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A Breath of Fresh Air? Firm Type, Scale, Scope, and Selection Effects in Drug Development

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  • Ashish Arora

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Alfonso Gambardella

    () (Department of Management and KITeS, Università Bocconi, 20136 Milan, Italy)

  • Laura Magazzini

    () (Department of Economics, University of Verona, 37129 Verona, Italy)

  • Fabio Pammolli

    () (IMT Lucca Institute for Advanced Studies, 55100 Lucca, Italy; and Fondazione CERM, 00187 Rome, Italy)

Abstract

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.

Suggested Citation

  • Ashish Arora & Alfonso Gambardella & Laura Magazzini & Fabio Pammolli, 2009. "A Breath of Fresh Air? Firm Type, Scale, Scope, and Selection Effects in Drug Development," Management Science, INFORMS, vol. 55(10), pages 1638-1653, October.
  • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:10:p:1638-1653
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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1055
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    References listed on IDEAS

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    Cited by:

    1. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    2. Ashish Arora & Michelle Gittelman & Sarah Kaplan & John Lynch & Will Mitchell & Nicolaj Siggelkow & Denisa Mindruta & Mahka Moeen & Rajshree Agarwal, 2016. "A two-sided matching approach for partner selection and assessing complementarities in partners' attributes in inter-firm alliances," Strategic Management Journal, Wiley Blackwell, vol. 37(1), pages 206-231, January.
    3. Thomas Bolli & Martin Woerter, 2013. "Technological Diversification and Innovation Performance," KOF Working papers 13-336, KOF Swiss Economic Institute, ETH Zurich.
    4. Ashish Arora & Michelle Gittelman & Sarah Kaplan & John Lynch & Will Mitchell & Nicolaj Siggelkow & Deepa Mani & Anand Nandkumar, 2016. "The differential impacts of markets for technology on the value of technological resources: An application of group-based trajectory models," Strategic Management Journal, Wiley Blackwell, vol. 37(1), pages 192-205, January.
    5. Martin Backfisch, 2017. "Have Pharmaceutical R&D Project Success Rates Decreased? A Critical Review and New Empirical Results," MAGKS Papers on Economics 201746, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    6. Henry Sauermann, 2017. "Fire in the Belly? Employee Motives and Innovative Performance in Startups versus Established Firms," NBER Working Papers 23099, National Bureau of Economic Research, Inc.
    7. Zunino, Diego & van Praag, Mirjam C. & Dushnitsky, Gary, 2017. "Badge of Honor or Scarlet Letter? Unpacking Investors' Judgment of Entrepreneurs' Past Failure," IZA Discussion Papers 11017, Institute for the Study of Labor (IZA).
    8. Eder, Andreas, 2017. "Cost efficiency and economies of diversification of biogas-fuelled cogeneration plants in Austria: a nonparametric approach," MPRA Paper 80369, University Library of Munich, Germany.
    9. Bruce Rasmussen, 2010. "Innovation and Commercialisation in the Biopharmaceutical Industry," Books, Edward Elgar Publishing, number 13680.
    10. repec:eee:respol:v:46:y:2017:i:7:p:1255-1271 is not listed on IDEAS
    11. Ye, Guangliang & Mukhopadhyay, Samar K., 2013. "Role of demand-side strategy in quality competition," International Journal of Production Economics, Elsevier, vol. 145(2), pages 696-701.
    12. repec:bla:stratm:v:38:y:2017:i:9:p:1791-1811 is not listed on IDEAS
    13. Brandon Pope & Andrew Johnson, 2013. "Returns to scope: a metric for production synergies demonstrated for hospital production," Journal of Productivity Analysis, Springer, vol. 40(2), pages 239-250, October.
    14. 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.
    15. Arora, Ashish & Gambardella, Alfonso, 2010. "The Market for Technology," Handbook of the Economics of Innovation, Elsevier.

    More about this item

    Keywords

    firm capabilities; drug development process; market for technology;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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