When a Competitor Abandons the Market, Should You
Advance or Retreat?
Companies pay close attention when a
competitor drops out of the market, according to new research by Joshua
Lev Krieger. Too often, though, they come to the wrong conclusion.
In late 2016 drug maker Eli Lilly announced it would stop
research on the Alzheimer's drug solanezumab after results proved disappointing
over three trials. For competitors such as Biogen, Merck, and Roche, this
decision presented an interesting dilemma.
Should they view Lilly’s exit as an opportunity to redouble
their efforts and grab more market share, or take it as a warning that it might
be time to get out while the getting was good?
A new research study suggests that more companies than expected
see a half-empty glass when a direct competitor exits the same market, and
leave themselves. Furthermore, that decision to abandon ship is often the wrong
decision.
“There is potentially a great market opportunity when a
competitor drops out,” says Joshua Lev Krieger, an assistant professor in the Entrepreneurial Management
Unit at Harvard Business School. “Based on my economics training, I thought
these positive market forces might counterbalance or dominate any potential
learning or herding behavior. But it turns out that, on average, the perception
of increased failure risk is stronger than the draw of less competition.”
In the November 2017 research paper Trials
and Terminations: Learning from Competitors’ R&D Failures ,
Krieger explores how pharmaceutical companies choose to react
strategically when a competitor exits the market during the development stage.
These companies may decide further investment is not warranted for any number
of reasons including poor test results, changing market conditions,
deteriorating financials of the host company, or escalating project costs.
Krieger chose to focus on drug development, in part, because in
the United States companies follow a well-defined, three-phase approval process
governed by the Food and Drug Administration. He looked most closely at
decisions made during phase two clinical trials—the period when diseased
patients are treated with the test drug and results are compared with patients
randomly receiving a placebo. The trials can last months or years and cost many
millions of dollars.
The study looked at 6,182 drugs, 325 markets, and 10,637
drug-indications, or projects. Krieger examined how projects react to
competitor failure in three types of situations: products in the same market
but using different technology; those in the same market with the same
technology; and products competing in different markets but using the same
technology.
Among the findings:
·
Companies were more than twice as likely to end development on a
drug if a competitor in the same market using the same technology decided to
drop out. When the competitor was in a different market but using the same
technology, firms had an 18 percent increase in the probability that they would
pull out. There was no significant change in the same market/different
technology grouping.
·
The decision to end a project after a competitor pulls out is
often wrong, an overreaction. “There is some evidence that those projects
that continued after experiencing same market/same technology competitor
failure news enjoy a better success rate than continuing projects that did not
experience such news," Krieger says. "That implies that too many
projects are abandoned after that type of news because the remaining pool of
projects is higher quality than in technology areas without failure news."
·
Based on regression analyses, Krieger estimates at least 129 of
the terminated projects in his study would have continued if not for learning
about same-technology competitor failures. “This analysis does not reveal
whether these additional terminations are wise choices, but it helps to
illustrate how the disclosure channel has a meaningful impact on competition
and many millions of dollars of R&D investment decisions.”
“People in the industry say, ‘Yes, we’re watching competitors
who are developing drugs that are the most similar to ours’—that means the same
disease and same mechanism of action—‘and we’re ready to react when they have a
result.’” (Acting on your competitor’s actions isn’t always so cut-and-dried,
Krieger notes. Some projects are never officially discontinued by their parent
company, in effect continuing as “zombie projects.”)
For future study, Krieger wants to investigate the relationship
between financial markets and drug development decisions—pulling out of trial
can be hazardous to a drug maker’s market cap. In 2006, Pfizer pulled the plug
on its cholesterol drug torcetrapib, then in Phase 3 studies, and the company’s
stock nosedived, costing a staggering $21 billion in market value, according to
the study.
“One of the projects I’m working on now is trying to understand
how the financial markets view this type of news,” he says. “And if can we
measure whether there’s overreaction.”
by Rachel Layne
https://hbswk.hbs.edu/item/when-a-competitor-abandons-the-market-should-you-advance-or-retreat?cid=spmailing-19003434-WK%20Newsletter%2002-21-2018%20(1)-February%2021,%202018
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