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

Author

Listed:
  • 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
    DOI: 10.1287/mnsc.1090.1055
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    More about this item

    Keywords

    firm capabilities; drug development process; market for technology;
    All these keywords.

    JEL classification:

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

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