Evaluating the Target Pipeline in a Pharmaceutical Acquisition

Many firms in the pharmaceutical industry turn to acquisitions when faced with gaps in their drug development pipelines and patent expirations as an alternative to making long-term investments in internal research and development. Investors are generally negative on this strategy, and upon the announcement of a pharmaceutical acquisition the stock of the acquiring firm often drops. This decline in share price creates an opportunity for the investor who can identify the characteristics of a target firm that increase the probability that the transaction will ultimately be a success, as measured by the subsequent appreciation in the acquirer\u27s stock. It is expected that the characteristics of a successful acquisition are related to the target firm\u27s pipeline. Specifically, higher quantities of late-stage drugs in the target\u27s pipeline as well as a focus on developing biotechnology drugs are expected to lead to superior returns for the acquiring firm\u27s investors