Biopharmaceutical R&D outsourcing: Short-term gain for long-term pain?

•Since 1980, pharma has delivered much better financial returns than biotech despite ceding share of the pipeline and the end market for medicines.•Game theory provides a new explanation for this puzzle, by analysing the trade in different kinds of R&D knowledge.•For R&D knowledge with large spillovers and economies of scope, downstream customers capture all the value created by the trade.•Simultaneously, downstream customers can transfer financial risk to the upstream biotech partners.•This depresses biotech returns and weakens incentives to invest in the technologies that may provide the biggest long term gains.