Making more of less: using divestitures to unlock pharmaceutical innovation

Abstract

Pharmaceutical managers have been encouraged to look to acquisitions and alliances for innovation. However, the literature warns that the capacity of a company to 'absorb' new knowledge is limited. Here, we introduce corporate divestitures as a tool for freeing up managerial attention. We build a sample of 349 companies, which announced 1784 divestitures and filed 63523 patents, over a 15-year period. We show that innovating companies that divest more produce more and improved patents, and those that divest to create corporate focus also produce more breakthroughs. In doing so, we introduce divestitures as an innovation tool, highlight the importance of the absorptive capacity of a company when discussing innovation, and add nuance to the discussion on external tools for innovation.

Keywords: Breakthrough innovation; Corporate divestitures; Innovation; Mergers and acquisitions; Patent quality; Patent quantity; Patents; Strategic alliances.