[Research Seminar 2019.09.11] When to pull the plug? Time allocation and the exploration-exploitation balance in drug discovery projects

Abstract

Firms in the biotechnology and pharmaceutical industry are investing billions of dollars in their R&D, especially in new drug discovery. Nevertheless, the industry witnessed declining returns on R&D investments in the past several years. Failure to discontinue less promising new drug discovery projects is an important driver behind this decreased productivity. Hence, firms in the industry are scrambling to restructure the new drug discovery process for better decision-making and making the attrition rate confine to early stages of discovery. Drawing on insights from the exploration-exploitation literature, our study addresses this problem by formally modeling and empirically testing the optimal time at which new drug discovery projects are to be discontinued, so that the resources can be diverted to more fruitful endeavors. Our findings on 1,274 early stage drug discovery projects, suggest that optimal discontinuation duration of early stage drug discovery projects warrants careful consideration of project- and firm-specific characteristics. These findings have important implications for the industry, which is undergoing tremendous transformation. The results also contribute to the exploration-exploitation literature by modeling and testing the time allocation decision between exploratory vs. exploitative projects.