A Breath of Fresh Air? Firm Type, Scale, Scope, and Selection Effects in Drug Development
This paper compares the innovation performance of established pharmaceutical firms and biotech companies, controlling for differences in the scale and scope of research. We develop a structural model to analyze more than 3,000 drug research and development projects advanced to preclinical and clinical trials in the United States between 1980 and 1994. Key to our approach is careful attention to the issue of selection. Firms choose which compounds to advance into clinical trials. This choice depends not only on the technical promise of the compound, but also on commercial considerations such as the expected profitability of the market or concerns about product cannibalization. After controlling for selection, we find that (a) even after controlling for scale and scope in research, established pharmaceutical firms are more innovative than newly entered biotech firms; (b) older biotech firms display selection behaviors and innovation performances similar to established pharmaceutical firms; and (c) compounds licensed during preclinical trials are as likely to succeed as internal compounds of the licensor, which is inconsistent with the "lemons" hypothesis in technology markets.
Volume (Year): 55 (2009)
Issue (Month): 10 (October)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rebecca Henderson & Iain Cockburn, 1996.
"Scale, Scope, and Spillovers: The Determinants of Research Productivity in Drug Discovery,"
RAND Journal of Economics,
The RAND Corporation, vol. 27(1), pages 32-59, Spring.
- Rebecca Henderson & Iain Cockburn, "undated". "Scale, Scope and Spillovers: The Determinants of Research Productivity in Drug Discovery," Working Papers ec25/94, Department of Economics, University of Lancaster.
- Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
- Gambardella,Alfonso, 1995. "Science and Innovation," Cambridge Books, Cambridge University Press, number 9780521451185, Diciembre.
- repec:rje:randje:v:37:y:2006:i:4:p:861-886 is not listed on IDEAS
- Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 1049-1090.
- Daron Acemoglu & Joshua Linn, 2003. "Market Size in Innovation: Theory and Evidence From the Pharmaceutical Industry," NBER Working Papers 10038, National Bureau of Economic Research, Inc.
- Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," Levine's Working Paper Archive 228400000000000002, David K. Levine.
- 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, vol. 24(2), pages 317-339, March.
- 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.
- Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
- Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-161, January.
- 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 569-596, September.
- Grabowski, Henry & Vernon, John & DiMasi, Joseph, 2002. "Returns on R&D for 1990s New Drug Introductions," Working Papers 02-21, Duke University, Department of Economics.
- Henry Grabowski & John Vernon & Joseph DiMasi, 2003. "Returns on R&D for 1990s New Drug Introductions," Levine's Working Paper Archive 618897000000000666, David K. Levine.
- 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.
- 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.
- 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.
- Marco S. Giarratana, 2003. "The Birth of a New Industry: Entry by Start-ups and the Drivers of Firm Growth. The Case of Encryption Software," LEM Papers Series 2003/28, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Ely Dahan & Haim Mendelson, 2001. "An Extreme-Value Model of Concept Testing," Management Science, INFORMS, vol. 47(1), pages 102-116, January.
- 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.
- 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, vol. 24(1), pages 91-114, June.
- Rosenberg, Nathan, 1990. "Why do firms do basic research (with their own money)?," Research Policy, Elsevier, vol. 19(2), pages 165-174, April.
- 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.
- 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.
- Matthew Higgins & Daniel Rodriguez, 2003. "The Outsourcing of R&D through Acquisitions in the Pharmaceutical Industry," Emory Economics 0324, Department of Economics, Emory University (Atlanta).
- 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, July.
- Holmström, Bengt, 1989. "Agency Costs and Innovation," Working Paper Series 214, Research Institute of Industrial Economics.
- 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.
- Steven Klepper & Peter Thompson, 2006. "Submarkets and the evolution of market structure," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 861-886, December. Full references (including those not matched with items on IDEAS)