Restructuring of the Pharmaceutical Industry

The pharmaceutical companies face serious challenges in the coming future when several of the blockbuster drugs run out of patents and a growing political pressure to stop the fast increase in health care expenditures has emerged. The recent wave of merger and acquisitions within the industry can be seen as an effective means to reduce costs and compensate for the educed earnings from patented drugs. The paper examines the main development in the expenditure to research and development (R&D) and number of patents in the industry with a focus on the role of company size. The analysis builds on a data set containing information of both patents and R&D expenditure for the world’s top 90 largest pharmaceutical companies, as well as their sales revenue, earning, and total asset from 2002 to 2013. The empirical part estimate the firm size effect on R&D efficiency and the amount of investment allocated to R&D, and the regression models control differences in firm characteristics by using fixed effects estimations. We find significant higher innovation activities in small companies with a higher innovation productivity as well. The restructuring of the pharmaceutical industry through a merger and acquisitions strategy may have been the large pharmaceutical company move to catch up in new drugs and revenues.