The role of mergers and acquisitions in mitigating the effects of corporate fraud in the pharmaceutical sector
| DOI | https://doi.org/10.1108/JFC-12-2020-0243 |
| Published date | 05 May 2021 |
| Date | 05 May 2021 |
| Pages | 4-19 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Mark Eshwar Lokanan,Shenon Augustine Fernandes |
The role of mergers and
acquisitions in mitigating the
effects of corporate fraud in the
pharmaceutical sector
Mark Eshwar Lokanan
Faculty of Management, Royal Roads University, Victoria, Canada, and
Shenon Augustine Fernandes
Royal Roads University, Victoria, Canada
Abstract
Purpose –In today’s highly comparativepharmaceutical sector, multiple humanitarian and pricingissues
are prevalent within the industry. Mergersand acquisitions (M&A) are perceived to be an essential method
for organizationalconsolidation and value generation. Thepurpose of this paper is to illustrate via descriptive
methodologyand t-tests, how a merger can mitigate the effects of fraud in the pharmaceuticalsector.
Design/methodology/approach –The research focuses on secondary data. This research paper
explores the differencesin these organizations’financial metrics using the t-test regressionanalysis, both pre
and post-merger.Secondary data have been used to compile separate financialratios for five years before and
five years after the scandal.
Findings –The results indicatea positive outlook for both organizations after the merger.Mergers appear
to have a favorable impact on the performance of a company, with the only exception ofexternal variables
(laws, controversies,fines, etc.) affecting its post-merger performance.
Originality/value –The paper uses secondary data to test the impact that mergers have on
pharmaceuticalcompanies after they have been implicatedin corporate malfeasance.
Keywords Financial performance, Fraud, Mergers, T-test
Paper type Research paper
Introduction
Controversies are nothing new to the business. The pharmaceutical and biotech companies
are no exception to scandals.Scams can come in all types. Fossil fuel firms have been hiding
experiments into human-caused climate change (McCall, 2018). The tobacco company was
involved in its commoditysmuggling, and then Ford’s“Pinto Memo”controversy tookplace
(McCall, 2018). History is rife with examples of big business making questionable deals to
raise profit margins at the detrimentof customers. A case in point: two of the world’s largest
pharmaceuticalfirms actively selling off-label medications to keep a spotin the industry.
As broadcasted across many mainstream media platforms, pharmaceutical firms are
perceived as anomalies in the medicalindustry (Wong, 2015). Through various eye-catching
headlines listed below, “Pfizer drug breach ends in biggest US crime fine”(Clark, 2009),
“‘Bottle Of Lies’Exposes The Dark Side Of The Generic-Drug Boom”(Lambert, 2019),
“Scandals Leave a Black Eye on the Pharma Industry”(Keown, 2018), “Scandals have
eroded US public’s confidence in drugindustry”(Lenzer, 2004a), “FDA’s counsel accused of
being too close to drug industry”(Lenzer, 2004b) and “Governments and companies are
JFC
29,1
4
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 4-19
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-12-2020-0243
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
failing to address pharmaceutical corruptionrisks”(Dunn, 1970), it is evident that there are
concerns of misconduct in the pharmaceutical industry. As a result, many mergers and
acquisitions (M&A), while the intentionsare useful from a purely financial perspective, may
have glossed over these issues.
About 328 million people live in the USA, home to the world’s largest health-care
industry. The USA alone spends$300bn a year on prescription medications, which is on the
increase [as cited in Wong (2015)]. While pharmaceutical companies have contributed
greatly to health care and improve patients’quality of life, public opinion polls frequently
condemn them as one of the least trusted industries. The penaltiesfor crimes committed by
pharmaceutical firms are nothing but a moderate reimbursement of their crimes. The
medicines industry and the pharmaceutical industry, which regulate their production, are
human creations created to enhance and extend naturalhealth and quality of life. But what
happens when so much authority is applied to a technical system that governs our most
fundamental and essential human rights, namely, health and life? Pharmaceutical firms as
the giant banks on Wall Street are considered too big to fail (Wong, 2015). This inequality
causes social consequences, and all actors who should be winners benefiting from this
technological framework(e.g. patients, physicians, pharmaceutical firms and the health-care
industry) insteadsecure more losses, eventually being framework losers.However, solutions
to restore the pharmaceutical industryreputation may generate the requisite stubborn shift
industry (Wong, 2015).
Pharmaceutical firms participate in complex schemes for prescription drug testing,
marketing and distribution.They face little, if any, consequences for fraudulentconduct. As
this section reveals, Merck’s Vioxx fiasco is justone of several examples of pharmaceutical
company bribery that damages Americans while leaving offenders unpunished (McCarthy,
2019). Drug firms regularly benefitby misleading the Food and Drug Administration (FDA)
and persuading the publicto purchase vast amounts of excessive, ineffective and sometimes
deadly prescription drugs (McCarthy, 2019). Traditional pharmaceutical fraud includes
guilty actions by drug industry executivesand researchers, sales managers, physicians and
even associated lawyers and politicians (McCarthy, 2019). This section discusses the
inadequate regulatory system regulating the pharmaceutical industry to illustrate the
essence and scope of pharmaceutical fraud. It provides two case studies to illustrate this
industry fraud in motion.
M&A are one of the essentialtools for development. According to Godbole (2013),merger
is the “combination of all properties, liabilities, loans and company of two or more
companies so that one of them survives.”Several companiesacross the globe have adopted
the strategy of M&A to achieve high business development [as cited in Patel (2018)]. The
M&A often serve the purpose of growth,reducing rivalry and creating a large company. To
most investors, mergers are the catnip counterpart of the stock market. Takeover bids
usually give investors’portfolios a pleasant boost and affirm their stock-picking smarts to
make greater profitsdown the merged company’s road (Morgenson, 2005).
According to Narayanaswamy (2017),financial analysis is a technique to research a
company’s annual report to provide important information to decision-makers [as cited in
Patel (2018)]. The acquiringfirm must always check the target firm’sfinancial results, as the
merger affects all stakeholders’financial position and wealth. As acquisition can
significantly affect the purchaser’sfinancial results by any means, i.e. positive or negative,
the purchaser has to assess the target firm well before entering into a merger agreement.
Again, mergers can lead to poor financialresults (Morgenson, 2005).
Mergers occur in five different ways. A vertical merger is a merger between non-
competing businesses, where one’s product is a critical part of another. Such a union may
Role of
mergers and
acquisitions
5
To continue reading
Request your trial