Find and Replace: R&D Investment Following the Erosion of Existing Products

87 Pages Posted: 17 Sep 2018 Last revised: 24 Jul 2020

See all articles by Joshua Krieger

Joshua Krieger

Harvard University - Business School (HBS)

Xuelin Li

University of South Carolina - Darla Moore School of Business

Richard T. Thakor

University of Minnesota - Carlson School of Management; Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Date Written: May 19, 2020

Abstract

How do innovative firms react when existing products experience negative shocks? We explore this question with detailed project-level data from drug development firms. Using FDA Public Health Advisories as idiosyncratic negative shocks to approved drugs, we first examine how drug makers react through investment decisions. Following these shocks, affected firms increase R&D expenditures, driven by a higher likelihood of acquiring external innovations, rather than developing novel projects internally. Such acquisition activities are concentrated in firms with weak research pipeline. We also find that competing developers move resources away from the affected therapeutic area and into exploratory projects. Our results have important implications about how firms’ commercialization capital investments affect their subsequent R&D decisions.

Keywords: R&D Investments, Drug Development, Product Shocks, M&A, Biopharmaceutical Industry, FDA

JEL Classification: D22, G31, G34, L21, L65, O32, O34, O38

Suggested Citation

Krieger, Joshua and Li, Xuelin and Thakor, Richard T., Find and Replace: R&D Investment Following the Erosion of Existing Products (May 19, 2020). Harvard Business School Entrepreneurial Management Working Paper No. 19-058, Available at SSRN: https://ssrn.com/abstract=3240344 or http://dx.doi.org/10.2139/ssrn.3240344

Joshua Krieger

Harvard University - Business School (HBS) ( 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

Xuelin Li

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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