Optimizing the R&D Process Using Spin-Outs: Case Studies from the Pharmaceutical Industry: R&D Spin-Outs Can Offer an Attractive Mechanism for Increasing the Effectiveness and Reach of R&D Activities While Maintaining the Focus of the Core Business. A Study of 42 Spin-Outs in the European Pharmaceutical Industry Reveals the Attributes That Lead to Successful Spin-Outs and Illustrate the Possible Advantages of Spin-Outs

Article excerpt

The number of corporate R&D spin-outs in the pharmaceutical industry has increased significantly in recent years (Ramirez and Duberley 2010; Chemmanur and Yan 2004; Dewdney and Smith 1998). This may be the result of several market forces currently reshaping the industry including rising R&D costs, high failure rates for new drug candidates (Findlay 2007), and the impending expiration of a number of blockbuster patents all of which are forcing pharmaceutical companies to refocus on core activities and reduce costs (Parhankangas and Arenius 2003). In this context, spin-outs offer opportunities to enhance efficiency, divest redundant or noncore activities, and reduce costs.

Spin-outs make an independent business out of an existing part of an organization a business unit, a department, or even a project team (De Cleyn and Braet 2009). The spin-out company may take personnel, assets, intellectual property, technology, or existing products from the parent organization to support its development. Companies have various reasons for realizing a spin-out. In the case of redundant capacities or noncore activities (for instance, after a merger), a spin-out can be used to reduce costs as an alternative to closing or selling the unit (Parhankangas and Arenius 2003; Bergh and Lira 2008). A spin-out can also be used to reduce capital requirements and risk, if R&D projects are not in the strategic focus of a pharmaceutical company (Chemmanur and Yan 2004). A third possible reason is the isolation of high-risk R&D projects in non-core areas, in order to prevent it from affecting the riskiness of the core business (Arnold et al. 2010; van Gils et al. 2009).

R&D spin-outs can also be used strategically to make R&D more flexible for increased effectiveness and efficiency (Krishnaswami and Subramaniam 1999). An effective spin-out can overcome cultural hurdles to innovation, such as bureaucratic thinking, fear of cannibalism, or "not invented here" syndrome by moving the activity to a separate organization with a different culture (Bergh and Lira 2008; Jagersma and van Gorp 2003). They can more easily pick up external impulses and serve as a mechanism to explore revolutionary ideas in a setting apart from mainstream business (Parhankangas and Arenius 2003; Jagersma and van Gorp 2003).

We attempted to ascertain the real effect of R&D spinouts on drug development and on the industry in general by examining how spin-outs affected their parent companies as well as the success rates for the spin-outs themselves.

Research methodology

Based on desk research, interviews, and case studies, we sought to explore why pharmaceutical companies are increasingly engaging in spin-out activities and determine the effects, both positive and negative, of these activities for both the parent companies and the spin-outs.

This research centered on pharmaceutical spin-outs with a focus on R&D activities; spin-outs with mainly marketing or production activities were not considered. Within R&D spin-outs, we analyzed two subgroups:

1. Intellectual property-oriented spin-outs focused on creating intellectual property (IP) and even original drug candidates in different phases of the drug discovery and development process.

2. Service-oriented spin-outs providing drug discovery and development services for pharmaceutical companies based on a fee-for-service-model (for instance, lead optimization, toxicology, analytics, clinical studies, or formulation services).

Hybrid companies with both IP-oriented and service-oriented businesses were placed into one of the two groups based on their major business. Within the analysis of this study, there is no differentiation between drug discovery spin-outs (focused on basic research and drug discovery) and drug development spin-outs (focused on preclinical and clinical development).

The empirical data and case examples were obtained during two independent investigations based on desk research and interviews. …