In doing some work, I inadvertently ran into research material that, upon careful reflection, is relevant to Elite and the much discussed question how they, rather than the various larger and more notable firms, are able to develop a disruptive technology with market leadership capabilities.
A Nobel Prize winning economist named Kenneth Arrow addressed the question of whether stronger or weaker firms have the greater incentive to innovate. Without getting too wonky, Arrow concluded that a weaker firm has the greater incentive to innovate because successful innovation leads to market entry and market share capture not previously held. However, the stronger firm, having already entered the market and captured share, has less to gain from further innovation because it views the additional expenses as only maintaining what it already possesses or their efforts at innovation have proven less fruitful. Consequently, innovative entrants can overtake established firms, not because established firms are managed poorly or suffer from disproportionate and limiting costs, but because of natural market incentives.
Others have taken Arrow’s work and extended its logic to incentives driving strong companies to acquire those firms viewed as economically weaker but with novel products. If we look at the efficiency effect we can see its relevance in pharma M&A. Specifically, the efficiency effect relates to the belief that the potential loss in revenues/profits can only be offset by either added R&D costs, with their incumbent greater element of risk, or the acquisition of a firm holding patent/s that are highly correlated to successful product development; thereby reducing risk. If we add to this the point that new products must be produced, marketed and sold, and we recognize this required expertise is costly for the new entrant to imitate, the new entrant’s desire to be bought aligns with the stronger firm's need to acquire. Obviously, it then comes down to a negotiated deal.
I would say to the board, if we read between the lines in the narrative, we can also surmise the greater logic why Elite should be acquired by a large pharma long before they would qualify for the Nasdaq.
