Search-and-Match in a Rush: Investigating Reactive Licensing in the Pharmaceutical Industry

51 Pages Posted: 22 May 2018

See all articles by Manuel Hermosilla

Manuel Hermosilla

Johns Hopkins University - Carey Business School

Date Written: April 18, 2018

Abstract

Large innovative firms routinely strengthen their new product pipelines by licensing developing technologies from other (typically startup) companies. Licensing is generally portrayed as a carefully planned and executed, "proactive" activity, used to implement the large firm's innovative strategy. We argue that these firms also use licensing in a different -"reactive"- way, when they seek to quickly fill the gap left by development setbacks of other products in their pipelines. In reactive circumstances, firms favor speedier dealmaking in detriment of time searching for candidate technologies that are compatible with the their capabilities. This haste hurts the "matching quality" of licensed technologies and, in turn, their post-licensing development performance. We study the problem in the context of the pharmaceutical industry, where this behavior can be rationalized by executive compensation tied to the firm's stock market returns. Exploiting quasi-experimental variation from clinical trial outcomes, we show that reactive licensing: (i) does occur, (ii) deteriorates matching quality, and (iii) creates significant productivity costs for firms that engage in it.

Keywords: Innovation, Licensing, Pharmaceuticals, Search, Technology

JEL Classification: L2, L6, M3, O3

Suggested Citation

Hermosilla, Manuel Ignacio, Search-and-Match in a Rush: Investigating Reactive Licensing in the Pharmaceutical Industry (April 18, 2018). Johns Hopkins Carey Business School Research Paper No. 18-11. Available at SSRN: https://ssrn.com/abstract=3164928 or http://dx.doi.org/10.2139/ssrn.3164928

Manuel Ignacio Hermosilla (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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