The role of patent expiration in acquisition decision and target selection in the pharmaceutical industry

Abstract

This paper addresses the calls for greater research on the antecedents of technological acquisitions by exploring a mechanism that drives both acquisition decision and target selection. Drawing from the RBV, this paper presents patent expiration as a driver behind pharmaceutical firms’ acquisition decisions and target selection. This paper argues that patent expiration constitutes a disruption to pharmaceutical firms’ pipelines and a threat to revenue and profit streams and that acquisitions represent a possible short-term solution for firms to replenish their patent portfolios and to ensure a continuous flow of revenues. Using a sample of US pharmaceutical firms, this paper shows that pharmaceutical firms engage in acquisitions when they face large amounts of patent expiration and when they are unable to internally replenish their patent portfolios. The results also show that acquiring firms have a preference for targets with resources similar to their existing portfolio of patents, which is explained by firms’ desire to minimize post-integration problems and possible disruptions derived from the difficulties in assimilation and commercial exploitation of distant knowledge. This is in contrast with previous studies indicating that acquiring firms benefit from knowledge bases that are more distant.