One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry

Abstract : We draw from documented characteristics of the biopharmaceutical industry to construct a model where two firms can choose to outsource R&D to an external unit, and/or engage in internal R&D, before competing in a final market. We investigate the distribution of profits among market participants, and the incentives to coordinate outsourcing activities or to integrate R&D and production. Consistent with the empirical evidence, we find that the sign and magnitude of an aggregate measure of direct (inter-firm) and indirect (through the external unit) technological externalities drives the distribution of industry profits, with higher returns to the external unit when involved in development (clinical trials) than in early-stage research (drug discovery). In the latter case, the delinkage of investment incentives from industry value, together with the ability of firms to transfer risks to the external unit, imply a vulnerability of early-stage investors’ returns to negative shocks, and the likely abandonment of projects with economic and medical value. We also find that competition in the equity market makes a buyout by one of the two firms more profitable to a research biotech than to a clinical services unit, and can stimulate early-stage investments. However, this long-term incentive can be minimal, notably if the superior efficiency of outsourced operations originates from economies of scope that can hardly be exploited when a firm takes control of the external unit exclusively for itself. R&D outsourcing thus does not always qualify as a relevant pathway to address the declining productivity in innovation that has characterized the industry over several decades.
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Contributor : Isabelle Celet <>
Submitted on : Tuesday, April 23, 2019 - 4:14:39 PM
Last modification on : Wednesday, April 24, 2019 - 1:35:18 AM

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  • HAL Id : hal-02107357, version 1

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Etienne Billette de Villemeur, Bruno Versaevel. One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry. Journal of Health Economics, Elsevier, 2019. ⟨hal-02107357⟩

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