Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms

48 Pages Posted: 14 Dec 2004 Last revised: 17 Nov 2022

See all articles by Ilan Guedj

Ilan Guedj

Bates White, LLC

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

This paper compares the clinical trial strategies and performance of large, established ("mature") biopharmaceutical firms to those of smaller ("early stage") firms that have not yet successfully developed a drug. We study a sample of 235 cancer drug candidates that entered clinical trials during the period 1990-2002 and were sponsored by public firms. Early stage firms are more likely than mature firms to advance drug candidates from Phase I to Phase II clinical trials. However, early stage firms have much less promising clinical results in their Phase II trials and their Phase II drug candidates are also less likely to advance to Phase III and to receive Food and Drug Administration approval. This pattern is more pronounced for early stage firms with large cash reserves. The evidence points to an agency problem between shareholders and managers of single-product early stage firms who are reluctant to abandon development of their only viable drug candidates. By contrast, the managers of mature firms with multiple products in development are more willing to drop unpromising drug candidates. The findings appear to be consistent with the benefits of internal capital markets identified by Stein (1997).

Suggested Citation

Guedj, Ilan and Scharfstein, David S., Organizational Scope and Investment: Evidence from the Drug Development Strategies and Performance of Biopharmaceutical Firms (November 2004). NBER Working Paper No. w10933, Available at SSRN: https://ssrn.com/abstract=625564

Ilan Guedj

Bates White, LLC ( email )

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David S. Scharfstein (Contact Author)

Harvard Business School - Finance Unit ( email )

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