A well-documented fact in the literature on R&D alliances in the pharmaceutical industry is that in-licensed drugs are significantly more likely to reach US Food and Drug Administration (FDA) approval than drugs developed internally by pharma firms. Using a granular dataset, we show that this result holds even when controlling for possible sources of heterogeneity across drug projects, including their clinical phase, drug classification, therapeutic area, molecule type, indication, and regulatory designation. Next, we posit and show that the success rate difference is partly driven by agency problems within companies. Namely, internal R&D teams bring forward less promising drug projects due to monetary and career incentives. We further show that this mechanism is distinct and coexists with other mechanisms proposed in previous literature, namely, selection effects and contractual inflexibility.
