In a recent article published in Concurrences Law & Economics, Cornerstone Research experts Lorenzo Cattivelli, Anca Cojoc, Penka Kovacheva and Maria Salgado highlight ways that mergers and acquisitions (M&A) can contribute to innovation in the biopharmaceutical industry. Among these, the authors contend that M&A and similar collaborations allow life sciences companies to unlock economies of scale and scope and innovate more efficiently.
The authors note that M&A creates natural synergies, bringing together companies’ complementary knowledge and capabilities to accelerate innovation across the life sciences ecosystem, while avoiding needless duplication of the infrastructure, expertise and investment required to advance new therapies.
Economies of Scale
Bringing new treatments and cures to market requires biopharmaceutical companies of all sizes to play an important role. Smaller companies’ nimble structures and specialized scientific expertise allow them to engage in vital scientific risk-taking and pivot quickly to pursue new discoveries. However, it is inefficient and often prohibitively expensive for smaller and early-stage companies to start from scratch, particularly when considering that 80% of biopharmaceutical companies operate without a profit.
Instead, M&A and other collaborations allow biopharmaceutical companies to connect their promising innovations with established global infrastructure from across the ecosystem. The authors assert that M&A allows companies to leverage economies of scale, and thereby more productively balance the considerable time and cost pressures associated with the late-stage research and development (R&D) needed to bring new medicines to patients.
“R&D costs are fixed costs that all pharmaceutical firms must incur to innovate. Research has shown that larger firms can exploit economies of scale in research activities to achieve lower per-unit development costs, which in turn can lead to improved innovation output.”
– Cattivelli et al, Concurrences Law & Economic Review, 2024
Economies of Scope
M&A also facilitates greater innovation through economies of scope – efficiencies made possible through collaboration between likeminded companies. The authors note that M&A allows companies to build off each other’s previous learnings and established best practices. By pooling their resources, scientific expertise and experience in bringing new treatments to market, combined companies can create a dynamic foundation on which to innovate more rapidly.
“By generating economies of scope and knowledge spillovers, mergers can have a positive impact on innovation, as shown by Jullien and Lefouili (2018). Similarly, Cockburn and Henderson (2001) find that economies of scope lead to superior research and development performance in the pharmaceutical industry.”
– Cattivelli et al, Concurrences Law & Economic Review, 2024
One particular example cited by the authors is knowledge synergies – a scientific snowball effect in which collaboration between researchers allows them to build on each other’s discoveries to more quickly develop and deliver new therapies. As countless examples from across the ecosystem demonstrate, M&A plays a vital role bringing together companies’ complementary scientific breakthroughs, leading to life-changing, even life-saving, new medicines for patients.
“Mergers can generate economies of scope, which arise when the cost of jointly conducting multiple but related activities is lower than when conducting them separately. Indeed, knowledge synergies, which are a special case of economies of scope, can enhance research performance regardless of changes in R&D inputs.”
– Cattivelli et al, Concurrences Law & Economic Review, 2024
These insights underscore the important link between M&A and innovation in the life sciences. To avoid obstructing the many early-stage innovations made possible by M&A, it is vital that the Federal Trade Commission and Department of Justice keep these findings in mind and take a balanced and bipartisan approach to M&A enforcement in the life sciences.