Missing Novelty in Drug Development

115 Pages Posted: 16 May 2018

See all articles by Joshua Krieger

Joshua Krieger

Harvard Business School

Danielle Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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: May 2018

Abstract

This paper provides evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We define a drug candidate as 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. We show that–counter to the predictions of frictionless models–firms respond to a plausibly exogenous positive shock to their net worth by developing more of these riskier novel candidates. This pattern suggests that financial market imperfections may lead even large public firms to behave as though they are risk averse, therefore hindering their willingness to invest in potentially valuable novel drugs.

Suggested Citation

Krieger, Joshua and Li, Danielle and Papanikolaou, Dimitris, Missing Novelty in Drug Development (May 2018). NBER Working Paper No. w24595. Available at SSRN: https://ssrn.com/abstract=3177954

Joshua Krieger (Contact Author)

Harvard Business School ( email )

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

Danielle Li

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
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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