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A Breath of Fresh Air? Firm types, scale, scope and selection effects in drug development

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  • Arora, Ashish
  • Gambardella, Alfonso
  • Magazzini, Laura
  • Pammolli, Fabio

Abstract

This paper measures differences in the innovation performance of different types of firms in the pharmaceutical industry. We compare the innovation performance of incumbent firms with entrants, controlling for differences in the scale and scope of research, both at the firm level and at the project level. To do so, we develop a simple analytical framework of drug development, which we use to estimate a structural model, using data on 3,000 drug R&D projects in preclinical and clinical trials in the US during the 1980s-early 1990s. Key to our approach is a careful attention to the issue of selection – firms choose which compounds to advance into clinical trials. This choice depends upon the likelihood of success, but also upon economies of scale and scope, and strategic considerations about product cannibalization. It also depends upon how the costs of development and the rewards of success are shared within organizations and between alliance partners. After controlling for selection, we find that: a) incumbent pharmaceutical firms draw their compounds from better statistical distributions; b) over time, learning or environmental selection make entrants firms more similar to the established firms both in terms of selection behavior and research productivity; c) compounds licensed by pharmaceutical firms are at least as likely to succeed as internal developed projects, inconsistent with the “lemons” hypothesis; d) firm scale improves innovation performance but not scale at the project level.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16042.

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Date of creation: Mar 2007
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Handle: RePEc:pra:mprapa:16042

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Keywords: firm capabilities; drug development process; market for technology;

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References

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  1. Danzon, Patricia M. & Nicholson, Sean & Pereira, Nuno Sousa, 2005. "Productivity in pharmaceutical-biotechnology R&D: the role of experience and alliances," Journal of Health Economics, Elsevier, Elsevier, vol. 24(2), pages 317-339, March.
  2. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 12(3), pages 305-327, December.
  3. Matthew Higgins & Daniel Rodriguez, 2003. "The Outsourcing of R&D through Acquisitions in the Pharmaceutical Industry," Emory Economics, Department of Economics, Emory University (Atlanta) 0324, Department of Economics, Emory University (Atlanta).
  4. Giarratana, Marco S., 2004. "The birth of a new industry: entry by start-ups and the drivers of firm growth: The case of encryption software," Research Policy, Elsevier, Elsevier, vol. 33(5), pages 787-806, July.
  5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  7. J. Myles Shaver, 1998. "Accounting for Endogeneity When Assessing Strategy Performance: Does Entry Mode Choice Affect FDI Survival?," Management Science, INFORMS, INFORMS, vol. 44(4), pages 571-585, April.
  8. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series, Research Institute of Industrial Economics 214, Research Institute of Industrial Economics.
  9. Rosenberg, Nathan, 1990. "Why do firms do basic research (with their own money)?," Research Policy, Elsevier, Elsevier, vol. 19(2), pages 165-174, April.
  10. Gambardella,Alfonso, 1995. "Science and Innovation," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521451185.
  11. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 569-96, September.
  12. Arora, Ashish & Gambardella, Alfonso, 1994. "Evaluating technological information and utilizing it : Scientific knowledge, technological capability, and external linkages in biotechnology," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 24(1), pages 91-114, June.
  13. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, Elsevier, vol. 22(2), pages 151-185, March.
  14. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, National Bureau of Economic Research, Inc, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  15. Ilan Guedj & David Scharfstein, 2004. "Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms," NBER Working Papers 10933, National Bureau of Economic Research, Inc.
  16. Ashish Arora & Andrea Fosfuri & Alfonso Gambardella, 2004. "Markets for Technology: The Economics of Innovation and Corporate Strategy," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262511819, December.
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Cited by:
  1. Leten, Bart & Kelchtermans, Stijn & Belderbos, Ren, 2010. "Internal Basic Research, External Basic Research and the Technological Performance of Pharmaceutical Firms," Working Papers, Hogeschool-Universiteit Brussel, Faculteit Economie en Management 2010/12, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  2. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure
    [The Handbook of Organizational Economics]
    ," Introductory Chapters, Princeton University Press, Princeton University Press.
  3. Ye, Guangliang & Mukhopadhyay, Samar K., 2013. "Role of demand-side strategy in quality competition," International Journal of Production Economics, Elsevier, Elsevier, vol. 145(2), pages 696-701.
  4. Brandon Pope & Andrew Johnson, 2013. "Returns to scope: a metric for production synergies demonstrated for hospital production," Journal of Productivity Analysis, Springer, Springer, vol. 40(2), pages 239-250, October.
  5. Thomas Bolli & Martin Wörter, 2013. "Technological Diversification and Innovation Performance," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 13-336, KOF Swiss Economic Institute, ETH Zurich.

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