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

Author

Listed:
  • Ashish Arora
  • Alfonso Gambardella

    (KITeS, Bocconi Univerity - Milan - Italy)

  • Laura Magazzini
  • Fabio Pammolli

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 R&D projects advanced to pre-clinical and clinical trials in the U.S. 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," KITeS Working Papers 003, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Mar 2009.
    • Handle: RePEc:cri:cespri:wp230
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    JEL classification:

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

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