TY  - JOUR
AU  - Krieger, Joshua L
AU  - Li, Danielle
AU  - Papanikolaou, Dimitris
TI  - Missing Novelty in Drug Development
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 24595
PY  - 2018
Y2  - May 2018
DO  - 10.3386/w24595
UR  - http://www.nber.org/papers/w24595
L1  - http://www.nber.org/papers/w24595.pdf
N1  - Author contact info:
Joshua L. Krieger
Harvard Business School 
Rock 213
Boston, MA 02163
Tel: 7818833737
E-Mail: jkrieger@hbs.edu

Danielle Li
MIT Sloan School of Management
100 Main St, E62-484
Cambridge, MA 02142
E-Mail: danielle.li@mit.edu

Dimitris Papanikolaou
Kellogg School of Management
Northwestern University
2211 Campus Drive, Office 4319
Evanston, IL 60208
Tel: 847/491-7704
E-Mail: d-papanikolaou@kellogg.northwestern.edu
AB  - 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.
ER  -