returns, which are incompatible with the long time cycles of pharmaceutical innovation. As a result, many NBFs end up offering their skills or potential new products to larger firms for research collaborations and joint product developments instead of undertaking development, manufacturing, and commercialization on their own.3

Large established chemical and pharmaceutical companies have the engineering know-how required to scale up from the laboratory bench to large-scale manufacturing, and further to control the industrial-scale processes. More importantly, they have the financial capabilities for conducting long and costly clinical trials. They are familiar with clinical testing procedures and the regulatory process, and they have established commercialization networks.4

A number of other factors have raised the incentives of the large firms to take advantage of the specialized expertise and product opportunities offered by the NBFs (see Grabowski, 1991, and Telling, 1992). U.S. policy on generic drugs in the 1980s (and particularly the Waxman-Hatch Act in 1984) reduced substantially the property rights of the pharmaceutical companies in their main products when patents expire. As a result, all major drug manufacturers had to undertake significant efforts to create a new portfolio of patented products. In addition, the evolution of the market from one where doctors order medicines without much attention to cost toward more conscious, expert buyers has required that products be not only new, but also superior.

Large firms have, then, found resorting to NBFs for new product ideas useful for several reasons. First, as suggested earlier, the research of the NBFs is often partly subsidized by investor capital and possibly public money via university linkages. Second, royalty payments to NBFs are, in most cases, contingent on success. Finally, because biotech firms are typically pressed for cash, large companies can negotiate favorable terms. In other words, an alliance with an NBF can be beneficial to a large firm because it does not require a large financial commitment, and because it allows the large firm useful access to knowledge that has in part been supported by public funds and in part by the investing public.5

In sum, because large firms and NBFs control assets that are largely complementary, systematic collaborations between them have arisen. Moreover, as we saw, economic forces have reinforced this trend by pushing both the NBFs to take advantage of the downstream capabilities of large firms, and the large firms to avail themselves of the upstream research skills of the NBFs.


The total turnover of many NBFs is, indeed, still composed for the most part of research contracts to larger firms rather than actual product sales. See, for instance, Burrill (1989).


They also have the financial and organizational capabilities for conducting research based upon "lumpy" assets (e.g., molecular design based on expensive supercomputers). In this case, large firms can offer complementary expertise in more "upstream" research as well.


We would like to thank Gerald Laubach for a very useful and enlightening discussion of these points.

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