Pharmaceutical companies that license externally generated drug candidates enjoy far greater R&D productivity than those that rely solely on internally generated ones, a recent study has found. Licensed compounds cost an average of $5 million to $9 million less to acquire at the preclinical stage than internal candidates cost to develop (Exhibit 1), are twice as successful in clinical trials, and achieve similar commercial results. So if pharma companies applied to their own programs the same rigor and best practices they use when licensing drugs from other companies, they could significantly increase the productivity of their research.

To understand the relationship between research productivity and licensing, we compared the cost, clinical-success rates, and commercial value of internally generated and licensed drugs. Because information on the amount of money pharmaceutical companies spend on discovery at the project level isn't publicly available, we used the current research pipelines of pharmaceutical companies for our sample and applied standard attrition rates to estimate the number of all preclinical projects from 1995 to 2001. By dividing this number into the cumulative amount spent on discovery during that period—estimated at 25 to...