Innovative and Selective Capabilities in Pharmaceutical R and D

Alfonso Gambardella
Bocconi University

ashish arora
Carnegie Mellon University

Laura Magazzini
ATA, SpA, Lucca

Fabio Pammolli

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     Last modified: May 23, 2006

Abstract
We build a model of the determina nts of innovative capabilities in drug development, and focus on the comparative R&D performance of large drug companies and smaller biotech firms. A key contribution of our analysis is that we control for the fact that different types of firms may have different thresholds for selecting innovation projects, which may confuse the decision of not undertaking a project with the inability to do so. This is therefore a crucial control to test for differences in innovative capabilities. We employ an unusually comprehensive dataset of more than 3,000 drug R&D projects in preclinical and clinical trials in the US during the 1980s-early 1990s. Apart from comparative advantages across firm types, we find that, after controlling for selection, the licensed compounds are drawn from a better distribution of the success probability. This suggests that there are social benefits associated with the markets for technology.