Rival Signals and Project Selection: Insights from the Drug Discovery Process
80 Pages Posted: 16 Aug 2018 Last revised: 2 Nov 2021
Date Written: October 2021
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, which indicates 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 focal firm's likelihood of project selection in opposite directions. We leverage a unique database comprising the drug development pipelines of the top 15 pharmaceutical companies between 1999 and 2016 to examine how rival projects drive the decision to progress a drug from pre-clinical laboratory trials to clinical trials in humans. We find that 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 refine our main result by exploiting heterogeneity in market potential (i.e., disorder prevalence/incidence) and a molecular compound's technology (i.e., therapeutic modality) in order 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
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