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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. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
  2. Gambardella,Alfonso, 1995. "Science and Innovation," Cambridge Books, Cambridge University Press, number 9780521451185.
  3. Patricia M. Danzon & Sean Nicholson & Nuno Sousa Pereira, 2003. "Productivity in Pharmaceutical Biotechnology R&D: The Role of Experience and Alliances," NBER Working Papers 9615, National Bureau of Economic Research, Inc.
  4. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  5. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-96, September.
  6. 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.
  7. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  8. 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, vol. 33(5), pages 787-806, July.
  9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  10. J. Myles Shaver, 1998. "Accounting for Endogeneity When Assessing Strategy Performance: Does Entry Mode Choice Affect FDI Survival?," Management Science, INFORMS, vol. 44(4), pages 571-585, April.
  11. Higgins, Matthew J. & Rodriguez, Daniel, 2006. "The outsourcing of R&D through acquisitions in the pharmaceutical industry," Journal of Financial Economics, Elsevier, vol. 80(2), pages 351-383, May.
  12. Ashish Arora & Andrea Fosfuri & Alfonso Gambardella, 2004. "Markets for Technology: The Economics of Innovation and Corporate Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511819.
  13. Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
  14. 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, vol. 22(2), pages 151-185, March.
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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 2010/12, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  2. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure," Discussion Papers 11-010, Stanford Institute for Economic Policy Research.

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