In contemporary context, the pharmaceutical and biotechnology sectors are
characterised by a high level of competition and innovation. Some fifteen or twenty years ago
biotechnology, which was heavily depended on advances in molecular biology, and
pharmaceuticals, which was predominantly based on microbiology and chemistry, were
widely recognized as separate industries. However, now biotechnology and pharmaceutical
companies are significantly interconnected and are evolving into complex systems,
representing particular innovation networks.
The transformation from an old to a new biotechnology industry has been attained
through the support of financial investors at the end of the 1970s. Business vision of biotech
industry has been changed. Investors expected that alike antibiotics that provided treatment
for infections, genetic methods would be able to cure genetic diseases. For instance, in 1979
Syntex Corporation provided serious financial support for some academic researches.
However, most of the pharmaceutical firms adopted a narrow-front strategy, first building
capabilities associated with specific products that they had in market or had targeted for
research and development. A few companies bypassed this stage and attempted to acquire
general biotech capabilities very quickly, usually through acquisition. Whichever strategy
they implemented, the pharmaceutical companies had to manage their way through a
transition that was sometimes painful for their existing personnel in R&D and in other parts
of the organization. There were “transition costs” (Williams, 1993). These costs help explain
the preference for an incremental transition, as do the relationships between biotech and the
pharmaceutical firms’ existing product lines and capabilities.
However, according to Ostro and Esposito the role of investment in biotechnology
was continuously shifting from financing scientific ventures towards funding young and
ambitious companies pursuing their stock potential (Ostro and Esposito, 1999). During 1990s
pharmaceutical and biotech industry were characterized with multidisciplinary knowledge
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Managing Innovation and Change
development and innovation that has been derived from robotics, mechanics, computer
industry, and of course biology and chemistry. Logically, large pharmaceutical companies
started developing extensive collaborations in research and innovations.
Achilladelis and Antonakis (2001) conducted a historical study of the dynamics and
tendencies of technological innovation in the pharmaceutical industry. As pharmaceutical
companies developed subsequent generations of drugs, some large multinational corporations
concentrated on product innovation and designed strategies based on high levels of R&D
expenditures, horizontal diversification and vertical concentration. As pointed out by the
researchers, all the major technological advancements of the last century have been attained
via in-house capabilities. This trend significantly contributes to the continuous concentration
effect experienced by large pharmaceutical firms. From this standpoint, pursuing increase in
market share, major pharma companies undertake mergers and acquisitions. As the majority
of specialists points out, particularly mergers and acquisitions are considered to be essential
ways to obtain innovation capabilities and assuming control levers of any major technological
changes within biotech industry. For instance, in the beginning of 90s, Swiss pharmaceutical
giant Hoffmann-La Roche after creating a complex network of licensing and research
agreements, embraced a new strategy that quickly moved the firm more deeply into the
biotech field (Gambardella, 1884). In effect, Roche decided to transplant a generalized
biotech capability through acquisition. It began by buying equity stakes in the biotechs with
which it was collaborating, a relatively common element in the large firm/small firm alliances
in this industry. But next, it broke the mold by purchasing a controlling (60%) share of the
most successful of the biotech startups, Genentech. Meanwhile, the Swiss firm was
spending between $130 and $140 million a year on its in-house capabilities in the new field.
By the mid-1990s, it was becoming apparent that various kinds of collaborative arrangements
between biotechs and pharmaceutical companies would continue to be an important feature of
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Managing Innovation and Change
the current long cycle of innovation in this industry. As Glaxo’s director of corporate
development explained, “No emerging or established pharmaceutical company is large
enough, or smart enough to meet all of its knowledge needs in isolation.” The front across
which change was taking place in the biomedical sciences was so broad that even the largest
pharmaceutical firms could no longer bring in-house all of the research capabilities they
needed. Indeed, the “knowledge needs” were so pressing that they had given rise to a new
subdiscipline, “bioinformatics,” that combined genomic information with computer
technology in order to make data more widely available to scientists (Saracevic &
Kesselman, 1993).
One of the peculiar trends regarding innovation in pharmaceutical industry is that
R&D represents a major determinant of company’s competitiveness (McKelvey and
Orsenigo, 2001). Simultaneously, large pharmaceutical firms transfer their R&D activities to
so-called dedicated biotechnology firms, because they usually have higher innovative
capabilities. Typical in several regards of the new pattern of R&D was the experience of the
Merck Research Laboratories (MRL). While pursuing in-house research, the firm also
worked with two biotech companies on alternative approaches to HIV prevention with a
vaccine or treatment. One of the biotechs was Repligen, a Cambridge, Massachusetts, firm
(founded in 1981) that specialized in efforts to develop treatments for cancer and
inflammation, as well as AIDS. Later, Merck collaborated with MedImmune, Inc., a
Maryland biotech, in an attempt to use that firm’s monoclonal antibodies as a means of
preventing HIV infection. The Merck/Repligen combination at first produced some
promising results, but neither the vaccine research nor the explorations of monoclonal
antibodies proved fruitful. Meanwhile, MRL’s in-house research was successful in
developing a novel antiretroviral therapy, Crixivan (indinavir). However, some researchers
remained unconvinced with the results from such collaborations, because as Galambos and
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Managing Innovation and Change
Sturchio assert, “large pharma has no real absorptive capacity to completely benefit from a
strategy of merging with dedicated biotechnology firms” (Galambos and Sturchio, 1998).
Opposing to the view of Galambos and Sturchio, other experts present several reasons
to why large corporations successfully collaborate in innovation areas within one industry.
According to some, the science base represents a magnet for information technology and
biotechnology business. Colleges and universities with a high rate of generating significant
innovations like University of California Medical School, San Francisco in medical research
and Stanford in IT and biotechnology, can be considered as bases upon which
commercialization of new knowledge is built. Logically, because scientific output represents
an economic value it attracts both venture capital and pharmaceutical companies who have an
interest in both utilizing the knowledge but also protecting their investment by placing their
managers in the start-ups or acquired firms. In addition, small companies, especially in highly
knowledge-driven industries, depend heavily on social capital (Cooke and Wills 1999).
Therefore, small innovative firms benefit from intellectual, technological and social
“spillovers” based on network collaborations with other entrepreneurs, other scientists,
financiers and companies in the same industry and with comparable mindsets to themselves.
According to Zucker et al (1998) in biotech and pharmaceutical industry proximity to
potential knowledge-assets and opportunities for commercialization constitutes s a great
stimulus to entrepreneurship, especially around “star” scientists or entrepreneurs.
Unlike Galambos and Sturchio or other opposing specialists, Teece (1989) in regard
to biochemical industry offered a term of “strategic alliances” or alliances in which both
parties, in this case large pharmaceutical company and start-up research laboratory share their
complementary assets. In his interdisciplinary study Brewer et al. (1995) provides evidence
that mentioned inter-organizational alliances differ from traditional hierarchical relationships,
because exchanges are external to the companies, and simultaneously those exchanges
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Managing Innovation and Change
constitute not only market relationships. Practically, legal contracting constitutes only a part
of such processes: reciprocity, shared norms of trustworthy behavior, honesty in research
appear and respect for individual property rights to be relevant components of these alliances,
enhancing their flexibility, enabling companies to gain access to unique resources and reduce
costs. According to Teece (1989) such alliances of innovation in pharmaceutical and biotech
industry represent both explicit and implicit contractual activity. Furthermore, such networks
are seen as a more powerful incentive for specialized companies to share their knowledge
than integration through acquisition by established firms. In the latter case, it is likely that
skilled employees, the key assets of the company, won’t accept the new vertical organisation,
and they may leave away; if the organisation has not already designed specific internal
knowledge, such acquisition strategies may result in competence destruction.
Teece (1989) observations were largely based on the practical activities of SmithKline
corporation as well as Eli Lilly in 80s. SmithKline-a firm some
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