In a complex and dynamic technological environment, firms are often unable to sustain continuous high levels of productivity over long periods of time without accessing knowledge from beyond their boundaries; even leading firms require external knowledge to develop new innovations. In the pharmaceutical industry, for instance, an increasing proportion of firm revenue is generated from products derived from technology discovered outside the firm. Ceccagnoli et al. (2010) support this notion: in 60 percent of new branded drugs introduced over a 20-year period, more than half of the patents protecting them originated outside the firm. More specifically, Edwards et al. (2003) report that virtually all drugs with biotechnology origins emanate, in fact, from universities. It is likely, however, that this dependence is understated because the analysis focused only on patents attached to new products identified in the FDA Orange Book. Nonetheless, it demonstrates the critical importance placed on the supply of new technologies through the earlier stages of the external research value chain.
Our focus is on the flow of technologies out of university (non-profit) labs to biotechnology firms and from there on to pharmaceutical firms. Given that few biotechnology firms have the resources and complementary assets to fully develop products it is expected that most externally generated products will pass through this downstream gateway. More specifically, we focus not only on the supply of projects from universities to biotechnology firms but also on the supply of projects that make it to the second link between biotechnology and pharmaceutical firms and, more importantly, several underlying characteristics of these inventions (e.g., stage of development, disease category and NIH funding).
When licensed to firms, university biotechnology inventions are typically very early stage. As such, technical development is necessary before the invention can be marketed. The uncertainty typically discussed is either technological uncertainty (that is, will the invention work) or market uncertainty (that is, will the product be profitable). We demonstrate in this paper that a third type of uncertainty, entrepreneurial uncertainty) is also very important. Entrepreneurial uncertainty is uncertainty as to the applicability of the invention (the application for which it is, in fact, useful--in this context, disease category). For example, a technology might be license from the university to the biotechnology firm for use in cancer, but when sublicensed to a second firm, the disease category might be cardiovascular.
In this paper we examine changes in the stage of development and disease indication from initial to sublicense. We estimate econometric models explaining whether a licensed inventions is sublicensed as well as the time between the patent priority date and the initial license and the time between the initial license to sublicense. Independent variables include stage of development, disease category, license characteristics (exclusivity, payment terms, etc.), National Institutes of Health funding, etc.