The Drug-Induced Gray Area

Swiss pharmaceutical giant Roche Holding AG has been on a buying spree this week. On Monday, it announced the purchase of California biotech company Therapeutic Human Polyclonals. Today, Roche acquired BioVeris, a maker of biological and chemical diagnostic systems. Indeed, the pharmaceutical industry is no stranger to frequent merger activity, especially with growing healthcare trends.

But what about the merger paradox? These seem like typical horizontal mergers: Roche and BioVeris, for example, both compete in the immunochemistry business. Here, the challenge of merger profitability is mitigated by the product differentiation and enhancement promised by this acquisition. BioVeris will allow Roche to expand into new market segments beyond its human-diagnostics focus.

Moreover, pharmaceutical mergers (like much of the real world) don’t fall neatly into theoretical categories of horizontal or vertical mergers. With BioVeris, for example, Roche not only acquires new products but also intellectual property rights, vaccine research, and licensed technology. Many large pharmaceuticals will acquire small biotech companies to augment R&D – arguably the signs of a vertical merger.

The key issue for pharmaceuticals is the balance between organic growth and growth through acquisition, which is complicated by property rights governing the R&D that is uniquely critical to the industry. In its merger analysis, Roche undoubtedly sees shades of gray that are difficult to reconcile with clear-cut economic theory.

Holly, Pat, Daniel, Kevin