The value of innovation and the spillover effect on alliance partners

This paper investigates the value of innovation for pharmaceutical firms and their strategic alliance partners. Rather than relying on the standard patent data to measure innovation success, we use a comprehensive data set on drug approvals by the United States Food and Drug Administration to examine the value of innovation for the drug companies and their alliance partners. In examining FDA approvals with different levels of innovation significance, our evidence shows that shareholders of the innovating firm and its alliance partners both benefit significantly from announcements of radical innovation. Furthermore, young, newly-public alliance partners with strong growth opportunities experience stronger spillover effects from radical innovation. More recently formed alliances are also associated with more significant spillover effects on alliance partners. Exploring the potential downside of alliance partnerships, we find that adverse events such as FDA warning letters or drug withdrawals cause significant wealth loss to the drug manufacturers, with some negative spillover effects on the firms’ alliance partners.