Ensuring Quality Science From “R” to “D”: An Optimal Adoption Strategy for In-Licensing of Pharmaceutical Innovation

In today's competitive business environment, pharmaceutical companies intensively explore contract R&D opportunities with small biotechnology companies and in-license externally discovered compounds to replenish their product pipelines. In order to maintain and increase external collaboration productivity, pharmaceutical companies must find the most promising outside compounds generated in the research stage as the inputs for later in-house development stages. Thus, the “R”-to-“D” transition is significant in ensuring the scientific quality of in-licensed compounds. In this paper, an optimal adoption strategy is proposed to evaluate the in-licensing opportunities for a pharmaceutical company as it finances several biotech partners who focus on the same therapeutic area. This strategy is fundamentally an outsourcing decision process for the pharmaceutical company, and it is modeled as a Poisson process during which small biotechs submit their outcomes to the pharmaceutical company. We give the formulation for the process, whose simulation results, here, indicate that under the high uncertainty of both time value and market payoff, the pharmaceutical company should make its decision by trading off research time for gradually emerging information on the compound's quality. Specific characteristics that emerged in this process are discussed. We also carried out interviews with pharmaceutical R&D managers to explore the “practical applicability” of the model.