Developing Novel Drugs

106 Pages Posted: 5 Jan 2018

See all articles by Joshua Krieger

Joshua Krieger

Harvard Business School

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 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

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 Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
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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