The hidden cost of R&D outsourcing

15 September 2022

By using game-theoretic modelling, Innogen Associate Jack Scannell and colleagues show that outsourcing R&D risks slowing progress in the biopharma innovation ecosystem.

Since the early 1990s leading drug companies have increasingly outsourced R&D to biotech companies for the discovery and development of new therapies. Some argue that this outsourcing tends to improve R&D productivity. However, game theoretic modelling highlights a problem; a dissociation between the amount of value created by R&D outsourcing and how that value is shared between counterparties in the deal.

For technologies with large knowledge spillovers and economies of scope (e.g., breakthroughs such as monoclonal antibodies, mRNA vaccines or gene therapies), the downstream partners capture all the financial value that the trade in R&D creates, while transferring financial risk upstream. Thus, the financial incentives to create general purpose technologies are surprisingly weak, slowing the overall rate of innovation.

The results published in Drug Discovery Today also have policy implications. For example, publicly funded university research often aims to produce technologies with large knowledge spillovers and economies of scope (e.g., basic understanding of biological mechanisms; large human genetic data sets; etc.). That is because these are the kind of technologies that have the greatest general utility. However, it is unrealistic to expect universities to capture much value if they out-license such technologies to drug or biotech firm.

Jack Scannell said of the work: “Our analysis may explain the puzzlingly weak long-term financial performance of the biotech sector. Perhaps the trade in R&D has transferred biotech profits to pharma, and pharma risk to biotech?”.


de Villemeur EB, Scannell JW, Versaevel B. Biopharmaceutical R&D outsourcing: Short-term gain for long-term pain? Drug Discov Today. 27 (11), 103333 (2022).