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Missing Novelty in Drug Development

Author

Listed:
  • Joshua L. Krieger
  • Danielle Li
  • Dimitris Papanikolaou

Abstract

This paper provides evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We define a drug candidate as novel if it is molecularly distinct from prior candidates. Using our measure, we show that firms face a risk-reward tradeoff when investing in novel drugs: while novel drug candidates are less likely to be approved by the FDA, they are based on patents with higher indicators of value. We show that–counter to the predictions of frictionless models–firms respond to a plausibly exogenous positive shock to their net worth by developing more of these riskier novel candidates. This pattern suggests that financial market imperfections may lead even large public firms to behave as though they are risk averse, therefore hindering their willingness to invest in potentially valuable novel drugs.

Suggested Citation

  • Joshua L. Krieger & Danielle Li & Dimitris Papanikolaou, 2018. "Missing Novelty in Drug Development," NBER Working Papers 24595, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24595
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    Cited by:

    1. Joshua Graff Zivin & Elizabeth Lyons, 2021. "The Effects of Prize Structures on Innovative Performance," AEA Papers and Proceedings, American Economic Association, vol. 111, pages 577-581, May.
    2. Howell, Sabrina & Rathje, Jason & Van Reenen, John & Wong, Jun, 2021. "Opening up Military Innovation:Causal Effects of 'Bottom-Up' Reforms to U.S. Defense Research," CEPR Discussion Papers 16063, C.E.P.R. Discussion Papers.
    3. Margaret K. Kyle, 2019. "The Alignment of Innovation Policy and Social Welfare: Evidence from Pharmaceuticals," NBER Chapters, in: Innovation Policy and the Economy, Volume 20, pages 95-123, National Bureau of Economic Research, Inc.
    4. Pierre Azoulay & Danielle Li, 2020. "Scientific Grant Funding," NBER Working Papers 26889, National Bureau of Economic Research, Inc.
    5. Richard Carson & Joshua S. Graff Zivin & Jordan Louviere & Sally Sadoff & Jeffrey G. Shrader Jr, 2020. "The Risk of Caution: Evidence from an R&D Experiment," NBER Working Papers 26847, National Bureau of Economic Research, Inc.
    6. Zivin, Joshua Graff & Lyons, Elizabeth, 2021. "ECONOMICS OF INNOVATION The Effects of Prize Structures on Innovative Performance," University of California at San Diego, Economics Working Paper Series qt8637337w, Department of Economics, UC San Diego.
    7. Pierre Azoulay & Danielle Li, 2020. "Scientific Grant Funding," NBER Chapters, in: Innovation and Public Policy, National Bureau of Economic Research, Inc.
    8. Arts, Sam & Hou, Jianan & Gomez, Juan Carlos, 2021. "Natural language processing to identify the creation and impact of new technologies in patent text: Code, data, and new measures," Research Policy, Elsevier, vol. 50(2).

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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • I10 - Health, Education, and Welfare - - Health - - - General
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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