Out-Licensing in Markets with Asymmetric Information : The Case of the Pharmaceutical Industry
Journal
IJIM International Journal of Innovation Management
ISSN
1363-9196
ISSN-Digital
1757-5877
Type
journal article
Date Issued
2011-08
Author(s)
Abstract
Few large pharmaceutical companies have recently discovered out-licensing of terminated R&D results as a way to recoup some of the significant investments made in R&D and to improve R&D productivity. Our empirical investigation reveals that the licensing partners are preferably young, small and highly specialized companies. This reverses the traditional logic of out-licensing. While out-licensing is usually done because of downstream concerns, our analysis shows that the company which owns the necessary assets for further development (the large pharmaceutical company) sells the license to a firm (the small partner company) which has- at the time of deal closure - no track record to prove its ability to successfully develop the compound. As the lack of a track record does not allow the pharmaceutical company to distinguish between the partner firms based on their development capabilities, these out-licensing deals are characterized by an asymmetric distribution of information. The application of the theory of adverse selection allows deriving managerial recommendations along three dimensions of the out-licensing deal: product coverage, price setting and performance presumption. By making changes along these dimensions, R&D managers are able to reduce the information asymmetry and approximate an equilibrium in the out-licensing market.
Language
English
Keywords
Out-licensing
research & development
pharmaceutical industry
asymmetric
information
information
adverse selection
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Imperial College Press
Publisher place
London
Volume
15
Number
4
Start page
755
End page
795
Pages
41
Subject(s)
Division(s)
Eprints ID
157448
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open.access
Name
11 IJIM out-licensing.pdf
Size
372.97 KB
Format
Adobe PDF
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