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Working papers

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.

Novelty and scope of innovation in manufacturing: The role of related and unrelated production experience

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

Abstract

In manufacturing, the accumulation of experience that occurs with production is likely to impact an organization's ability to innovate. However, how different types of experience may relate to the characteristics of an organization's innovation output is an open question. In this study we investigate how a firm's accumulated related and unrelated manufacturing experiences are associated with this firm's ability to innovate its production methods. We choose as our context the manufacturing of active pharmaceutical ingredients (APIs) for anti-cancer drugs that have lost product-patent protection. This allows us to examine our research question in a multi-product and multi-firm longitudinal setting. To characterize firms' innovation output we observe their portfolios of patented manufacturing inventions, which we qualitatively evaluate over time (through a unique collaboration with expert patent attorneys) along two critical dimensions: novelty and scope. We find that experience with manufacturing related products is associated with a decrease in the novelty and an increase in the scope of the manufacturing methods that a firm develops and patents for a focal product. Conversely, experience with manufacturing unrelated products is associated with an increase in a focal product's patents' novelty and a decrease in its patents' scope. This simultaneous consideration of both novelty and scope allows us to demonstrate how different types of experience may enhance one dimension of innovation while hurting another, and helps to reconcile conflicting conceptual arguments that have been presented in the literature. Our findings provide practical guidance regarding how managers might want to structure their firms' product portfolios and the longitudinal effect of their choices on their firm's intellectual property.