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.