Published: April 07, 2004 in Knowledge@Wharton When faced with the challenge of commercializing its AIDS drug, Trimeris Inc., a small biotech company based in Durham, N.C., didn’t hire a sales force or sink money into marketing. Instead, it called in Hoffman-La Roche Inc., the Swiss pharmaceutical giant. In 1999, tiny Trimeris and burly Roche hammered out an agreement under which Roche agreed to put its production and marketing might behind Trimeris’ drug, called Fuzeon, in exchange for a piece of the profits. In January, the two companies announced that they were extending their partnership. 

 

David Hsu, a Wharton management professor who specializes in studying entrepreneurship, says this sort of arrangement has become common in the drug industry. Small biotechs such as Trimeris innovate, creating promising drugs and vaccines, while big drug companies such as Roche look to partner with them, lending their heft to the biotechs’ promise. 

 

In a co-authored paper entitled, When Does Start-up Innovation Spur the Gale of Creative Destruction, Hsu argues that this sort of cooperation belies the popular idea of technological innovation. In the usual formulation, start-ups sneak in with new products and swipe sales from incumbent leaders. As a result, the innovators grow, while the older companies stagnate, even shrink. That’s certainly been the case in the hard-drive industry, for example, and in online retailing.

 

But sometimes the market operates more benignly, with new entrants such as Trimeris cooperating with established players such as Roche. Suddenly, the gale of creation doesn’t look so destructive.

 

Understanding what leads some start-ups to choose cooperation over competition was the impetus for Hsu’s article, written with co-authors Joshua Gans at the University of Melbourne in Australia and Scott Stern at Northwestern University, and published in the RAND Journal of Economics.
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