Innovation Incentives and Biomarkers

Ariel Dora Stern; Brian M. Alexander; Amitabh  Chandra

Article | Clinical Pharmacology & Therapeutics | January 2018

Innovation Incentives and Biomarkers

by Ariel Dora Stern, Brian M. Alexander and Amitabh Chandra

Abstract

Previously, we have discussed the importance of economic incentives in shaping markets for precision medicines. Here we consider incentives for biomarker development, including discovery and establishment. Biomarkers can reveal valuable information regarding diagnosis and prognosis, predict treatment efficacy or toxicity, serve as markers of disease progression, and serve as auxiliary endpoints for clinical trials. Some have multiple uses, while others have a specialized role, resulting in diverse incentives across players in the healthcare system.

Keywords: Health Care and Treatment; Innovation and Invention; Research and Development; Markets;

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Citation:

Stern, Ariel Dora, Brian M. Alexander, and Amitabh Chandra. "Innovation Incentives and Biomarkers." Clinical Pharmacology & Therapeutics 103, no. 1 (January 2018): 34–36.

This study sheds new light on first- and early-mover advantages. Research on this classic topic often assumes that each firm participates in the entirety of the innovation process and that all firms aim to monetize their innovations on product markets. However, a division of labor between innovative new entrants and industry incumbents, endowed with complementary assets, is common in many industries. Such settings are distinct because new entrants have the additional option to sell their innovation in a “market for technology” and may, therefore, seek acquisition rather than shepherding an innovation through the entire commercialization process. We argue that this binary outcome—i.e., success via acquisition—creates different opportunities and threats for new entrants and has important and novel implications for the following question: is it advantageous to be early to market? Using data from the U.S. medical device industry, we find that pioneer (dis-)advantages in a market for technology setting are similar to those typically seen in product markets but different in some important respects. In particular, pioneers must pave the way for a new product type in order to reduce the technological and market risks, where reducing technological risk is of paramount importance. As a reward, pioneers ultimately realize a higher likelihood of acquisition, but among acquired firms, early entrants wait longer for acquisition to happen. To a certain extent, therefore, later movers can free ride on early-movers’ efforts: although they are less likely to experience acquisition, acquisitions of later entrants happen more quickly.

Working Paper | HBS Working Paper Series | 2018

Negative Shocks and Innovation: Evidence from Medical Device Recalls

George P. Ball, Jeffrey T. Macher and Ariel Dora Stern

When innovations are successfully commercialized into new products, they can create value for both consumers and firms. When products malfunction, however, they can harm consumers and disrupt firm operations. Product failures are, therefore, likely to impact firms’ subsequent innovation activities. Using 13 years of Food and Drug Administration data, we examine the effects of firm and competitor medical device recalls on subsequent new product innovation. Recalls vary by source, proximity, and severity while innovations vary in their sophistication and novelty. We use recurrent-event accelerated failure time models to examine how product failures experienced by firms and their competitors impact subsequent major and minor innovations. We find that focal firm recalls slow minor innovation, an effect that is strongest when recalls are in the same product area as innovation activity. A one standard deviation increase in the number of proximate focal firm recalls implies more than a one-year delay in minor innovation. However, competitor firm recalls lead to acceleration in both minor and major innovative activity. The relationship between competitor recalls and minor innovation is strongest when recalls are more severe, while the relationship between competitor recalls and major innovation is strongest when recalls are proximate and more severe. Just one localized, severe competitor recall leads to a one-month reduction in time to major innovation. Our results suggest that product failures influence subsequent innovation but that their impact is dependent upon recall source, proximity, and severity. The strategic and public policy implications of these results are highlighted.

Keywords: product recalls; System Shocks; Innovation and Invention; Medical Devices and Supplies Industry;

Citation:

Ball, George P., Jeffrey T. Macher, and Ariel Dora Stern. "Negative Shocks and Innovation: Evidence from Medical Device Recalls." Harvard Business School Working Paper, No. 19-028, September 2018. View Details

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Biologics represent a substantial and growing share of the U.S. drug market. Traditional “small molecule” generics quickly erode the price and share of the branded product upon entry; however, only a few biosimilars have been approved in the U.S. since 2015, thereby largely preserving biologics from competition. We analyze European markets, which have had biosimilar competition since 2006. Using our own survey, we analyze how market features and public policies predict biosimilar entry, price, and penetration, finding significant heterogeneity across countries and products. Effective buyer institutions are associated with increased biosimilar penetration. Our estimates can inform ongoing policy discussions.

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Innovation Incentives and Biomarkers

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