The Short and Long Run Effects of Collaboration on Pharmaceutical Innovation ∗

Collaboration between firms in new product development is fraught with substantial uncertainty and risk but can provide significant competitive advantages. Therefore, understanding the drivers of inter-firm collaboration in R&D and its outcomes is of critical importance. Using a unique panel dataset constructed from multiple sources that documents the outcomes of all FDA trials from 2000 to 2011 we examine the role of inter-firm collaboration in innovation in the pharmaceutical industry. In particular, we study: (1) Whether the effects of collaboration are different in the short and long term? (2) Whether early or late stage collaboration is more effective? and (3) Are there features of partnerships that make some collaborations more successful? We find that collaboration has a short run cost of prolonging the duration of early stage trials. On the other hand, accumulated early stage collaboration experience has a long term benefit in improving the chances of success in future trials. Moreover, early stage and late stage collaboration experience are neither substitutes nor complements but distinct skills relevant at different stages of the R&D process. Overall, early stage collaboration experience is more critical to a firm’s short run costs and long run success. In successful early stage collaborations firms seek partners with wider scope and experience with drug classes and therapeutic conditions. However, in successful late stage collaborations firms seek partners that are more focussed with narrow experience in the relevant drug class. Overall, our results indicate that collaboration involves a trade-off between upfront short run costs and long term pay-offs. Thus, from public policy and managerial strategy perspectives collaboration should be viewed as an “investment” decision. Provided a firm “invests” strategically in its collaboration decisions these can create a source of competitive advantage increasing and sustaining its chances of long term success.