Drug companies are more likely to keep research and development (R&D) in-house, rather than outsource it, when they already have patented drugs on the market in the same therapeutic area, and especially when those patents still have years of protection left, according to a new study co-authored by Lucy Xiaolu Wang, assistant professor in the Department of Resource Economics.

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The reason: To avoid what economists call “cannibalization,” or competing with themselves.

Wang and co-authors Thomas Jungbauer, Sean Nicholson and Michael Waldman of Cornell University and June Pan of Visa examine how companies organize drug development in a way that protects their most profitable products. The paper is published in the American Economic Journal: Microeconomics.

When a company has a blockbuster drug under patent, it doesn’t want a new drug—even one it’s developing—to eat into those profits. So, it keeps tighter control over the process.

Using data from the pharmaceutical industry, the study found companies are less likely to outsource R&D when they have other patented drugs in the same therapeutic class. They’re especially cautious if those patents still have years left before they expire.

The research also indicates that when development is done in-house, companies are more likely to stay focused on the original goal of the project. In contrast, outsourced projects are more likely to change direction during development.

That control matters. By developing drugs internally, firms can shape how similar the new treatment is to existing ones, potentially limiting “cannibalization,” where a new product steals sales from an older one.

The research draws on data from more than 11,000 drug development projects between 1989 and 2004, using detailed information about patent ownership, outsourcing and drug classifications. The findings were consistent across multiple tests, even after accounting for company size and experience.

The authors argue that common explanations for why companies choose to outsource, such as cutting costs and access to specialized expertise, don’t tell the whole story. A bigger factor, the study suggests, is how a firm's own patent portfolio shapes the decision.

While focused on pharmaceuticals, the researchers say the findings could apply to other industries where companies must carefully balance innovation with protecting existing products.