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    Developing Novel Drugs
    09 Feb 2018Working Paper Summaries

    Developing Novel Drugs

    by Joshua Krieger, Danielle Li, and Dimitris Papanikolaou
    This paper contributes to our understanding of how financing constraints affect the direction of innovation in drug development. The authors develop a new measure of drug novelty based on molecular characteristics, and explore the tradeoffs involved in decisions to develop more novel therapies.
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    Author Abstract

    We analyze firms' decisions to invest in incremental and radical innovation, focusing specifically on pharmaceutical research. We develop a new measure of drug novelty that is based on the chemical similarity between new drug candidates and existing drugs. We show that drug candidates that we identify as ex-ante novel are riskier investments, in the sense that they are subsequently less likely to be approved by the FDA. However, conditional on approval, novel candidates are, on average, more valuable-they are more clinically effective; have higher patent citations; lead to more revenue and to higher stock market value. Using variation in the expansion of Medicare prescription drug coverage, we show that firms respond to a plausibly exogenous cash flow shock by developing more molecularly novel drug compounds, as opposed to more so-called "me-too" drugs. This pattern suggests that, on the margin, firms perceive novel drugs to be more valuable ex-ante investments but that financial frictions may hinder their willingness to invest in these riskier candidates.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: January 2018
    • HBS Working Paper Number: HBS Working Paper #18-056
    • Faculty Unit(s): Entrepreneurial Management
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    Joshua Lev Krieger
    Joshua Lev Krieger
    Assistant Professor of Business Administration
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