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

66 Pages Posted: 17 Sep 2018 Last revised: 5 Dec 2018

See all articles by Joshua Krieger

Joshua Krieger

Harvard Business School

Xuelin Li

University of Minnesota - Twin Cities, Carlson School of Management

Richard T. Thakor

University of Minnesota - Carlson School of Management

Date Written: December 2, 2018

Abstract

How do R&D-intensive firms react to negative shocks to their existing products? We explore this question using detailed project-level data from drug development firms. Using FDA Public Health Advisories as an exogenous and idiosyncratic negative shock to approved drugs, we examine how firms and their competitors react in terms of their R&D investment and financing decisions. We document that these negative shocks lead affected firms to increase R&D expenditures, which they finance with debt. In terms of investment behavior, these shocks increase the likelihood of affected firms acquiring drug projects from other firms, rather than developing new projects internally. Examining the channels behind this increase in R&D in-licensing, we explore heterogeneity in treatment effects and competitor spillovers. We find that competitors move resources away from affected therapeutic areas and into more exploratory projects, after indirectly experiencing these shocks. Rather than turning to external acquisitions, these competing firms appear to reshuffle their own drug portfolios—moving resources away from the affected therapeutic area and into more exploratory projects.

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 (December 2, 2018). 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 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

Xuelin Li

University of Minnesota - Twin Cities, Carlson School of Management ( email )

Minneapolis, MN
United States

Richard T. Thakor (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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