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Firm Boundaries, Technological Relevance, and the Rate of Project Development

Alliances promote faster drug development, especially when the project is closely related to the developing firm’s knowledge base.

Topics: Strategy

The Idea

Alliances promote faster drug development, especially when the project is closely related to the developing firm’s knowledge base.

The Research

Previous research has yielded contradictory findings about the role of alliances in the development of new drugs. Some studies suggest that alliances lead to better outcomes because of the benefits of specialization: small firms that concentrate on niche technologies partner with larger firms that have the scale and experience to bring the drugs to market. Other studies support the “lemons” theory: firms develop their most promising compounds in-house and license out the less promising ones.

Jerry Kim examined data from 2,114 drug development projects from 1980 through 2003. His study focused on two dimensions of the distance between the project and the firm developing the drug: first, whether the project originated internally or externally; and second, how closely the project matched the firm’s existing knowledge base.

Kim found that projects originating outside the firm have a higher rate of success, and that this effect is magnified when a project is closely related to the firm’s core strengths. The study also demonstrated one of the risks of inbound licensing: given the investment required to get the collaboration started, both firms may be reluctant to terminate a failing project. Kim found that alliances tend to extend the duration of failing projects, except when the projects are highly relevant to the developing firm’s knowledge base.

Practical Applications

Pharmaceutical companies

This study confirms that licensing promising compounds from other firms can be an efficient way to fill your drug development pipeline. But it also suggests that you must be careful not to escalate your commitment to failing projects. If you opt for an inbound licensing strategy, you should select projects that are closely related to your firm’s core strengths instead of using alliances to diversify into unfamiliar markets.

Read the Research

Jerry Kim

"Firm Boundaries, Technological Relevance, and the Rate of Project Development"

View abstract/citation 

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