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Out-Licensing In Markets With Asymmetric Information: The Case Of The Pharmaceutical Industry

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  • GERRIT REEPMEYER

    ()
    (University of St. Gallen, Institute of Technology Management, Switzerland)

  • OLIVER GASSMANN

    ()
    (University of St. Gallen, Institute of Technology Management, Switzerland)

  • FRAUKE RÜTHER

    ()
    (University of St. Gallen, Institute of Technology Management, Switzerland)

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    Abstract

    Few large pharmaceutical companies have recently discovered out-licensing of terminated R&D results as a way to recoup some of the significant investments made in R&D and to improve R&D productivity. Our empirical investigation reveals that the licensing partners are preferably young, small and highly specialized companies. This reverses the traditional logic of out-licensing. While out-licensing is usually done because of downstream concerns, our analysis shows that the company which owns the necessary assets for further development (the large pharmaceutical company) sells the license to a firm (the small partner company) which has — at the time of deal closure — no track record to prove its ability to successfully develop the compound.As the lack of a track record does not allow the pharmaceutical company to distinguish between the partner firms based on their development capabilities, these out-licensing deals are characterized by an asymmetric distribution of information. The application of the theory of adverse selection allows deriving managerial recommendations along three dimensions of the out-licensing deal: product coverage, price setting and performance presumption. By making changes along these dimensions, R&D managers are able to reduce the information asymmetry and approximate an equilibrium in the out-licensing market.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Innovation Management.

    Volume (Year): 15 (2011)
    Issue (Month): 04 ()
    Pages: 755-795

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    Handle: RePEc:wsi:ijimxx:v:15:y:2011:i:04:p:755-795

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    Related research

    Keywords: Out-licensing; research & development; pharmaceutical industry; asymmetric information; adverse selection;

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