Missing Novelty in Drug Development / Joshua L. Krieger, Danielle Li, Dimitris Papanikolaou.

Format:

Book

Author/Creator:

Krieger, Joshua L.

Contributor:

National Bureau of Economic Research.

Li, Danielle.

Papanikolaou, Dimitris.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24595.

NBER working paper series no. w24595

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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.

Notes:

Print version record

May 2018.