Dynamic impact of uncertainty on R&D cooperation formation and research performance: Evidence from the bio-pharmaceutical industry

Abstract

Our study concentrates on the dynamic research and development (R&D) process in the pharmaceutical industry, which is characterized by high uncertainty and a low probability of success in passing research phases. We evaluate whether R&D cooperations are appropriate instruments to help firms counter various types of uncertainty in different R&D markets and across the drug development process. Our study uses a novel and comprehensive database on the pharmaceutical industry that tracks firms’ drug pipelines, R&D success rates, new drugs launched on the market and the formation of R&D cooperations throughout different research phases and research (therapeutic) markets from 1990 to 2011. We provide interesting and insightful results regarding technological, demand and profit uncertainty and their impacts on R&D cooperation formation across the drug development process. For example, we find that technological, demand and profit uncertainty vary drastically across R&D markets, and most types of uncertainty are significantly higher in the early research phase than in the late research phase. R&D cooperations are formed at the early stage of the R&D process to counter high technological, demand and profit uncertainty and to increase the likelihood of successfully passing drug development phases. In contrast, R&D cooperations formed at the late stage of the R&D process are less motivated by these types of uncertainty and more motivated by R&D funding scarcity. Our calculation shows that an early-stage R&D cooperation would increase life expectancy for the U.S. population by 2.6 million years and a late-stage R&D cooperation would decrease life expectancy by 56,000 years.