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Job market paper

Process innovation in the pharmaceutical industry

Ivan Lugovoi, Dimitrios A. Andritsos

HEC Paris, 1 rue de la Liberation, 78530 Jouy-en-Josas, France,

ivan.lugovoi@hec.edu, andritsos@hec.fr

Claire Senot

A.B. Freeman School of Business, Tulane University, 7 McAlister Dr., New Orleans, LA 70118, USA, csenot@tulane.edu

Problem definition

Process innovation is commonly claimed to be a major source of competitive advantage for firms. Despite this perceived influence it has received substantially less attention than product innovation and much uncertainty remains about its true association with firm performance. We investigate the relationship between a pharmaceutical manufacturing firm's process-innovation portfolio and its economic performance.

Academic/Practical relevance

Our study uniquely conducts a multi-dimensional evaluation of a firm's portfolio of process innovations at the product level. This allows a quantitative evaluation of both the relative benefit of the different dimensions of a portfolio as well as the potential complementarities between these.

Methodology

Through a collaboration with expert patent attorneys we develop a unique longitudinal dataset that combines secondary data and evaluations of a firm's portfolio of process patents along three key dimensions: novelty, scope, and locus. We conduct econometric analyses for a large-scale sample of drugs open to competition from generics, for which process innovation is the main source of competitive advantage.

Results

We find a positive association between overall process innovation and firm performance. When differentiating between dimensions of process innovation, results further suggest that high novelty is beneficial, and complemented by a broad scope, but only for patents applying to the later phase of the pharmaceutical manufacturing process.

Managerial Implications

Our results provide important practical insights that can inform process-related R&D investments in the pharmaceutical sector. In particular, it may not be economically beneficial to invest in high-novelty process innovations in early production stages, which are characterized by numerous opportunities to innovate with potentially higher but less predictable economic payoffs. On the other hand, at later stages of the production process, where the opportunities to innovate are less numerous with potentially lower but more predictable economic payoffs, portfolios that are jointly characterized by high novelty and high scope could be more valuable.