Developing Novel Drugs

124 Pages Posted: 5 Jan 2018 Last revised: 27 Apr 2020

See all articles by Joshua Krieger

Joshua Krieger

Harvard University - Business School (HBS)

Danielle Li

Massachusetts Institute of Technology (MIT)

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 29, 2017

Abstract

We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical and
novel innovation. We do so by introducing a new measure of novelty: a drug candidate is novel
if it is molecularly distinct from prior candidates. Using our measure, we show that firms face a
risk-reward tradeoff when investing in novel drugs: while novel drug candidates are less likely to
be approved by the FDA, they are based on patents with higher indicators of value. Consistent
with a simple model of costly external finance, a plausibly exogenous positive shock to firms’ net
worth leads the development of novel (and riskier) drug candidates. This pattern suggests that
even large public firms behave as though they are risk averse, reducing their willingness to invest
in potentially valuable radical innovation.

Keywords: Drug Development, Innovation, Research & Development

JEL Classification: O31, O32, O34, G32, L25, D22

Suggested Citation

Krieger, Joshua and Li, Danielle and Papanikolaou, Dimitris, Developing Novel Drugs (December 29, 2017). Available at SSRN: https://ssrn.com/abstract=3095246 or http://dx.doi.org/10.2139/ssrn.3095246

Joshua Krieger (Contact Author)

Harvard University - Business School (HBS) ( email )

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Morgan 270C
Boston, MA 02163
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617-495-5864 (Phone)

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facid=951435

Danielle Li

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Dimitris Papanikolaou

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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