Optimizing the R&d Process Using Spin-Outs: Case Studies from the Pharmaceutical Industry

Article excerpt

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.

OVERVIEW: R&D spin-outs offer pharmaceutical companies an increasingly attractive mechanism for increasing the effectiveness of R&D activities by allowing companies to maintain a clear focus on core activities and yet still exploit discoveries that are less central to the core business. This study analyzed 42 European R&D spin-outs with regard to background, realization, and further development. Interviews were conducted with key personnel in both parent companies and spin-outs to explore the underlying strategy and success factors. Key aspects of successful spin-outs are a clear focus on core activities and a cadre of highly motivated employees. The use of spin-outs has resulted in increased activity along the entire pharmaceutical value chain, producing an increase in drugs introduced to the market in recent years. However, spin-outs are also responsible for the disintegration of established value chains, resulting in higher coordination and transaction costs. Spin-outs offer managers a potential option to refocus their activities and reduce costs. The successful examples and potential pitfalls offered here illustrate best practices for managing spin-outs to maximize R&D productivity.

KEYWORDS: Spin-outs, Pharmaceutical industry, Outsourcing, Spin-offs, Drug discovery and development

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 Lim 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 effi- ciency (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 Lim 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). …