of transparency with regard to financials. There are many hurdles as well how long
will it take to get over that, will they actually merge, or just disappear? Its difficult to tell.
On the developed markets side, if you look at California, or the Europe biotech landscape, or small start-ups
that dynamic of creating compounds, getting it to a stage where its interesting to sell it off, or combining with
another company that will continue as a model of innovation. I think companies have come back from the idea
that they can invent in their labs.
It would be interesting to see if in ten, fifteen years, once these domestic industries have consolidated and
gained at least a vaguely substantial amount of market power within their own country, whether they will then
start trying to acquire in other countries.
Yes, its happening in India already, where there are reasonably sized companies that come out of internal,
domestic consolidation. They have tried to go international with mixed success, and are subsequently acquired,
generally, by quote unquote, the developed countries Japan, the US or Europe. So all the big Indian companies
have been sold out, except maybe one or two. Or they have partnered in whatever capacity to really reach into
the international market as its not that easy. Furthermore, the capabilities they had in domestic markets were
driven by large quantities, low pricing and low innovation, a strategy that does not work internationally.
A final question have the trends that we have described over the last few years been carrying on from the last
fifteen, twenty years? Is it generally the same as before?
I think theres been an evolution, I dont think youve seen very recently, unless Im wrong, consolidation
amongst the top companies. That really has slowed down. What you have seen is acquiring footprints in
markets, such as India, China, or Brazil. So theres a change. The mergers like Pzifer Pharmacia, Sanofi Aventis,
I dont think weve seen them in the last four, five years. It just doesnt add value anymore.
59
David Milton, Takeda Pharmaceutical Company, formerly Shire Pharmaceuticals
A Short History of the Pharmaceutical Industry
The 1960s/1970s were a high point for the pharmaceutical industry. By the early 1980s, easy targets
were being identified however, and the rate of discovery of New Chemical Entities (NCEs) was
declining, despite increasing R&D spending. Those that did come through tended to be minor
improvements, not breakthroughs.
Prevailing view at the time that larger firms were better. With hindsight, people realised that maybe
smaller biotech firms were also valuable, having less red tape and bureaucracy, particularly important
in R&D.
o Whilst economies of scale may exist in late stage clinical trials, they can also kill small
entrepreneurial spirit. Value of partnerships with universities and so forth.
o Nevertheless, with the rise of marketing and sales when a new molecule was developed, a
firm had to seize on the profit window, having spent fifteen years developing a drug, they may
have twenty years of exclusivity larger firms are more able to fund expensive advertising
strategies.
80s/90s: Synergy and Economies of scale, with several large mergers, such as Pfizer/Warner-Lambert
and Astra/Zeneca.
Then I think there was a different move TKT, for example, was a very small specialist company.
What Shire decided to do was to focus on quality in specific areas where they had a specialty.
Suddenly, there was a realisation that a different operating model of small, niche firms could work.
Nevertheless, with limited periods of exclusivity, there was a constant treadmill at work.
What forces determine M&A activity in the pharmaceuticals industry?
Theyre multiple, varied and complex, with organisational circumstances having to be taken into
account.
Some M&A is for technology and skill acquisition, sometimes it is to do with pipeline and pipeline
gaps, or a want to rebalance from a geographical point of view.
International Markets
o Once a domestic market becomes too challenging, you are forced to internationalise. For the
Europeans take the UK, for example the market was too small to support a large
pharmaceutical industry, and so there was an early drive to internationalisation.
o Companies are taking chances in emerging markets
Are they genuinely value creating at the moment? Both China and India have
problems concerning patent protection.
What many of the emerging markets have at the moment is basic, high volume
material, the high value products, such as oncology drugs, are still a few years off.
Nevertheless, there is a growing middle class in emerging markets. Pharmerging
markets are strategic investments for the future.
When you develop drugs, it takes 15/20 years. It will take a long time, given information now, to
develop what is needed now. One needs to second guess. A lot of M&A activity seems to be about
value in five/ten years time, a gamble on where the money will be down the line.
What does the future hold?
Centres of power will move. The FDA will no longer hold the reigns, instead, perhaps, when the
Chinese or Indian authorities say something, people will listen.
Individual targeted medicines. Further merging of technologies and communications maybe an iPad
can function as a diagnostic device?
60

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ECON 3012: Dissertation

Abnormal Returns and Cash Flows in

time of merger announcement, and a measure of post-merger return, as determined by changes in

scaled cash flow.

in pharmaceuticals may be represented by R&D and pipeline problems. In addition, economies

empirically investigate mergers in this ever-growing segment of the pharmaceutical industry.

In 2008, GlaxoSmithKline announced that it was to acquire Sirtris Pharmaceuticals, a firm

pharmaceuticals industry that will have to be tackled in moving forwards.

2.1 General M&A Activity

with various methods of analysis used.

has been a substantial decline in acquirer abnormal returns over time.

associated with higher Tobins Q values.

that acquirers significantly underperformed in a three year post-event period, by -0.523%.

2.2 Pharmaceutical Merger Literature

the year post-merger. However, on longer horizons, this association disappears.

2.3 Role of Innovation and R&D

subsequently reaching FDA approval is only 15.3% (Hay, et al., 2014)1.

Figure 1, (PhRMA, 2012)

Figure 2, (PhRMA, 2013)

increase in efficiency (CMR Institute, 2013).

a control group, for the post-merger period.

controlling for merger propensity, there is no evidence of improved performance.

for a research-led acquisition to be successful, acquiring firms need a certain capacity of

carries on existing as a subsidiary, their concern is a valid one.

2.4 Pharmerging Markets

as the global pharmerging market. (Figure 3)

bespoke, targeted strategies (Buente, et al., 2013).

Mergers and Acquisitions database. Selection criteria are as follows:

i) Target or Acquirer NAICS code of 325412.

iii) 100% of shares owned at completion, with >51% acquired in transaction.

iv) Transaction value is greater than $500 million.

v) Both companies are public.

can be easily economically measured.

slightly differ. However, we assume this difference is not significant.

3.2.1 Event Study

this, normal returns can be projected, according to the formula:

window, by subtracting expected returns from actual realised returns:

the eleven day window:

acquirer-target combination (DeGraaff, 2006) as follows:

zero using the following test-statistic:

Where is the Cumulative Average Abnormal Return:

3.2.2 Post-Merger Performance

analysed, compared to preacquisiton POCFROS. Following the method of DeGraaff, (2006),

four year post-acquisiton period):

where r is the correlation coefficient and n is the sample size.

3.2.3 Excess Capacity

announcement: (Chung & Pruitt, 1994; Broussard, et al., 2004)

EMV + LVPS + TLD + NSD

3.2.5 Pharmerging Acquisitions

acquisitions of local firms (Freshfields Bruckhaus Deringer, 2012), imposing a criterion of

pharmerging specification leave 56 mergers to be investigated. In addition, as most of the target

Campbell & Chui, 2010; Deutsche Bank: Markets Research, 2012).

will be referred to in subsequent discussion, and summary transcripts available in an appendix.

for the pharmerging acquisitions, are presented as follows:

4.1 Overall Sample

insignificant, between 4% and 5%, as time horizon lengthens. Evidence of correlation

acquirer TQ is lower than target TQ, 2.6 compared to 2.9.

Target CAR -1, 1 57 7 0 1 0 0

N Correlation T* p-Value N Correlation T* p-Value

4.2.1 Subsample (TQAcq size)

11-day correlations, where it is between 0.19-0.20.

predominantly negative.The correlation is stronger for S2 however.In contrast, there is a