Vertical Versus Horizontal Integration in the Biopharma Industry: The Link between Acquisition Announcements and Stock Market Performance

Declining productivity and disappointing lack of profitability after three decades of biotechnology commercialization, despite enormous investment and the great promise of breakthrough solutions, have led researchers to question whether traditional horizontal acquisition strategies result in superior firm performance. Our chapter explores the answer to this question as well as to the role that disclosure plays in this important emerging industry. Using standard event study methodology, we examine differences in market performance of vertical versus horizontal acquisition strategies, along with the role played by the amount of information disclosed in the announcement. Our results suggest that vertical acquisitions underperform horizontal acquisitions, with the amount of disclosure playing a role in the market's ability to react to a firm's acquisition strategy accurately and quickly. Our results suggest that accountants who have called for additional disclosure, especially in complex industries such as biopharma, are correct in assuming that nonfinancial information plays a significant role in investors’ valuation of an acquisition event. Managers of biopharma firms, however, are cautioned that more disclosure, through the reduction of uncertainty, may result in lower market valuations for acquirers.