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Title

Impact of Research and Development Strategy on Sustainable Growthin Multinational Pharmaceutical Companies

Authors

Fumio Teramae, Tomohiro Makino, Yeongjoo Lim, Shintaro Sengoku,
Kota Kodama

Citation

Sustainability, Vol. 12, Issue 13

Pub. date

2020, 7Creative Commons

Information is in the article.

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sustainability
ArticleImpact of Research and Development Strategy on
Sustainable Growth in Multinational
Pharmaceutical Companies
Fumio Teramae 1,2, *, Tomohiro Makino 1 , Yeongjoo Lim 3 , Shintaro Sengoku 4 andKota Kodama 1,5, *
1
2
3
4
5

*

Graduate School of Technology Management, Ritsumeikan University, Osaka 567-8570, Japan;
makino.tomohiro@gmail.com
Eli Lilly Japan K.K., Hyogo 651-0086, Japan
Faculty of Business Administration, Ritsumeikan University, Osaka 567-8570, Japan; lim40@fc.ritsumei.ac.jp
School of Environment and Society, Tokyo Institute of Technology, Tokyo 152-8550, Japan;
sengoku.s.aa@m.titech.ac.jp
Center for Research and Education on Drug Discovery, The Graduate School of Pharmaceutical Sciences in
Hokkaido University, Sapporo 060-0808, Japan
Correspondence: gr0434fx@ed.ritsumei.ac.jp (F.T.); kkodama@fc.ritsumei.ac.jp or
kota.kodama@cris.hokudai.ac.jp (K.K.)

Received: 23 May 2020; Accepted: 30 June 2020; Published: 2 July 2020


Abstract: Research and development (R&D) productivity is continuously declining, and it is said thatthe conventional model of pharmaceutical business is becoming obsolete. Many research studies on
R&D productivity focus on inputs (e.g., strategic transactions to absorb external innovation, R&D
expenditures), outputs (e.g., approvals of a new drug), and outcomes (e.g., total sales, incomes).
However, few prior studies address the relationship among these three components simultaneously.
Therefore, we comprehensively analyzed factors affecting R&D productivity by statistically examininga sample of 30 large multinational companies. Our results show that strategic transactions do
not increase the number of approved drugs and negatively affect growth in terms of total sales.
Additionally, our results show that a home-region-oriented international strategy positively affects total
sales, thus indicating that responsiveness to local medical needs is important for sustainable growth.
This paper contributes to the body of research on R&D productivity in the pharmaceutical industry.
Keywords: pharmaceutical industry; R&D; strategic transactions; R&D expenditures; international
strategy; strategy implementation; comparison results

1. Introduction
The business activities of the pharmaceutical industry are composed of several elements: researchand development (R&D), regulatory submission and launch, sales and marketing (S&M), andinvestment collection and reinvestment [1]. To maintain sustainable growth, pharmaceutical companies
must increase income (i.e., total sales) through a continuous delivery of new products (e.g., newdrugs) and optimize expenditures (e.g., R&D expenditures, S&M expenditures) through increased
productivity. Although this idea applies to other industries as well, there are major differences between
these other industries and the pharmaceutical sector.
One major difference is that pharmaceutical companies must obtain the official approval of theregulatory authorities of each country before a drug is placed on the market. In principle, approval is
only obtained after conducting clinical trials that meet very strict regulatory requirements. As a result,the success rate from drug discovery to drug launch is very low (only 4%), and the R&D period takes an
Sustainability 2020, 12, 5358; doi:10.3390/su12135358

www.mdpi.com/journal/sustainability

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average of 14 years. Out of these 14 years, clinical trials take an average of seven years for completion,and their costs represent 63% of the overall expenditures per new drug [2]. As regulatory requirements
to ensure safety and efficacy become more stringent, the success rates of clinical trials decline [3–6],
and the R&D expenditures per approved drug increase [7]. Therefore, the continuous delivery of new
products in the pharmaceutical industry is more challenging compared to other industries.
Another unique aspect of the pharmaceutical industry is that the government, its relatedorganizations, and health insurers intervene in the pricing and reimbursement of new products
in countries such as England, Sweden, Canada, Australia, and Japan. These processes occur because
drug costs affect healthcare financing [8,9]. The pressure on the profitability of the pharmaceuticalindustry is growing as healthcare budgets and expenditures increase for a rapidly aging society,especially among developed countries. Additionally, the price of a drug tends to decline after its
patent expires and generic drugs are launched [10]. Meanwhile, scientifically novel and innovative
drugs that satisfy unmet medical needs can generate higher profits or gain a larger market share evenin this environment [11,12]. Therefore, the pharmaceutical industry requires innovation more thanother industries.
To overcome these industry-specific challenges, pharmaceutical companies have become morediscovery-oriented and science-driven organizations [13]. For example, some pharmaceuticalcompanies are increasingly outsourcing research to external research organizations [14], while others areactively capitalizing on external science and research-based innovation through strategic transactions.
These transactions, which include mergers and acquisitions (M&A) and R&D in-licensing, help firms
acquire the newest scientific and medical knowledge on the targeted diseases, as well as cutting-edge
technologies for R&D [15–17]. Actually, some of the biggest deals in terms of transaction size wereannounced or completed in 2019. These deals include the following: Bristol-Myers Squibb and Celgene(74 billion USD), AbbVie and Allergan (63 billion USD), Takeda and Shire (58.6 billion USD), Pfizer andArray Biopharma (11.4 billion USD), Novartis and Medicines Company (9.7 billion USD), Eli Lilly and
Loxo Oncology (8 billion USD), and GlaxoSmithKline and Tesaro (5.1 billion USD).
This movement involves two aspects: one is the model of innovation process in science and anotheris the innovation capability-building strategy. The shift to discovery-oriented and science-driven
organizations is based on the belief that the traditional linear model would work in the scientific filed.
This is the basic science used to create sophisticated technologies, with economic significance. However,in recent years, the linear model has been challenged by empirical research, and new models have been
proposed. One of them is the chain-linked model, based on the conviction that the basic science should
be based on the customers’ needs in the potential market and that the feedback loops accumulatescientific knowledge and refine technologies required for innovation. Another is the multi-channelinteractive learning model, according to which the multi-channeling interface accelerates feedback
loops, and the openness and agility create a competitive advantage [18]. Taking into account theuniqueness of the pharmaceutical industry mentioned above, it is unlikely that feedback loops can beused in the clinical development phase, as proposed by the chain-linked model and multi-channelinteractive learning model. However, it is expected that R&D based on medical needs in the potential
market will add more value according to our previous finding that the difference in international
strategies reflecting the responsiveness leads to the difference in adjusted total sales [19]. To the best of
our knowledge, there are only a few studies in this regard.
M&A and R&D in-licensing (i.e., technology import) is one of the innovation capability-building
strategies, and the newest scientific and medical knowledge and cutting-edge technologies areexamples of innovation capabilities [20]. The innovation capability-building strategies assume thatpharmaceutical companies can successfully complete integration, but there are some challenges, as
integration is a key goal of M&A [21]. For instance, differences in company cultures in both parties of
M&A hinder the integration of all operations on both sides [22,23]. According to the classical location
theory, geographical distance limits the effectiveness of knowledge transfer [24]. Time difference
between R&D bases limits the effectiveness of knowledge transfer [25]. Research studies associatedSustainability 2020, 12, 5358

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with innovation processes and innovation models such as open innovation in the pharmaceuticalindustry are becoming more prevalent [26–28]. Despite an increase in the number of studies regarding
innovation, studies on whether the absorption of innovation within the pharmaceutical industry
improves R&D productivity at the enterprise level are limited. Additionally, there are conflicting
results, since some studies show an overall positive impact [29,30] while other studies show a negative
impact [31,32]. Moreover, according to prior research studies [2,29–32], R&D productivity mustencompass three components: inputs (e.g., R&D investments), outputs (e.g., new drug launches), andoutcomes (e.g., sales). Unfortunately, the number of comprehensive research studies that addressthese components is limited [33]. Therefore, it is still worthwhile to holistically evaluate how the
R&D strategy contributes to R&D productivity at the enterprise level for sustainable growth in thepharmaceutical industry.
2. Materials and Methods
2.1. Data
In this paper, we defined a multinational pharmaceutical company as a company whose sales
in foreign countries represent 10% or more of its total sales [34,35]. We regarded the increase of total
sales as sustainable growth, for the sake of simplification, although sustainable growth was originallydefined as the annual percentage of increase in sales that is consistent with the company’s financial
target [36]. We think that the growth of total sales (i.e., top line) will lead to a proactive investment
in R&D.
Out of the 50 largest multinational pharmaceutical companies based on worldwide drug sales
from 2010 to 2017, we analyzed 30 pharmaceutical companies (Table 1) [37,38]. We hand-collected
data on M&A and R&D in-licensing for the number of strategic transactions, the R&D expenditures,
the number of drugs approved by the U.S. Food and Drug Administration (FDA), the total sales,
and the geographic sales from 2010 to 2017. The data sources about the strategic transactions were
Crunchbase [39] and Biomedtracker [40]. We excluded the financing and marketing in-licensing
transactions because their main purpose is not to absorb innovation. R&D expenditures, total sales,
and geographic sales were obtained from the annual reports and financial reports such as 10-K and
20-F forms per company. We counted the sales of pharmaceutical drugs for humans and excluded
the sales of drugs for animals, diagnostics, devices, and royalties as much as possible. We converted
the currency units to USD based on the period average data in the International Monetary Fund’sInternational Financial Statistics [41]. We conservatively used cumulative R&D expenditures over eight
years considering the average duration of clinical trials [2] and prior research [33,42]. FDA-approved
drugs were obtained from the New Molecular Entity (NME) Drug and New Biologic Approvals
lists [43] because almost all the new drugs are launched in the U.S. due to the rapid internationalizationof the pharmaceutical industry. The expectation of growing sales with overseas expansions occurs
due to the possibility of multinational clinical trials, and a large number of clinical trials occur in the
U.S. [44–46].
Multinational pharmaceutical companies are adopting a different international strategy at theenterprise level, along with other companies in other industries [19,47], which directly affects thechange in total sales and R&D productivity. Using data from 2017, we classified the 30 companies into
four types as per the classification established by Rugman and Verbeke [47]. Their classification was
based on the concept of triad power, and the triad was a geographic space comprising the U.S., the EU,
and Japan. Today, however, the triad has expanded to include North America, Europe, Asia-Pacific,
and others. As of 2014, the distribution of geographic sales was roughly 40% in North America, 30% in
Europe, and 30% in the Asia-Pacific region and others [17]. As the market size of the three regions
is almost the same, this classification is applicable to the pharmaceutical industry, and we did not
adjust the total sales by geographic sales. We noted that the geographical category of each company

Sustainability 2020, 12, 5358

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could vary to some extent, because the information of European countries is not always detailed in theannual and financial reports.
Table 1. List of sample pharmaceutical companies.
Company

Home Region

Internationalization 1

AbbVieAlexionAmgen
Astellas Pharma
AstraZeneca
Bayer
BiogenBoehringer Ingelheim
Bristol-Myers Squibb
CelgeneDaiichi Sankyo
Eisai
Eli Lilly
Gilead Sciences
GlaxoSmithKline
Johnson & Johnson
Merck & Co
Merck KGaA
Mylan
Novartis
Novo Nordisk
Pfizer
Roche
SanofiShionogi
Shire
Sumitomo Dainippon
TakedaTeva Pharmaceutical
UCB

North America
North America
North America
Asia-Pacific/Others
EuropeEuropeNorth America
EuropeNorth America
North America
Asia-Pacific/Others
Asia-Pacific/Others
North America
North America
EuropeNorth America
North America
EuropeNorth America
EuropeEuropeNorth America
EuropeEuropeAsia-Pacific/Others
EuropeAsia-Pacific/Others
Asia-Pacific/Others
Asia-Pacific/Others
EuropeHome-region-oriented
GlobalHome-region-oriented
GlobalGlobalGlobalHome-region-oriented
GlobalHome-region-oriented
Home-region-oriented
Home-region-oriented
Home-region-oriented
Home-region-oriented
Home-region-oriented
GlobalHome-region-oriented
GlobalGlobalGlobalGlobalHost-region-oriented
Bi-regional
GlobalGlobalBi-regional
Host-region-oriented
Host-region-oriented
Bi-regional
Host-region-oriented
Bi-regional

1 Internationalization: Global, more than 20% of sales in all three regions; bi-regional, more than 20% of sales in two

regions but less than 50% in the home region; home-region-oriented, more than 50% of sales within the home region;
host-region-oriented, more than 50% of sales in one region besides the home region [47].

2.2. Analysis
For the purpose of R&D productivity, we defined the strategic transactions and the R&D
expenditures as inputs, the number of approved drugs as outputs, and the change in total sales as
outcomes. First, we investigated the trends in strategic transactions and R&D productivity in thepharmaceutical industry. To analyze the number of strategic transactions over time, we performed the
Kruskal–Wallis test, rather than the Jonckheere–Terpstra test, because we did not expect an increase or
decrease in the number of strategic transactions in advance. We used Pearson’s correlation analysis todetermine the relationships between individual components of R&D productivity.
Second, we compared pharmaceutical companies that are pursuing different international
strategies in terms of R&D productivity to identify the possible factors that influence their productivity.
We used the Shapiro–Wilk test to test for normality. If the data showed normality, we performed
the Student’s t-test or Welch’s t-test, depending on the equivariance determined using the Levene
test. If the data did not show normality, we performed the Mann–Whitney U test. We performed a
multiple linear regression analysis to understand how individual components of the R&D productivity
influence the output and outcome. For the type of international strategy, we created a dummy variablewith 0 for global and 1 for home-region-oriented. We explored the reason why the identified possible

Sustainability 2020, 12, 5358

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factors impacted R&D productivity. We performed Fisher’s exact test or the Pearson Chi-Squared (χ2 )test to analyze the differences between these groups.
All statistical calculations for this study were performed in the IBM SPSS statistical software
version 26.0 for Windows. A two-sided p-value < 0.05 indicates statistical significance.
3. Results
3.1. Trends in Strategic Transactions and R&D Productivity within the Pharmaceutical Industry
Figure 1a shows the trends in strategic transactions from 2010 to 2017. There is no clear trend
regarding the change in the number of strategic transactions over the eight-year period (p = 0.429,
Kruskal–Wallis test). Figure 1b,c show the relationship between inputs and outputs for eight years.
While there is no correlation between the number of strategic transactions and the number of approved
drugs (r = 0.072, p = 0.352), there is a positive correlation between the eight-year cumulative R&D
expenditures and the number of approved drugs (r = 0.406, p < 0.05). Figure 1d shows the relationshipbetween outputs and outcomes for eight years. There is no correlation between the number of approved
drugs and the change in total sales (r = 0.015, p = 0.468). Figure 1e,f show the relationship between
inputs and outcomes for eight years. While there is no correlation between the number of strategictransactions and the change in total sales (r = −0.223, p = 0.118), there is a negative correlation between
the eight-year cumulative R&D expenditures and the change in total sales (r = −0.320, p < 0.05).
We observed that the 30 large companies have constantly absorbed external innovation byleveraging M&A rather than R&D in-licensing. However, our results indicate that the absorption of
external innovation did not increase R&D productivity (i.e., no impact on outputs and outcomes).
Interestingly, the cumulative R&D expenditures contributed to the advancement of clinical trials andthe number of approved drugs. However, cumulative R&D expenditures did not contribute to thechange in total sales. Moreover, the number of approved drugs did not contribute to the change in total
sales, which implies that the indication of approved drugs might be more important for maintaining
sustainable growth than the number of new drugs.

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Figure 1. Trends in strategic transactions and R&D productivity. (a) The total number of strategic
Figure 1. Trends in strategic transactions and R&D productivity. (a) The total number of strategictransactions each year is displayed as a solid line. The number of M&A is displayed as a thin-dottedtransactions each year is displayed as a solid line. The number of M&A is displayed as a thin-dottedline.
is displayed
displayed as
as aa thick-dotted
thick-dottedline.
line.(b)(b)Theline.The
Thenumbernumber ofofR&D
R&D in-licensing
in-licensing transactionstransactions isThecorrelation
betweenthe
total
numberofstrategictransactions
from
2010
to
2017
and
the
total
numbercorrelation between the total number of strategic transactions from 2010 to 2017 and the total number
of of
FDA-approved
molecularentity
entitydrugs
drugsandandthethenewnew
biologicdrugs
FDA-approveddrugs
drugs(which(whichinclude
include thethe new
new molecularbiologic
drugs
from
2010
toto
2017)
black point
pointrepresents
representsa auniqueuniquecompany= 30).
from20102017)isisshown
shownasasaadotted
dottedline.
line. Each
Each black
company(n (n= 30).
The
same
hereinafter.
cumulativeR&D
R&Dexpenditures
expenditures
from
2010
2017
The
same
hereinafter.(c)(c)TheThecorrelation
correlation between
between cumulative
from
2010
to to
2017
and
thethetotal
numberto 20172017isisdisplayed
displayedasasa adotted
dotted
line.
The
and
total
numberofofFDA-approved
FDA-approveddrugs
drugs fromfrom 20102010 toline.
(d)(d)
The
correlation
betweenthethetotal
numberof of
FDA-approved
drugs
from
2010
to to
2017
and
thethechangein in
total
correlation
betweentotal
number
FDA-approved
drugs
from
2010
2017
and
changesales
from2017tois2017
displayed
as a dottedline.line.
(e) (e)
TheThecorrelation
between
total
sales2010
fromto2010
is displayed
as a dottedcorrelation
betweenthe
thetotal
totalnumber
number ofstrategictransactions
fromfrom
20102010
to 2017andandthe thechangein total
sales
from
2010
to to
2017
is is
displayedas aof strategictransactions
to 2017changein total
sales
from
2010
2017
displayed
dotted line. (f) The correlation between the cumulative R&D expenditures from 2010 to 2017 and thechange in total sales from 2010 to 2017 is displayed as a dotted line. * p < 0.05; ** p < 0.01.

Sustainability 2020, 12, 5358
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7 of 15

as a dotted line. (f) The correlation between the cumulative R&D expenditures from 2010 to 2017 and3.2. Comparison
between Global Companies and Home-Region-Oriented Companies in Terms ofthe change in total sales from 2010 to 2017 is displayed as a dotted line. *p < 0.05; **p < 0.01.
R&D Productivity

3.2.investigate
Comparison the
betweenglobalcompanies
and home-region-oriented
companies
in terms of global
R&D companies toTofactors
thatwould impact
R&D productivity,
we comparedproductivity
home-region-oriented
companies based on the differences in their international strategies. Referring to
the concept
case research,
we choseto selectpolar
types,
given thenumbercases, and to
Toofinvestigate
the factorsthat would
impactR&D
productivity,
welimited
compared
globalof
companies
bettertocompare
cases, which could
lead toa more[48].
home-region-oriented
companies
based
on sophisticatedthe differencesunderstanding
in their international
strategies.
Referringto thetheconceptof case research,
weoutputs,
chose to selectpolar types,between
given theglobal
limitedcompanies
number of andWecompareddifferences
in inputs,
and outcomescases, and to bettercompanies
compare cases,which
to aweremorenosophisticatedhome-region-oriented(Figure2).could
Whilelead
there
differencesunderstanding
in the number[48].
of strategicWecomparedthedifferencesin
inputs,outputs,andoutcomes
betweencompanies(pandtransactions (p = 0.203, Mann–Whitney U test), the eight-year cumulative R&Dglobal
expenditures= 0.267,
home-region-oriented companies (Figure 2). While there were no differences in the number ofWelch’s
t-test), or the number of approved drugs (p = 0.101, Student’s t-test), we did identify a significant
strategic transactions (p = 0.203, Mann–Whitney U test), the eight-year cumulative R&D expendituresdifference in the change in total sales (p < 0.05, Student’s t-test). Specifically, the home-region-oriented(p = 0.267, Welch’s t-test), or the number of approved drugs (p = 0.101, Student’s t-test), we did
companies
had a higher change in total sales compared to that of global companies. We also evaluatedidentify a significant difference in the change in total sales (p < 0.05, Student’s t-test). Specifically, thethe differencein the numberof M&A
andthe number
transactions
foundhome-region-oriented
companies
hada higherchangeofinR&D
total in-licensing
sales comparedto that of andglobalno difference
betweenthegroups (p1.000, Mann–Whitneyp=
0.418,
Mann–Whitney
U test,companies.
We alsoevaluated
the=differencein the number Uof test;M&A
andthe numberof R&D inrespectively).
Our results andindicatehome-region-oriented
companies
show
better outcomes,
but nolicensing transactions
foundthatno difference
between the groups(p = 1.000,
Mann–Whitney
U test;p = 0.418, Mann–Whitney
U test,respectively).
Our results
indicate
thatpossible
home-region-oriented
clear relationshipbetween inputs,
outputs,
and outcomes,
as wellas otherfactors impacting
companies
show
betteroutcomes,
but
no
clear
relationshipbetweeninputs,outputs,
and outcomes,
R&D productivity.
as well as other possible factors impacting R&D productivity.

Figure2. Comparison
betweenglobalcompanies
andhome-region-oriented
Theblack
black bar
Figure2. Comparison
betweenglobalcompanies
andhome-region-oriented companies.
companies. The
represents
global companies(n = 12), (nwhile
thewhile
whitethebarwhite
represents
home-region-oriented
companies
bar represents
global companies= 12),
bar represents
home-region-oriented(n = 10). (a) The number of strategic transactions from 2010 to 2017. (b) The eight-year cumulative
R&D expenditures from 2010 to 2017. (c) The number of approved drugs from 2010 to 2017. (d) The
change in total sales from 2010 to 2017. * p < 0.05.

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3.3. Relationship between Inputs, Outputs, and Outcomes in Terms of R&D Productivity
We performed a multiple linear regression analysis to study the relationship between inputs
and outputs with the number of approved drugs as a dependent variable, and the following as
independent variables: the type of international strategy, the number of strategic transactions, andthe eight-year cumulative R&D expenditures (Table 2). We also analyzed the relationship between
inputs, outputs, and outcomes with the change in total sales as a dependent variable and the following
as independent variables: the type of international strategy, the number of strategic transactions, theeight-year cumulative R&D expenditures, and the number of approved drugs (Table 3).
Table 2. Regression analysis of the relationship between inputs, outputs, and outcomes (dependent
variable: the number of approved drugs).
Independent Variable

B

β

t

p

VIF

Constant
International strategy
8-year cumulative R&D expenditures
Strategic transactions

2.968−3.4160.000
0.156−0.240
0.701
0.142

1.211
−1.542
4.755
0.939

0.241
0.140
0.000
0.360

1.207
1.085
1.145

R2 (Adjusted R2 )F

0.640 (0.580)
10.647 ****** p < 0.001. International strategy, a dummy variable with 0 for global and 1 for home-region-oriented.

Table 3. Regression analysis of the relationship between inputs, outputs, and outcomes (dependent
variable: change in total sales).
Independent Variable

B

β

t

p

VIF

Constant
International strategy
8-year cumulative R&D expenditures
Strategic transactions
Approved drugs

2828.054
9099.736−0.087−491.310
286.7220.657−0.265−0.462
0.295

0.871
3.031
−0.914−2.274
0.955

0.396
0.008
0.374
0.036
0.353

1.366
2.448
1.201
2.775

R2 (Adjusted R2 )F

0.640 (0.580)
10.647 ****** p < 0.001. International strategy, a dummy variable with 0 for global and 1 for home-region-oriented.

Tables 2 and 3 show the results of the regression analysis for the relationship between inputs,
outputs, and outcomes. This analysis shows that the eight-year cumulative R&D expenditures have asignificant positive impact on the number of approved drugs (F = 10.647, R2 = 0.580, p < 0.001). Thisfinding coincides with the trends of the pharmaceutical industry (Figure 1c). It may also be concluded
that a home-region-oriented strategy has a positive impact on the change in total sales (p < 0.01)
and the number of strategic transactions negatively impacts the change in total sales (F = 3.017,
R2 = 0.278, p < 0.05). Surprisingly, our results indicate that using strategic transactions to absorb
external innovation did not increase R&D productivity.
3.4. Factors Impacting on R&D Productivity in the Pharmaceutical Industry
We investigated how the difference in international strategy affects the R&D strategy to determine
why the international strategy affects the change in total sales. Specifically, we investigated thedifferences in the indications of approved drugs between the two groups. We hypothesized that global
companies tended to focus more on global medical needs while home-region-oriented companies
would tend to focus more on local and regional medical needs, according to a popular theory about
internationalization [49]. For example, a case study of internationalization in the Indian pharmaceuticalindustry reported that the Indian pharmaceutical companies started developing products specificallyfor foreign markets to advance their global presence [50]. Thus, we compared U.S.-based global

Sustainability 2020, 12, 5358

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strategy affects sales. Specifically, we evaluated differences in the proportion of drugs for cardiovasculardiseases, infectious diseases, cancers, nervous system diseases, and endocrine and metabolic diseases.
We focused on these indications because infectious diseases are prevalent on a global scale while cancer
rates are higher in the U.S. Meanwhile, cardiovascular diseases, nerve system diseases, and endocrine
and metabolic diseases are major causes of death both within the U.S. and worldwide [51,52]. We
also added orphan designation as a surrogate of rare diseases because this hypothesis dictates that
home-region-oriented companies tend to focus more on rare diseases entailing higher unmet medical
needs in their home region.
Table 4 shows the results of these comparisons. U.S.-based global companies have a higher
proportion of drugs for treating infectious diseases (p < 0.001, Pearson χ2 test). Meanwhile, U.S.-based
home-region-oriented companies have a higher proportion of anticancer drugs and orphan designation
than U.S.-based global companies (p < 0.01, Pearson χ2 test; p < 0.01, Pearson χ2 test, respectively).
There are no differences in the proportion of drugs for cardiovascular diseases (p = 0.708, Fisher’s exacttest), nervous system diseases (p = 0.330, Fisher’s exact test), and endocrine and metabolic diseases(p = 0.163, Pearson χ2 test). We found that U.S.-based global companies are launching products thatmeet global needs into the U.S. market, while home-region-oriented companies are launching productsthat meet local needs into the U.S. market. Thus, it was confirmed that companies implement an R&D
strategy that is consistent with their international strategy. Furthermore, our results indicate that an
R&D strategy focusing on a home-region orientation can increase R&D productivity.
Table 4. Comparison between global companies and home-region-oriented companies (R&D strategy).
GlobalApproved Drug Classification
Cardiovascular diseases
Yes
No
Infectious diseases
Yes
No
Cancers
Yes
No
Nervous system diseases
Yes
No
Endocrine and metabolic diseases
YesNo
Orphan designation
Yes
No

Home-Region-Oriented

n

%

n

%

2
41

4.7
95.3

6
63

8.7
91.3

25
18

58.1
41.9

18
51

26.1
73.9

2
41

4.7
95.3

18
51

26.1
73.9

6
37

14.0
86.0

5
64

7.2
92.8

3
40

7.0
93.0

11
58

15.9
84.1

4
39

9.3
90.7

25
44

36.2
63.8

p

V

0.708

0.076

0.001

0.321 **

0.004

0.272 **

0.330

0.110

0.163

0.132

0.002

0.299 **** p < 0.01.

As our results indicate that the strategic transactions to absorb external innovation have notincreased R&D productivity, we explored the possible cause. We performed a multiple linear regression
analysis with the change in total sales as a dependent variable and the following as independent
variables: the number of strategic transactions, the eight-year cumulative R&D expenditures, and thenumber of approved drugs. We performed this analysis for global companies and home-region-oriented
companies to check if this finding applies to both groups. For home-region-oriented companies, theanalysis showed that the number of strategic transactions negatively affects the change in total sales(β = −0.749, R2 = 0.557, p < 0.05). For global companies, we did not identify a clear relationship

Sustainability 2020, 12, 5358

10 of 15

between the change in total sales, the number of strategic transactions, the eight-year cumulative R&D
expenditures, and the number of approved drugs (F = 1.297, R2 = 0.075, p = 0.340).
Prior studies regarding the internationalization of R&D have led to conflicting results. Somestudies show that R&D sections are located overseas to access the best talents, while others show thatR&D sections are located close to the companies’ home region due to the difficulty of managing foreign
R&D sections [14,53–56].
We compared global companies with home-region-oriented companies in terms of the proportionof strategic transactions in the same region. We hypothesized that the geographic strategy for strategictransactions would influence the performance of external innovation absorption.
Table 5 shows the proportion of strategic transactions in the same region. The home-region-oriented
companies have a higher proportion of strategic transactions in the same region than global companies(p < 0.05, Pearson χ2 test). Our results indicate that home-region-oriented R&D strategic transactions
would not work as expected for the absorption of external innovation.
Table 5. Comparison between global companies and home-region-oriented companies (transactions strategy).
Geographic Perspective
Strategic transactions in their home region
Yes
No

GlobalHome-Region-Oriented

n

%

n

%

30
55

35.3
64.7

56
57

49.6
50.4

p

V

0.045

0.142 *

* p < 0.05.

4. Discussion and Implications
R&D productivity is continuously declining, and it is said that the conventional model ofpharmaceutical business is being broken up [57]. Thus, individual pharmaceutical companies are
required to understand the right growth strategies. We examined how R&D expenditures affected
the number of approved drugs in 30 large pharmaceutical companies. According to our results,
higher R&D expenditures yielded more approved drugs. Our results are consistent with a prior study
focusing on 13 pharmaceutical companies [42]. However, our results surprisingly show that approved
drugs do not always contribute to growth in terms of total sales. Rather, large R&D expenditures
negatively affect growth in terms of total sales. Although increasing R&D expenditure seems to be astraightforward strategy to increase the number of approved drugs, our results suggest that this strategy
is not sustainable. More recently, pharmaceutical companies have been leveraging external R&D
innovation through M&A and R&D in-licensing [16]. Our results show that 30 large pharmaceuticalcompanies have consistently made strategic transactions (e.g., M&A and R&D in-licensing); however,there is no evidence to suggest that these strategic transactions have increased the number of approved
drugs. Surprisingly, we found that the number of strategic transactions negatively affected growth interms of total sales for home-region-oriented companies.
One of the possible reasons for this finding is the problem of absorptive capacity. According to
Lubatkin et al. [58], when two companies with similar knowledge bases enter an M&A, they tend to
exchange knowledge. According to Lange et al. [59], a large difference in the knowledge bases reduces
the power of influence on the generation of innovation output. According to Sampson et al. [60], whentechnological diversity is high in R&D alliances, barriers to effective knowledge transfer arise. According
to Leeuw et al. [61], diversity in the alliance portfolio negatively affects radical innovative performanceas defined by the percentage of turnover due to new or significantly improved products and services.
According to Choi et al. [62], international R&D alliances tend to have a smaller technological distancethan international manufacturing and marketing alliances. These findings explain the absorptive
capacity model, in that companies cannot absorb knowledge and technologies from new domains if
they do not improve their absorptive capacity [63]. The absorptive capacity perspective suggests that

Sustainability 2020, 12, 5358

11 of 15home-region-oriented companies made many strategic transactions, which increased the diversity of
their external knowledge and technologies, resulting in a lack of absorptive capacity.
Another possible reason is the home-country bias. There are several research studies inwhich the choice of location is important [64,65]. Since pharmaceutical companies have a relativeadvantage at home, they seek out foreign locations that have complementary strengths to their
particular technology [66]. However, this is challenging for pharmaceutical companies due to theirhome-country bias [56]. For example, the top 10 highly internationalized pharmaceutical companies in
Europe exhibited a significant preference for local partnerships within their home country [67]. The
home-country bias may be explained by the low marginal cost of maintenance of the R&D networks in
the home region and the fact that the geographical dispersion of R&D sections makes the controlled
flow of external knowledge more difficult. Logically, pharmaceutical companies should access thebest R&D resources to capture external innovation, but home-region-oriented companies tend to makestrategic transactions within their home region. In short, home-region-oriented companies neither
absorb external innovation nor appropriately invest their assets and resources due to these problems.
This results in many strategic transactions decreasing R&D productivity and negatively affecting thechange in total sales. Our results provide important insights about the innovation capability-building
strategy from the perspective of R&D productivity. Hence, we propose the following recommendations:(1) pharmaceutical companies should increase their absorptive capacity, so that they may better manage
diverse external knowledge and technologies [63], and (2) pharmaceutical companies should execute“sensing”, as defined by the capabilities-based entrepreneurial theory, to identify and access the rightinnovative capabilities, such as technologies and knowledge [68,69].
Moreover, we found that pharmaceutical companies research and develop products in line with
their international strategy and home-region-oriented companies focus on research and develop new
drugs that satisfy local unmet medical needs. Therefore, home-region-oriented companies havelaunched more orphan-drugs. Orphan drugs may achieve blockbuster status by combining several
advantages of orphan drugs: faster launch with a fast regulatory review process, market exclusivity
designation, premium pricing, and multiple indications for the same drug [70]. The number of rarediseases increases year by year because medical technologies are rapidly advancing at the genomic
level [71]. These advances provide the opportunity to develop personalized medicine strategies as wellas orphan drugs. The conventional business model relying on blockbusters focused on developing andlaunching a product that satisfies the medical needs in an extremely large market (e.g., H2 blockers totreat gastric and intestinal ulcers). However, as a blockbuster strategy is not suitable for sustainablegrowth, the pharmaceutical industry is abandoning this strategy and moving to a niche-buster or
multi-buster strategy [72]. These strategies target specific markets with niche drugs such as orphan
drugs for cancer. Our results support the chain-linked model even though feedback loops would
be limited in the pharmaceutical industry. Hence, we propose the following recommendations:(1) pharmaceutical companies should gather customer insights regarding unmet medical needs in thetargeted market, and (2) pharmaceutical companies should research and develop cutting-edge drugs,
which can create competitiveness. We believe that our recommendations will work well to increase
R&D productivity. We advance a hypothesis based on our findings and prior research studies, andillustrate the relationship between inputs, outputs, and outcomes (Figure 3).

Sustainability 2020, 12, x FOR PEER REVIEW

12 of 15

will work well to increase R&D productivity. We advance a hypothesis based on our findings andSustainability 2020, 12, 5358
12 of 15prior research studies, and illustrate the relationship between inputs, outputs, and outcomes (Figure
3).

Figure 3. Assumed relationship diagram showing the factors impacting R&D productivity.
Figure 3. Assumed relationship diagram showing the factors impacting R&D productivity. .

5. Conclusions, Limitation, and Future Directions
5. Conclusions, Limitation, and Future directions
Our results suggest that it is time to change the business model for sustainable growth from
Our results ofsuggestthat it is time tochangethe businessmodel
for sustainablegrowththethe perspective
internationalization
andinnovation[73]. We
recommend
switchingfrom fromthe R&D
perspective
ofdependentinternationalizationand innovation [73].
We innovation
recommendandswitching
the R&D
model, that isupon home-region-oriented
external
relies onfrom
blockbusters
tomodel,
thatisdependent
uponhome-region-oriented
external
innovation
andreliesonblockbusters
meet global medical needs, to a model that pursues external innovation more flexibly and actively andtomeet global
medicalto a model
thatcutting-edge
pursues external
responds
to localneedsneeds,
by deliveringmore
drugs.innovation more flexibly and actively
and responds
toislocal
needs by deliveringmore
cutting-edge
drugs.
Our study
an exploratory
study, thatis limited
by its small
sample size (30 large multinational
Our
study
is
an
exploratory
study,
thatislimited
by
its
small
samplesize study,(30 large
pharmaceutical companies with various company sizes). Additionally, in thiswemultinational
used strategic
pharmaceuticalcompanies
withvariouscompany
sizes).
Additionally,in
thiswesalesusedtransactions and R&D expenditures as indicators of input, approved drugs as output,study,
and totalasstrategictransactions
andR&D
expendituresasindicatorsof
input,
approveddrugs
asoutput,andoutcomes, but future research study could use technical personnel as an indicator of input, patents
totalsales asoutcomes,
but asfutureresearchstudy could
technical
personnel
as an indicator[74].
ofas output,
andtrademarks
outcometo investigate
theuseeffectof R&D
strategy multilaterally
input,
patents
as output,
trademarks
as outcome
to investigate
effectof R&D
strategy
Moreover,our study
takes anda quantitative
approachto highlight
how the the
R&D
strategy
contributes
tomultilaterally[74].
Moreover,
our
study
takes
a
quantitative
approachtohighlight
how
the
R&D
R&D productivity. Therefore, future research studies should include a qualitative approach that utilizes
strategy
contributes
to R&Dproductivity. Therefore,
researchstudiesshould includeainterviews
to gain insight
into decision-making
processesfuture
regardingstrategictransactions.
Althoughqualitative
approachthat utilizes
interviews togainR&D
insight
into decision-making
processes
regardingfurther researchis necessary
to understandhowstrategy
contributes to R&D
productivity,bystrategictransactions.
Althoughfurther
research
isnecessary
tounderstandhow
R&D
strategy
verifying the hypothesis drawn in Figure 3, we believe that our study contributes to the body ofcontributes
R&D
productivity,
verifying growth
the hypothesis
drawn in Figure
3, we believe that our
research onto
R&D
productivity
forby
sustainable
in the pharmaceuticalindustry.
study contributes to the body of research on R&D productivity for sustainable growth in the
Author Contributions:Conceptualization, F.T.; methodology, F.T.; software, F.T.; validation, F.T.; formal analysis,
pharmaceuticalindustry.

F.T.; investigation, F.T.; resources, F.T.; data curation, F.T.; writing—original draft preparation, F.T.; writing—review
AuthorContributions:Conceptualization,
F.T.; K.K.
methodology,
F.T.; validation,
F.T; formal
and editing,T.M., Y.L., S.S.
and K.K.; supervision,
All authors F.T.;
have software,
read and agreed
to the publishedversionof the manuscript.
analysis,
F.T.; investigation, F.T.; resources, F.T.; data curation, F.T.; writing—original draft preparation, F.T.;
writing—review
and editing,T.M., Y.L.,and Society
K.K.; supervision,
K.K. Allofauthorshave
read
and agreed
to theFunding: This work
was supported
by S.S.
Japan’sfor the Promotion
Science,grant
numbers
20H01546.
publishedversionof the
The funding
sourceshadmanuscript.
no involvement in the study design; in the collection, analysis and interpretation of data;in the writing of the report; and in the decision to submit the article for publication.
Funding: This work was supported by Japan’s Society for the Promotion of Science, grant numbers 20H01546.
Acknowledgments:
to theineditorsand design;
the referees
forcollection,
their valuablecomments
that helpedof
toThe
funding sources We
hadareno grateful
involvement
the studyin theanalysisand interpretation
improve this paper.
data; in the writing of the report; and in the decision to submit the article for publication.
Conflicts of Interest: Fumio Teramae, one of the authors, is an employee of Eli Lilly Japan K.K. The company
Acknowledgments:
We aregrateful towith
the theeditors
andof
thereferees
does not have any direct
relationshipcontent
thisarticle.for their valuable comments that helped to
improve this paper.

References
Conflicts
of Interest: Fumio Teramae, one of the authors, is an employee of Eli Lilly Japan K.K. The company
does not have any direct relationship with the content of this article.
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