Majors, Organizational Legitimacy and Rents from Blockbuster Innovation in the Biopharma Industry

Majors, Organizational Legitimacy and Rents from Blockbuster Innovation in the Biopharma Industry

by Ram Mudambi, Solon Moreira, Michael Carleton and Thomas Fare

I.   Intuitive summary and rationale

We analyze the phenomenon of “Majors” – those firms that hold central positions in an industry and are consistently able to achieve outsized market success. Majors dominate a wide range of industries, including biopharmaceuticals (biopharma),  accounting,  aerospace, automotive, oil, and investment banking. We argue that Majors are not just large firms; rather, they have organizational legitimacy  (OL),  a factor that supersedes conventional measures of firm dominance like size, age and R&D intensity. In particular, we focus on the case that precision medicine initiatives have added to the Pharma Majors’ ability to extend their OL status through access to better targeted, more efficacious  drugs, diagnostics, and technology.


In our context, organizational legitimacy (OL) can be defined as the extent to which industry actors perceive an organization as a central player whose influence extends beyond its ability to shape industry dynamics. It is also aligned with the accepted existing culture, norms and values within the industry ecosystem. Examples of organizations which are perceived as having high OL within their industry are Apple, Coca Cola and Merck. These organizations experience a “taken for granted” or “high trust” status associated with their strategic actions. For example, the launch of new products, entry into new markets, and R&D spending on uncertain technologies are viewed as legitimate and worthy of investment.

Stakeholders take for granted  that  these firms are the industry’s insiders and will maintain that status. Indeed, high OL influences other organizations within the same ecosystem to recognize the Majors’ strategic actions as legitimate. For example, firms with high OL within their industry are perceived as having better insider knowledge, R&D data, and marketing capabilities. This perception in effect further endows the Majors with superior orchestration and acquisition capabilities, enabling them to develop and launch new products with a greater probability of success. The strategic advantages of OL provide a buffer against failure, and a platform upon which to take greater risk. OL tends to be established slowly and may take a long time to achieve; however, once a firm achieves this status, it tends to remain relatively stable over time.

Essentially, OL confers on Majors the ability to create stabilizing networks of partners, suppliers, talent, and financial institutions (see Figure 1; note all figures posted at the end of the article). Such stabilizing networks generate an equilibrium dynamic thereby creating financial confidence that spurs the investment essential for business. In short, Majors have leave to pursue strategic options that are not available to other firms due to the favorable way they are perceived by relevant stakeholders.

Stabilizing networks created by OL are likely to be further enhanced as the era of precision medicine expands. Technological advancements in patient-specific data generation, storage and interrogation will drive advancements in precision medicine. These advancements are likely to be generated by smaller more focused and innovative companies. Companies with OL, as major gatekeepers of large clinical data sets, experienced development teams, and global marketing power, are attractive partners for these smaller companies to realize the impact of their precision medicines. Such partnerships with Majors can arise through mechanisms like licensing deals, joint ventures, or acquisitions.

What goes into establishing OL?

We examined this phenomenon in the context of biopharmaceuticals, an industry which is organized as a global oligopoly. In this industry, Majors have been colloquially called “Big Pharma.” We identify Majors as those firms that have established OL on a media-based metric of legitimacy.2 We show that drugs marketed by Majors are considerably more likely to reach blockbuster status than drugs marketed by non- majors. (A “drug” in this usage will mean small- molecule compounds, biologics, vaccines, and combination therapies.) We will also see that legitimacy is conferred on Majors through their relationships with regulatory agencies as well as the number and type of agreements between Majors and non-majors in the course of sharing confidential data and developing and marketing novel medicines.

Furthermore, we note  that  non-majors must rely on the inherent characteristics of the product itself, while Majors are able to create blockbusters from breakthrough and non-breakthrough products alike. In fact, Majors can create blockbusters from products licensed or acquired from non-majors. This makes deals between Majors and non-majors attractive for both parties. Non-majors gain from the added market potential of their product provided by their Major partner; in turn, majors gain access to and acquire cutting edge drugs discovered with resources that are not their own.

Products from non-majors that address unmet needs in smaller markets have become a key component for the advance of precision medicine. Such products are taken up by Majors looking for revenue from new market niches as well as potential applications in other therapeutic areas. Precision products by non- majors can thereby reach patients sooner; in fact, some products may not otherwise have reached markets if they were retained by non- majors.

II.  Theory

1.      Strategy basics

Extending the textbook dominant firm model

Majors generate persistently high returns relatively to other players in their respective industries. This phenomenon is particularly salient in industries requiring large R&D investments. The supernormal returns exhibited by Majors are sustained either through the exertion of market power (e.g., existing  offerings) or through innovation (e.g., novel drugs).

In R&D-intensive industries, some explanations for profitability have focused on the ability to integrate external knowledge with the accumulated knowledge over time to enhance competitive advantage. To gain that advantage, Majors excel at, first, acquiring, accumulating, analyzing, and integrating information, and, second, directing, and managing large-scale resources to reach a goal, e.g., to bring differentiated and innovative products to market (see Factors in Table 1).

As the complexity related to the development of new drugs increases, no pharmaceutical firm possesses in-house all the relevant technologies to feed its R&D initiatives. Given their favorable industry position stemming from OL, Majors can access the most relevant technologies through strategic partnerships. Non-major firms perceive the opportunity to engage in collaborations with Majors as particularly important; for example, biotechs may approach Majors under confidentiality agreements to broker research collaborations at early stages of drug development. From a non-major perspective, these collaborations present higher chances of success; from the Majors’ perspective, their position privileges them to early access to the most important, cutting- edge offerings. Because of Majors’ legitimacy status, biotechs expect Majors to respect the terms of confidentiality; Majors reciprocate by respecting the biotechs’ rights, which ensures the Majors potential access to relevant data from other biotechs in the future. (Technically, this is referred to as “rationality within a repeated game”.)

Particularly relevant in this context is the current competitive landscape of the biopharmaceutical industry. One measure is the Internal Rate of Return (IRR) on R&D investments, which has been continuously decreasing for some years (see Figure 2). Simply put, the number of new Pharma drugs approved per dollar invested in R&D over many decades has been decreasing (see the widely known inverse R&D-Productivity curve in

Figure 3). In short, this depicts more R&D dollars per year, yet a decreasing number of drugs reaching the market over time. This situation is congruent with the model described in Section II.1.

The R&D conundrum faced by the pharmaceutical industry is largely due to the increasing complexity associated with the development of new drugs and the resulting low success rate of drug approval. Consequently, Majors now place significant emphasis on orchestrating their resources to identify and access relevant technologies that can be productively incorporated into their internal development pipeline.

Another exacerbating phenomenon confronting the industry is the need to remake itself in the face of the patent expiration of many blockbuster drugs that financed projects for over twenty years. As noted, despite massive investments, the industry has introduced few new medicines from its internal research – and many more drug candidates have failed in trials or post-marketing (e.g., Vioxx). Perhaps R&D dollars are the wrong metric when assessing the productivity and overall health of the industry? If so, how should productivity be quantified? Is OL another way of measuring the overall health of the industry?

The dominant oligopoly model and pharmaceutical “Majors”

The reality of most global oligopolies is that  the core of dominant firms (that we are calling Majors), co-exist symbiotically with a large number of smaller firms. In the economics literature, this group of smaller firms has often been referred to as the “competitive fringe.” Our definition and identification of Major firms is based on the idea of OL. We operationalize it using media attention as a metric. In other words, Majors are firms that receive disproportionately high media attention. As we have noted, OL gives Majors advantages that are not available to non-majors, i.e., the firms in the competitive fringe.

In our context, OL translates to a perception that key stakeholders have about the nature, structure, and value of the activities developed by firms within their ecosystem. OL creates a sense that an organization’s status is taken for granted by audiences: it confers an aura of inevitability that can be used to an organization’s advantage.

Evaluative benchmarks of organizations with OL are scrutinized less intensively by audiences, as these benchmarks are taken for granted. OL is therefore a resource that can be employed in the pursuit of other resources, talent, technologies, and support from key stakeholders. As audiences converge on a consensus regarding the story of an organization, it becomes, to a degree, a self- fulfilling prophesy; audiences perceive the actions of a firm with OL to be appropriate and inevitable.

In the biopharmaceutical industry, the “Major” phenomenon goes beyond the domination of an industry by a small set of firms. In fact, Majors in the biopharmaceutical industry have privileged access to a host of academic centers, central labs, contract research  organizations (CROs) and highly innovative biotech companies, all of which can expedite speed to market by supporting selective aspects of clinical development. Within this dynamic, Majors benefit from their long histories and size, specifically in the form of economies of scope in R&D; in turn, smaller innovative players rely on Majors to bring their projects to market.

In such oligopolies, Majors play a key role in the industry innovation ecosystem. More importantly they focus their efforts on directing specific points of the innovation value chain. They seed innovative efforts in promising  general fields. This creates an innovation system within which Majors both access and shape new technologies and products. Thus, Majors direct innovation internally and acquire a significant percentage of innovation from the competitive fringe (I.e., products, IP, laboratory methods, IT capabilities). These innovations can be observed in the form of the large number of acquisitions  of, as well as alliances, partnering, and licensing deals with, smaller firms comprising the competitive fringe.

Consequently, the innovation of Majors has broadened from in-house activities in drug research and discovery to include licensing leads, developing licensed leads for commercialization, and then leveraging their power to market developed leads. In essence, they manage their R&D risk by outsourcing development and validation of innovative therapies (e.g., CAR-T cells, gene therapy, etc.). Finally, they step in to take drugs to the finish line.

Identifying Majors

While OL is not directly observable, there exist indirect metrics that represent the extent to which the general public is aware and accepting of an organization. This form of legitimacy can be constructed by intermediaries that form the public’s opinion of legitimate organizations.Intermediaries may include scientific journals, professional associations, and the news media. Journalists are alerted to papers and talks that accompany product releases; journalists can use materials in these forums to serve as critical evaluators, choosing what information to include in media reports and how key facts are framed.

Majors in the biopharmaceutical industry augment their status through their charitable foundations that donate money to causes (e.g., funds for rare disease foundations) and by giving drugs gratis to developing nations to address chronic and acute diseases (e.g., Merck provided Mectizan for river blindness; Merck and J&J provided Ebola vaccines). Majors’ charitable work confers a “good citizen” image that can sustain a company’s legitimacy during hard times (drug failures, recalls, or prosecution).

Consistent with our arguments, Major status is conferred as a function of OL, rather than size. Size may serve as a proxy for an insider position; however, Major firms in the biopharmaceutical industry are not necessarily the largest. For example, Boehringer Ingelheim and Amgen, both non-majors, employed 41,300 and 48,000 people respectively in 2008. By contrast, Eli Lilly and Bristol Myers Squibb, both Majors, employed 40,450 and 42,000 people respectively in that year.2

Table 2 reports the biopharmaceutical firms which we identified by Majors as well as the total number of marketed blockbusters. We also specify the origin of the drugs that achieved the blockbuster status (i.e., M&A, licensing or internal development). While the Majors tend to account for a large chunk of the industry’s total R&D investments, a relatively small percentage of blockbuster drugs in our sample were originated from internal development or early stage acquisitions (25 drugs). Instead, the majority of the blockbusters had their origins in M&As (43 drugs) or licensing deals (35 drugs).

The dominance of industry Majors in blockbuster drugs is also observed in terms of the average worldwide annual peak sales for drugs that achieve this status. While the average late stage revenue for drugs marketed by a Major is $2,483 million, for non-majors this amount is $1,978 million.

2. R&D basics

Biopharmaceuticals is one of the industries in which there is a well-functioning market for technology. On the supply side, R&D intensity is high, and technology holders rely on the presence of a strong IP regime that allows them to make technologies available for licensing and recover their investments in innovation over a period of time.

On the demand side, big biopharmaceutical firms can systematically rely on the existing market for technologies to feed and complement their internal R&D initiatives. As a result, firms use licensing to gain access to proprietary technologies, such as Abgenix’s Xenomouse or Human Genome Sciences’ gene sequencing technology, to complement their internal R&D in a range of therapeutic areas. This creates a scenario of “Division of R&D labor” between Pharma Majors specializing in systematic innovation while scanning the technology environment for research innovation undertaken by smaller firms.

This scenario of “division of R&D labor” puts Majors in a privileged position to feed their internal R&D with drugs developed by other non-major industry players (see Figure 4). The benefits of legitimacy confer on Majors a better capacity to identify and further develop new drugs which were not initially developed by themselves. Indeed, the way that Majors are perceived within the industry as more legitimate players offers them better opportunities to partner with other firms in the industry.

While our data shows that Blockbusters developed by Majors are predominantly sourced from other firms, we expect that this pattern will become even stronger in the years to come. With the increasing complexity associated with the development of new drugs (e.g., precision medicines targeted to responder populations vs a general population), Majors will become ever more likely to rely on the biopharma industry ecosystem to acquire very early stage molecules, vaccines, and biologics.

We expect this process will further deepen  the division of R&D labor putting further emphasis on the role that Majors play in orchestrating new treatments based on a process of recombining technologies and expertise currently held by different players. We can also foresee biotechs and Majors optimizing their respective organizations in this process.

The resolution of this increasingly complex identification and development  of efficacious drug combinations (dosed simultaneously or sequentially) will be informed by the ability to interrogate larger and deeper clinical data sets. One could posit that the sourcing of blockbuster treatments from “innovative” smaller entities to OL companies will be determined by sharing development and clinical data for review and valuation. Data is king in the emerging world of medicine – from drug discovery to patient treatment. OL companies in this environment may have a significant advantage in determining “winners” by who has access to their data and whose data they can access. Since these data need to be private and secure, companies with OL have an institutional advantage due to the implied degree of trust when sending data to, or more important, receiving data from partners.

Privileged data access would enhance OL for a small group of companies, but such “data silos” may not be the most efficient or cost- effective way to drive precision medicine and novel therapies across complex disease areas where there currently exists unmet medical need.

III. Breakthrough Designation, Blockbuster drugs, Precision Medicine

Scientific breakthroughs – scientific success

In the biopharmaceutical industry, the FDA offers a special “breakthrough” designation for novel drugs that offer a substantial improvement over existing therapies; address a new disease (e.g. rare disease); or treat a known condition  via a new mechanism (immuno-oncology vs chemotherapy). In this context breakthrough innovations can arise from a wide variety of sources, including entrepreneurial firms; non- major firms; or universities; among others. Other sources of innovation can arise from unexpected drug indications or technology platforms (e.g., CRISPR-Cas9).

Breakthrough innovation has a somewhat complex relationship with value creation. While the innovation literature firmly connects knowledge and the creation of value, true breakthrough innovations are rare, and radical scientific discovery is inherently distinct from mainstream knowledge. Broadening the breakthrough designation to include treatments for unmet needs or rare diseases increases the likelihood for novel drug approval; these drugs may also be considered for wider application in other disease conditions with similar mechanisms.

Knowledge, value creation, and  innovation all cost money that management balances against investing in drug development projects that may lead more directly to products. Under certain circumstances, the logic and logistics of scientific success and market success may operate at cross purposes and result in significant losses (e.g., anti-sense and RNAi technologies as drug therapies).

Breakthrough innovations introduce risks that drain extant cash flows, starving investments in development. Should new products arise from breakthroughs, companies may face years of increased spending on marketing and sales while cannibalizing sales from mature offerings. Biopharma has had this issue on two fronts recently – first, the increasing competition from “me-too” drugs coming hard on the heels of a first-in-class offering; second, the still-menacing patent cliff that precipitously cuts revenue with the introduction of generic drugs.

On the other hand, those who do not invest in breakthroughs risk obsolescence, even if payoffs take some years. In fact, the very discovery of new technology has the capacity to destabilize entire industries and simultaneously  reward early adopters. Companies with OL are, by nature, stable against disruptive technologies. Innovation groups at these organizations have the wherewithal to assess the disruption with a view to investing in, acquiring, or licensing the new technologies.

By their nature (market size, public health impact), blockbuster drugs play a key role in this industry. Between 2000 and 2005, these drugs accounted for 28 to 36 percent of total global pharmaceutical sales. As noted above, when patents on blockbuster  drugs  expire,  profits from those drugs drop rapidly. In this research we find that even after controlling for the size, age, innovative capabilities, location, and prior innovative and financial success of the drug’s controlling firm, the firm’s status as a Major has a significant impact on the probability that a drug will become a blockbuster.

We also find that legitimacy has a discontinuous impact on the likelihood of blockbuster success: the top firms benefit substantially from it, while the rest do not. This  is consistent with the notion of Majors. In our analysis, the effects of legitimacy are significant: products commercialized by Majors have a 6.4 percentage point advantage, relative to products of non-majors, in their probability of achieving blockbuster status.

Legitimacy in the era of Precision Medicine

Precision medicine is a discipline that uses data and statistical analyses to identify responder populations to a novel drug for a disease condition. (This is distinct from personal medicine in which a doctor uses a patient’s data to prescribe therapies for that patient.)

Precision medicine fits well with biotech’s niche to develop novel medicine – not just drugs but also technologies for gene sequencing, protein profiling, metabolomics, microbiomics, etc. On the other hand, Majors have access to large clinical databases (from trials) to stratify populations for responders and identify other disease areas that have potential responders to the novel drug even though the drug was not developed strictly for that application. Hence OL companies can leverage their status in collaboration with smaller, more agile and innovative partners to introduce new precision medicine products.

Concluding discussion

We use evidence from the biopharmaceutical industry to show that a product’s likelihood of becoming a blockbuster significantly increases when it is controlled by a Major. Thus, Major status captures something over and above the important drivers of firm success that have been identified in the literature. This means that Pharma Majors excel at:

  • selecting from amongst markets for major public health needs and a large set of scientific successes to identify drugs / therapies that have the best chance of achieving blockbuster status in the market;
  • implementing the commercialization and/ornramping up of the prospects of these drugs/ therapies.

A particularly salient example of how Majors shape the industry can be found in the evolution of the drug Lipitor. Lipitor is a me-too statin used to treat high cholesterol that was discovered at Warner Lambert’s Parke Davis division in 1985. The product was not readily seen as a breakthrough innovation and was nearly canceled. The existing statin market was well established at the time of Lipitor’s discovery. However, Lipitor had one potential advantage: its lowest dose was more effective than the highest dose of its competitors.

In 1996, as the drug neared its launch, Warner Lambert was a large firm, with 38,000 employees. However, it was not a Major, and would not ultimately become a Major. Warner Lambert struck a marketing agreement with Pfizer, seeking to leverage Pfizer’s status as a Major.

At launch, projections of the alliance suggested that Lipitor would generate $300 million in worldwide revenue. Pfizer added a key positioning argument to help market Lipitor to the medical community: its relative efficacy allowed doctors to prescribe lower doses. Within a year post-launch, Lipitor reached 18 percent market share.

By 2000, with a clearer picture of Lipitor’s potential, Pfizer acquired Warner Lambert for$90 billion. Lipitor went on to bring in more than $13 billion in global revenues per year. While it is impossible to know what could have happened, it is unlikely that Warner Lambert could have pushed Lipitor to the heights it achieved under Pfizer. On the basis of the analysis in this paper, we contend that Pfizer’s legitimacy lent Lipitor a sense of safety that it would not have had under Warner Lambert. JoPM

One indication of OL is the case in which a biotech is preparing to file a novel drug with the FDA for approval. Biotechs need to weigh the costs and time for final approval in light of their limited resources. Biotechs may turn to funding sources or a partnership with a Big Pharma; both options come with a price. Biotechs that turn to Big Pharma for a partnership hope to gain from a Major’s long-standing history with the FDA. Big Pharma also has resources to cover the cost of filing, execution of trials, and associated costs and fees of managing relations with the Agency. Furthermore, Majors can effectively buy time; in 1992, the US Congress passed the Prescription Drug User Fee Act (PDUFA), a law that allows the FDA to collect fees from drug manufacturers to fund the new drug approval process in a timely manner. Cash-rich Majors pay the fee to move up the review waiting line. The biotech trades off rights to the drug in exchange for a faster review and better relations with FDA throughout the review process. In this case, the Major has again used its OL to bring innovation into its product portfolio.]


This paper draws on research from Hannigan, T.J., Mudambi. R., and Sfekas, (2013). ‘A longitudinal analysis of blockbuster pharmaceutical drugs’. DRUID Winter Academy Paper 982.

Ram Mudambi is the Frank M. Speakman Professor of Strategy at the Fox School of Business, Temple University, Philadelphia, USA. Previously he served on the faculties of Case Western Reserve University, the University of Reading in England, and the University of North Carolina – Chapel Hill. He received his Ph.D. from Cornell University. His current research focuses on the geography of innovation particularly in the context of emerging economies. He is a Fellow of the Academy of International Business (AIB) and of the European International Business Academy (EIBA). He has published over 100 peer reviewed research papers. His work has appeared in the Journal of Political Economy, the Journal of Economic Geography, the Strategic Management Journal and the Journal of International Business Studies among many others. His practitioner pieces have appeared in the Harvard Business Review, the Sloan Management Review, and the California Management Review. His media appearances include the New York Times, The Atlantic magazine, National Public Radio and numerous local radio and TV programs.

Solon Moreira is an assistant professor of strategy and entrepreneurship at Fox School of Business, Temple University. He received his PhD from Copenhagen Business School. Using the Biopharmaceutical industry as an empirical context, his research examines the link between innovation and firm performance. He is particularly interested in understanding how firms can tap into external sources of knowledge to adjust to a changing technological landscape.

Michael Carleton is currently Vice President of Translational Medicine at Inipharm Inc. He obtained his B.A. and Ph.D. in microbiology from the University of Texas at Austin and was a Cancer Research Institute Postdoctoral Fellow and Young Arthritis Investigator at Fox Chase Cancer Center. Subsequent to his postdoctoral research, Michael served in a variety of R&D roles in biotech (Rosetta Inpharmatics, Matrix Genetics, Presage Biosciences, Mavupharma) and pharma (Merck and Bristol-Myers Squibb). Michael’s research interests have spanned the entire oncology translational medicine spectrum from preclinical target validation and biomarker ID to Phase II/III clinical development. He has published over 30 peer reviewed research papers within a diverse set of scientific disciplines including oncology, immunology, genomics, virology and bacteriology. Michael is an inventor on over 10 patents, he has served as a reviewer for numerous journals and as a reviewer for the NCI special emphasis study section: SBIR Phase II Bridge Awards to Accelerate the Development of New Cancer Therapies, Biomarkers and Cancer Imaging Technologies Toward Commercialization. Most recently, Michael served as the Bristol-Myers Squibb representative on the joint steering committee for FNIH Partnership for Accelerating Cancer Therapies (PACT).

Thomas L. Fare is currently the Senior Editor of the Journal of Precision Medicine. He also supports PlanetConnect as a Director of Strategic Alliances. Prior to his current roles, Dr Fare spent over 13 years with Merck & Co. and over 30 years in a variety of biotechnology and technology positions. He received his PhD in Electrical Engineering and Science at the University of Pennsylvania. He has authored or co-authored peer-reviewed papers in fields ranging from circuit design to gene profiling technologies. He uses his extensive experience in researching current topics to identify emerging technologies and cutting-edge research. Based on these searches, he identifies and engages potential authors and speakers on topics that address unmet needs in precision medicine.

Figure 1: Biopharmaceutical Industry Ecosystem

Figure 2: Internal Rate of Return in R&D Investments

Figure 3: Number of Drugs approved per billion dollars R&D
Source: Motlagh, H.N. (2018).
A paradoxical trend in drug development.
Accessed February 21, 2020..

Figure 4: R&D Funnel in the Biopharmaceutical Industry


1. Chesbrough, H. W. (2011). Open innovation: The new imperative for creating and profiting from technology. Boston, Mass: Harvard Business School Press.

2. To calculate the legitimacy of a firm and subsequently identify the Majors, we used the Lexis Nexis database. For each firm, we conducted a search of the firm’s name and the term “pharmaceutical”. This search was conducted with a beginning date of 1980, and a concluding date of the peak sales year of the associated drug in our database. The number of stories in which the firm appeared was aggregated for each year, generating a cumulative total of the media mentions. For firms that were the result of mergers, the cumulative totals were combined (i.e., Bristol Myers and Squibb were combined for the years after the 1989 merger). To identify Majors, we took the 90th percentile of the continuous measure in a given year of media legitimacy, and coded firms above it as being Major firms.