Rival Signals and Project Selection: Insights from the Drug Discovery Process

Markou, P., Kavadias, S., & Oraiopoulos, N. (2023). Rival signals and project selection: Insights from the drug development process. Management Science.

76 Pages Posted: 16 Aug 2018 Last revised: 16 Feb 2023

See all articles by Panos Markou

Panos Markou

University of Virginia - Darden School of Business

Stelios Kavadias

Cambridge Judge Business School

Nektarios Oraiopoulos

University of Cambridge - Judge Business School

Date Written: September 2022

Abstract

Project selection decisions are complex because they must balance not only financial returns, project risk, and fit with strategy, but also competitive circumstances. A rival's project development efforts provide two pieces of information: a market rivalry signal, indicating potentially heightened competition in a market, and a technological signal, indicating a possible solution to a problem in that market. We hypothesize that these signals affect a firm's likelihood of project selection in opposite directions, and that the timing of the signals matters for selection. We examine the drug development pipelines of the top 15 pharmaceutical companies from 1999--2016 to examine how rival projects drive the decision to progress a drug from pre-clinical laboratory trials to clinical trials in humans. Early-stage rival projects provide a stronger market rivalry signal, and they are associated with a decreased likelihood of the firm selecting its own project to compete in the same market. Late-stage rival projects signal technological feasibility and are associated with an increase in the likelihood of selection. We then exploit heterogeneity in market potential (i.e., disorder prevalence/incidence) and a molecular compound's technology (i.e., therapeutic modality) to independently manipulate the salience of the two signals. Finally, we provide evidence on how selection based on rival signals informs project success. Information from rival projects prompts the selection of more successful drugs, but only after a threshold when sufficient uncertainty has been resolved.

Keywords: project selection, new product development, spillovers, competition, R&D management, pharmaceutical industry, empirical

Suggested Citation

Markou, Panos and Kavadias, Stylianos and Oraiopoulos, Nektarios, Rival Signals and Project Selection: Insights from the Drug Discovery Process (September 2022). Markou, P., Kavadias, S., & Oraiopoulos, N. (2023). Rival signals and project selection: Insights from the drug development process. Management Science., Available at SSRN: https://ssrn.com/abstract=3225056 or http://dx.doi.org/10.2139/ssrn.3225056

Panos Markou (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Stylianos Kavadias

Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Nektarios Oraiopoulos

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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