Developing Novel Drugs
106 Pages Posted: 5 Jan 2018
Date Written: December 29, 2017
We analyze firms' decisions to invest in incremental and radical innovation, focusing specifically on pharmaceutical research. We develop a new measure of drug novelty that is based on the chemical similarity between new drug candidates and existing drugs. We show that drug candidates that we identify as ex-ante novel are riskier investments, in the sense that they are subsequently less likely to be approved by the FDA. However, conditional on approval, novel candidates are, on average, more valuable -- they are more clinically effective; have higher patent citations; lead to more revenue and to higher stock market value. Using variation in the expansion of Medicare prescription drug coverage, we show that firms respond to a plausibly exogenous cash flow shock by developing more molecularly novel drug compounds, as opposed to more so-called "me-too" drugs. This pattern suggests that, on the margin, firm perceive novel drugs to be more valuable ex-ante investments, but that financial frictions may hinder their willingness to invest in these riskier candidates.
Keywords: Drug Development, Innovation, Research & Development
JEL Classification: O31, O32, O34, G32, L25, D22
Suggested Citation: Suggested Citation