In a world of hypercompetition and commoditization, innovation is crucially important for the success and survival of organizations.  Indeed, the vast majority of top executives consider innovation to be one of their companies’ top strategic priorities for driving growth. Fewer than half, however, are satisfied with the financial returns on their investments in innovation. This is not particularly surprising as the most common outcomes of innovation endeavours are research and development failures. Declining R&D productivity is the single greatest challenge facing the healthcare sector.
 
Accordingly, the inadequate state of Big Pharma’s drug pipeline has received plenty of recent attention in these pages. As development costs approach $2 Billion per approved drug, the industry is struggling to find new drugs before older drugs face competitions from generics. Currently, the lion’s share of revenues in the industry comes from a small number of drugs that exceed revenues of $1 Billion per year, known as “Blockbusters”.
 
Knowledge related to R&D successes typically spills over through publications and reports (e.g., academic journals, media, patents), as well as direct attempts to reverse engineer products once they become available in the market place. Knowledge related to R&D failures – the most pervasive R&D outcome -- is rarely distributed. Yet, “knowledge about research failures can be useful to others, since it may suggest novel lines of approaching a problem and at least permits avoidance of the same mistakes.”   Given the value of avoiding similar mistakes, and the inefficiency of the distribution of R&D failures it seems that designing a market where firms could trade this knowledge would create value.  Surprisingly, research and practice have shied away from this idea. As a first step to address this gap, we articulate the viability and potential impacts of a market for R&D failures. Firms participating in this market will increase their individual financial returns from R&D investments, and expedite the process of bringing new drugs to market. As a result, society will benefit from the ability to treat a larger array of diseases at a lower cost.  This study aims to explore how firms collaboration can help economize on the need to generate knowledge? Explain the characteristics of a market for R&D failures, and enhance our understanding how incentives and collaboration mechanism work in organizations?  We have chosen to illustrate these extraordinary implications through the prism of the pharmaceutical industry, which has strong incentives to develop a market for R&D failures. That said our framework translates to any industry in which breakthrough innovations are necessary.