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Missing Novelty in Drug Development

Joshua L. Krieger, Danielle Li and Dimitris Papanikolaou ()

No 24595, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G31 I10 O3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea and nep-ino
Date: 2018-05
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