Project Selection and Success: Insights from the Drug Discovery Process
50 Pages Posted: 16 Aug 2018
Date Written: August 1, 2018
Effective R&D is essential for innovation and synonymous to choosing the right innovative ideas. Yet, selecting the right R&D projects is challenging because of the uncertainty and complexity inherent in making those selection decisions. We leverage a unique database comprising the drug development pipelines of the Top 15 pharmaceutical companies between 1999-2016 to examine how operational factors --- technological uncertainty, competitive development projects, and the presence of project transaction costs --- drive the selection decision. We find that firms continuously invest in development projects if they have previously had success in a domain, but that this decision is crucially moderated by the project development choices of their competitors. Early-stage competitive investments decrease the likelihood of the firm selecting to compete in the same domain, whereas late-stage project investments signal high technological feasibility and increase this likelihood. Still, entry into the same domain occurs only when the competitors do not have a large head-start in development. Moreover, the presence of project-level transaction costs manifested in in-licensed compounds makes them less likely to be selected than in-house ones, even though they exhibit above-average rates of success when selected. Finally, we provide evidence on how these selection factors meaningfully contribute to productivity.
Keywords: project selection, new product development, R&D management, investment carryovers, pharmaceutical industry
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