Innovation in the Pharmaceutical Industry: The Process of Drug Discovery and Development - Innovation and Marketing in the Pharmaceutical Industry - page 59

R&D projects and has no free capacity for commercializing them all (that is, a
capacity threshold has been reached); (b) the fi rm is already operating close to its
commercialization capacity and thus, becomes increasingly selective about the mar-
ket value of additional projects; (c) the spun-off technology is considered to be of
low complementarity value to the fi rm (e.g., it is misaligned with the fi rm's preva-
lent know-how, requires large investment in new co-specialized assets, or has a poor
fi t with the existing core markets); and (d) the new technology represents a low
cannibalization threat for the incumbent fi rm's other products. The assertion in (d)
is based on the premise that potential cannibalization can be best controlled when
the technology in question is kept in-house.
In case a fi rm has its R&D pipeline running low on projects of high expected
value, the decision to “purchase” new projects may depend on the fi rm's risk aver-
sion. The potential trade-off between adjustment costs (the forgone returns from
co-specialized investments if they become underutilized or must be downsized in
the face of diminishing activity—e.g., the thinning out of a specialized sales force),
and the candidate project's transaction costs (the transfer and the assimilation costs
for a licensed-in candidate) should be evaluated before a new project is brought in
from outside the fi rm (Chan et al. 2007 ).
Analytically, it can be shown that even if entrant fi rms are more risk-seeking than
incumbent fi rms, for suffi ciently high adjustment costs relative to transaction costs,
the entrants may choose to specialize in R&D and would rarely seek to commercial-
ize projects (Chan et al. 2007 ). Knowing this, established fi rms may consider rais-
ing their own adjustment costs (by making a greater investment in co-specialized
assets) as a preemptive strategic move aimed to lower the transfer cost (e.g., the
license fee) of future projects offered by entrants. Although current practices in the
pharmaceutical industry appear broadly consistent with the implications suggested
by this analysis, targeted empirical research can help illuminate the related strategic
interplay between entrants and incumbents in more detail.

2.3.5 Strategic Alliances as a Shortcut to Market

in the Pharmaceutical Industry

The earlier and the later stages of the drug innovation process differ by nature.
Accordingly, the tasks and the required skills, competencies, and resources would
change along the innovation pathway of a drug. The specifi c objectives of each
investigative phase enable tasks to be performed by different organizations so that
the ones most adept in certain functions get to carry them out.
Strategic alliances represent a propitious ground for symbiotic collaboration
between the small biotech and the large pharmaceutical fi rms. They provide for a
closer interfi rm relationship than licensing, yet are safer than outright acquisitions.