Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 109

type. While this study was based on small firms with relatively simple organiza-
tional structures compared to large pharmaceutical firms, it corresponds with the
reality that firms prefer to make changes whose effects they understand. This
research points out that change may or may not be beneficial to organizations and
depends on the circumstances. This suggests that firms should carefully consider
the history of changes made in the R&D organization and in the portfolio, to assess
whether further change is likely to help or hinder overall performance.
Further research from the finance literature (Kuhn and Luenberger 2010 ) sug-
gests that the right timing of portfolio revisions and adjustments is essential for
long-term growth in a dynamic investment situation. This builds on work in portfo-
lio theory such as Markowitz ( 1952 ). The key insight from Kuhn and Luenberger
( 2010 ) is that a balance needs to be struck between very infrequent portfolio rebal-
ancing (not reacting enough to changes in the economic environment) and overly
frequent rebalancing (comes at a cost). This insight is applicable to R&D portfolios
in the sense that changes that are too frequent can drain organizational resources in
simply managing the modifications as opposed to accelerating progress to deliver
on objectives. Further research can explore how to balance the twin needs of flexi-
bility and stability in a new drug portfolio.

3.4.3 Acquisition and Licensing

There are varying opinions in literature about whether a firm should fill its portfolio
via acquiring projects from other firms. Some researchers argue that acquisitions
tend to hurt innovation because they may distract managers from innovation (Hitt
et al. 1990 ), compete for funds with existing innovation projects (Hitt et al. 1991 ),
and trigger the exodus of key employees (Ernst and Vitt 2000 ).
However, other researchers argue that for some firms, acquisitions could be a
tonic for innovation. For example, Prabhu et al. ( 2005 ) suggest that firms with better
internal knowledge have higher ability to utilize external knowledge from acquisi-
tions. Sorescu et al. ( 2007 ) use the term “product capital” to refer to the product
development and product support assets that a firm has, and argue that firms with
high product capital are better able to select the right acquisition target and deploy
the acquired knowledge to gain competitive advantages.
The trend, however, points to a continuation of large acquisitions, mega-mergers,
and drug licensing deals (DiMasi 2000 ; PharmaProjects 2010 ; IMAP 2011 ). What
empirical evidence supports this trend? Higgins and Rodriguez ( 2006 ) examine the
performance of 160 pharmaceutical acquisitions from 1994 to 2001, and find that on
average, acquirers realize significant positive returns. They find that firms experi-
encing the greatest deterioration in R&D productivity are most likely to undertake
the acquisition of a research-intensive firm to replenish their portfolio. They also
find surprisingly, that 71 % of acquiring firms either maintain or improve their prod-
uct portfolios post-acquisition, leading to positive returns. They suggest pharma-
ceutical firms realize gains from acquisitions because of their ability to obtain