Missing Novelty in Drug Development
Name
hhab024.pdf
Description
Published version
Size
858.39 KB
Format
Adobe PDF
Checksum (MD5)
5544360ee031c4ca9dc4d1423055c362
Author(s)
Krieger, Joshua
Li, Danielle
Papanikolaou, Dimitris
Date Issued
2022
Journal
Review of Financial Studies
Publisher
Oxford University Press (OUP)
Citation
Krieger, Joshua, Li, Danielle and Papanikolaou, Dimitris. 2022. "Missing Novelty in Drug Development." Review of Financial Studies, 35 (2).
Version
Final published version
Abstract
Abstract
We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We introduce a new measure of drug novelty based on chemical similarity and show that firms face a risk-reward trade-off: novel drug candidates are less likely to obtain FDA approval but are based on more valuable patents. Consistent with a simple model of costly external finance, we show that a positive shock to firms’ net worth leads firms to develop more novel drugs. This suggests that even large firms may behave as though they are risk averse, reducing their willingness to investment in potentially valuable radical innovation.
We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We introduce a new measure of drug novelty based on chemical similarity and show that firms face a risk-reward trade-off: novel drug candidates are less likely to obtain FDA approval but are based on more valuable patents. Consistent with a simple model of costly external finance, we show that a positive shock to firms’ net worth leads firms to develop more novel drugs. This suggests that even large firms may behave as though they are risk averse, reducing their willingness to investment in potentially valuable radical innovation.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution 4.0 International license
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DOI of Published Version
https://doi.org/10.1093/RFS/HHAB024
