Innovation in the Pharmaceutical Industry: The Process of Drug Discovery and Development - Innovation and Marketing in the Pharmaceutical Industry - page 47

Biotech fi rms are often credited as the engine of innovation in the pharmaceutical
industry (Wuyts and Dutta 2008 ). They generate drug discoveries by maintaining a
narrow focus on the latest knowledge in the life sciences and are dedicated to mas-
tering leading-edge technology. However, the majority do not have easy access to
large amounts of capital and could be severely underfunded or understaffed. Their
limited resources may prevent them from attaining the critical mass or the diversity
in R&D projects necessary for the realization of signifi cant economies of scale or
scope in drug innovation.
For example, recent research has found that although the out-of-pocket R&D
costs for the development of an approved drug do not vary greatly between small
biotech and large pharmaceutical companies, those originated by small biotech
fi rms take about 7.5 months longer to reach FDA approval, which raises their capi-
talized cost (DiMasi and Grabowski 2007 ). Effi ciencies in operations are hard to
attain for these fi rms. Even if they manage to successfully take their innovative
products through clinical trials, small biotech fi rms may not have the requisite com-
mercialization capabilities to go to market. Therefore, the stages of the innovation
process that need large-scale efforts combined with access to considerable capital,
infrastructure, and proprietary assets (e.g., clinical trials, manufacturing, or market-
ing) might be the stages best delegated to other industry participants.
If the strategic preferences of biotech fi rms are more in line with building com-
petencies in the life sciences and performing on the forefront of biotechnology, they
may seek to outsource clinical trials to better equipped organizations (e.g., hospi-
tals, university research centers), or form strategic alliances with fi rms that already
have the necessary competencies, e.g., large pharmaceutical companies. Outsourcing
the later stages of clinical trials to larger, better funded and well-staffed organiza-
tions can be not only the more effective but also the more effi cient strategy to rap-
idly bring drug development to completion and, contingent on FDA approval,
commercialization (Grewal et al. 2008 ). Partnerships and strategic alliances consti-
tute a vehicle that can provide biotech fi rms with a shortcut to what they need the
most—fast access to capital, infrastructure, or market knowledge. Delegating these
concerns to those more adept to handle them enables biotech fi rms to remain focused
on invention and discovery, and frees their resources to react swiftly to the latest
scientifi c information needed for sustaining a technological edge. The attendant
division of labor might be an effi cient collaborative outcome stemming from exist-
ing competencies and the desired domains of expertise in the pharmaceutical
industry. 15
15 In an exploratory study of biotech fi rms (Khulji et al. 2006 ), their managers—mostly
scientists-turned-entrepreneurs—reveal the confl icting tensions they most frequently grapple with:
the desire to retain leverage, control, and confi dentiality by keeping the invention close to their
chest for as long as they can, and the realization that to advance and be effective, they need to col-
laborate and attract partners who have greater access to capital, more business contacts, better
organizational capabilities, and understanding of marketplace dynamics. Trust issues, insuffi cient
alignment of interests, and coordination problems in asset deployment are some of the areas that
introduce challenges in such arrangements.