Traditionally, firms in the pharmaceutical industry have depended on their internal research and development (R&D) capabilities to maintain a productive new product pipeline. During the past two decades, however, the industry's pipeline productivity has decreased compromising the industry's ability to meet shareholder expectations. As a strategy to invigorate pipeline productivity, and impact financial performance, pharmaceutical firms have increased utilization of strategic technical alliances. Earlier research shows that the degree of financial impact resulting from strategic technical alliances varies in terms of partnership type and differences between client and partner firms. This research studies strategic technical alliances between pharmaceutical and biotechnology firms from 1985 to 2012. Event study methodology is used to determine the relationship between stock market response to alliance announcements, measured as cumulative abnormal returns, and factors representing the absorptive capacity of the pharmaceutical firms in the sample. Then, variables indicating the development stage of the drugs included in the alliances are added to assess the effect of project risk on the market response. The study finds that, in general, the stock market responds in a positive manner to strategic technical alliances in the pharmaceutical industry reflecting the market's immediate response, and expectations of future firm value, resulting from the alliance. The degree of the market's response varies in terms of the client firms' absorptive capacity with new product introductions being the strongest driver. The market responds similarly to alliances across different drug development stages, however, a stronger response is observed in preclinical and extension stages. Practitioner Points• Entering strategic technical alliances to help reverse declines in pipeline productivity increases shareholder value. • In general, the stock market response to strategic technical alliances is stronger for pharmaceutical firms with higher levels of R&D activities. • The stock market values a strong new drug pipeline as a hedge against the high new drug failure rate, which is characteristic of the pharmaceutical industry.
During the past three decades, a series of changes in the market environment have altered the structure of the pharmaceutical industry. While these changes have benefitted the generic drug sector, the effect on the branded drug sector has been detrimental. In sum, these changes have shortened the product life cycles for branded drugs by shifting market share to generic drugs sooner. As a result, it is more challenging for branded drugs to meet return on investment expectations because sales revenue has decreased. This study examines change in the pharmaceutical industry through the lens of the Structure‐Conduct‐Performance paradigm. While research and development intensity has remained stable during the past three decades, new product introductions have shifted to favor brand extension drugs over new, innovative drugs. This change in conduct, reflecting the structural changes that have impacted the industry, indicates a transformation in managers' expectations for returns from investment in new drug development. From a performance standpoint, in the latter part of the period studied, we find a positive relationship between stock return and the introduction of brand extensions reflecting the stock market's approval of the change in product strategy. Our discussion concludes that emerging structural changes may help offset the challenges faced by the branded drug sector and ultimately drive additional changes in the branded sector's conduct.
PurposeBetween 1985 and 2000, the six largest US pharmaceutical firms entered a very active period of partnerships with other pharmaceutical firms to expand their knowledge of biotechnology-based research and development (R&D) frameworks and to bolster the growth of their drug portfolios. The purpose of this study is to examine the annual reports published by these companies for evidence of strategic framing of these partnerships.Design/methodology/approachA content analysis method was most appropriate for this study, as it allows for analysis of a large amount of information and accurate analysis over time. Ninety-six annual reports from the six major US pharmaceutical firms (Abbott, Bristol Myers Squibb, Eli Lilly, Johnson and Johnson, Merck, and Pfizer) were coded. The final codebook included 18 categories derived from framing theory. After collection, the data were uploaded to SPSS for statistical analysis.FindingsResults indicate that mention of partnerships grew considerably in depth and length over time, but companies did not consistently employ frames to describe why or how they engaged in external partnerships.Originality/valueThis is the first study to assess mentions of pharmaceutical firms' external efforts to build their R&D programs and drug portfolios, from the intersecting perspectives of framing theory and the resource-based view (RBV) of the firm, to illustrate how changes were communicated to shareholders during a dynamic period of change within the industry.
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