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The Timing of Codevelopment Alliances in New Product Development Processes

Eric (Er) Fang, Jongkuk Lee, & Zhi Yang

The Timing of Codevelopment

Alliances in New Product Development Processes: Returns for Upstream and Downstream Partners Upstream biotech firms (i.e., upstream partners) and downstream pharmaceutical firms (i.e., downstream partners) often form alliances to cope with performance uncertainty and to exploit product specificity in new product development. Although the performance implications of such alliances have been investigated, research has not offered insight into how the timing of such codevelopment alliances influences partner returns. The authors develop and test predictions that timing changes the costs and benefits accruing to upstream and downstream partners and that the effect of timing is influenced by a set of alliance, firm, and market conditions. An event study of 276 codevelopment agreements between biotech and pharmaceutical firms during 1998-2010 reveals that alliance governance structure, partner technological capability, and the competitiveness of market environments change the abnormal returns achieved by partners entering these relationships in important ways.

Keywords-, codevelopment timing, upstream partner, downstream partner, abnormal stock returns, transaction costs

I n high-tech industries, many upstream firms involve

downstream firms in their new product development (NPD) process, and downstream firms play active roles in this codevelopment setting (Prahalad and Ramaswamy 2000). Upstream firms are those that produce technologies or products for use downstream in the value chain; down­stream firms apply or commercialize these technologies or products to serve their customers (Rothaermel and Deeds 2004). For example, in the collaboration between biotech and pharmaceutical firms, biotech firms act as upstream partners that provide technological breakthroughs to phar­maceutical firms, which then act as downstream partners by developing and introducing specific applications of those technologies (Wuyts, Dutta, and Stremersch 2004). Codevelopment between upstream and downstream partners, rather than each partner handling the entire NPD life cycle internally, represents an innovation strategy to

Eric (Er) Fang is Associate Professor of Marketing and James Tower Faculty Fellow, College of Business, University of Illinois at Urbana-Champaign (e-mail: erfang@illnois.edu). Jongkuk Lee is Assistant Professor of Mar­keting, Ewha School of Business, Ewha Womans University (e-mail: jongkuk@ewha.ac.kr). Zhi Yang (corresponding author) is Professor of Marketing and Associate Dean, School of Business Administration, Hunan University (e-mail: yangmkt@http://swds888.com/doc/1d31f0eb453610661ed9f4dc.html ). The first two authors con­tributed equally to the article. The first author acknowledges the financial support of a National Science Foundation of China grant (No. 71328203), and the third author acknowledges the financial support of China’s national science and technology plan (No. 2014DP20028) and the National Science Foundation of China (No. 71431008). The authors are grateful to the JM review team for their constructive comments. Christine Moorman served as area editor for this article.gain external knowledge inputs that can widen the pipeline of new products (Chesbrough, Vanhaverbeke, and West 2006; Loftus and Rockoff 2013).

This study focuses on partnership timing in terms of the stage of the NPD process when partners choose to initiate codevelopment. The NPD process spans from early discov­ery stages through basic research to late stages of commer­cialization, and codevelopment might occur at different stages along the way (Lee 2011; Rothaermel and Deeds 2004). For example, among the biotech (upstream) and pharmaceutical (downstream) codevelopment alliances we examined, we found the example of Xenon, a clinical, genetics-based drug discovery and development company, which initiated an early-stage agreement with Merck to dis­cover and develop small molecule candidates to treat car­diovascular diseases (PRNewswire 2009). For Xenon, this codevelopment agreement served as a risk mitigation strat­egy in its early stages; in turn, it gave Merck the opportu­nity to license exclusive targets and compounds from Xenon for its own development and commercialization. In contrast, Dynavax Technologies, a biopharmaceutical com­pany, entered a collaboration agreement with Merck to develop an experimental hepatitis B vaccine in late-stage clinical trials (Krauskopf 2007). For Dynavax, this late- stage codevelopment offered an opportunity to commercial­ize its new products while retaining its claims on the new product; it also gave Merck the opportunity to add this new product to its line without suffering the risk of early-stage
NPD processes. As these examples suggest, codevelopment between upstream and downstream partners seems to offer a win-win strategy for the joint value creation because the partners can pool complementary resources (Dyer and

This study focuses on partnership timing in terms of the stage of the NPD process when partners choose to initiate codevelopment. The NPD process spans from early discov­ery stages through basic research to late stages of commer­cialization, and codevelopment might occur at different stages along the way (Lee 2011; Rothaermel and Deeds 2004). For example, among the biotech (upstream) and pharmaceutical (downstream) codevelopment alliances we examined, we found the example of Xenon, a clinical, genetics-based drug discovery and development company, which initiated an early-stage agreement with Merck to dis­cover and develop small molecule candidates to treat car­diovascular diseases (PRNewswire 2009). For Xenon, this codevelopment agreement served as a risk mitigation strat­egy in its early stages; in turn, it gave Merck the opportu­nity to license exclusive targets and compounds from Xenon for its own development and commercialization. In contrast, Dynavax Technologies, a biopharmaceutical com­pany, entered a collaboration agreement with Merck to develop an experimental hepatitis B vaccine in late-stage clinical trials (Krauskopf 2007). For Dynavax, this late- stage codevelopment offered an opportunity to commercial­ize its new products while retaining its claims on the new product; it also gave Merck the opportunity to add this new product to its line without suffering the risk of early-stage NPD processes. As these examples suggest, codevelopment between upstream and downstream partners seems to offer a win-win strategy for the joint value creation because the partners can pool complementary resources (Dyer and

© 2015, American Marketing Association

ISSN: 0022-2429 (print), 1547-7185 (electronic)64

Journal of Marketing Vol.79 (January 2015), 64-82