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      Find and Replace: R&D Investment Following the Erosion of Existing Products
      19 Dec 2018Working Paper Summaries

      Find and Replace: R&D Investment Following the Erosion of Existing Products

      by Joshua Krieger, Xuelin Li, and Richard T. Thakor
      This study sheds light on how product outcomes shape the direction of innovation and markets for technology. In the drug development industry in particular, negative product shocks appear to spur investment changes both within the directly affected firm and in competing firms in the same R&D markets.
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      Author Abstract

      How do R&D-intensive firms react to negative shocks to their existing products? We explore this question using detailed project-level data from drug development firms. Using FDA Public Health Advisories as an exogenous and idiosyncratic negative shock to approved drugs, we examine how firms and their competitors react in terms of their R&D investment and financing decisions. We document that these negative shocks lead affected firms to increase R&D expenditures, which they finance with debt. In terms of investment behavior, these shocks increase the likelihood of affected firms acquiring drug projects from other firms, rather than developing new projects internally. Examining the channels behind this increase in R&D in-licensing, we explore heterogeneity in treatment effects and competitor spillovers. We find that competitors move resources away from affected therapeutic areas and into more exploratory projects, after indirectly experiencing these shocks. Rather than turning to external acquisitions, these competing firms appear to reshuffle their own drug portfolios—moving resources away from the affected therapeutic area and into more exploratory projects.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: December 2018
      • HBS Working Paper Number: HBS Working Paper #19-058
      • Faculty Unit(s): Entrepreneurial Management
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