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Working Paper | HBS Working Paper Series | 2019

Trials and Terminations: Learning from Competitors' R&D Failures

by Joshua L. Krieger

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Abstract

I analyze project continuation decisions where firms may resolve uncertainty through news about competitors' research and development (R&D) failures, as well as through their own results. I examine the trade-offs and interactions between product-market competition and technological learning from parallel R&D projects. Leveraging the biopharmaceutical industry's unique characteristics to overcome barriers to measuring project-level responses, I employ a difference-in-differences strategy to evaluate how competitor exit news alters a firm's own project discontinuation decisions. The findings reveal that technological learning dominates competition effects. Firms are most sensitive to competitor failure news from within the same market and same technology area—more than doubling their propensity to terminate drug development projects in the wake of this type of information. Finally, I explore how levels of competition, uncertainty, and opportunities to learn moderate the response to competitor failure news.

Keywords: Research and Development; Projects; Failure; Decision Making; Learning;

Language: English Format: Print 79 pages Read Now

Citation:

Krieger, Joshua L. "Trials and Terminations: Learning from Competitors' R&D Failures." Harvard Business School Working Paper, No. 18-043, November 2017. (Revised November 2019.)

About the Author

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Joshua Lev Krieger
Assistant Professor of Business Administration
Entrepreneurial Management

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More from the Author

  • Case | HBS Case Collection | December 2019

    Forecasting ClimaCell

    Joshua Lev Krieger, Christopher Stanton and James Barnett

    A weather technology startup, ClimaCell considers the R&D trade-offs and financing implications of pursuing a proposed contract with a major automobile maker, rather than continuing its focus on building a scalable, all-purpose weather prediction engine.

    Citation:

    Krieger, Joshua Lev, Christopher Stanton, and James Barnett. "Forecasting ClimaCell." Harvard Business School Case 820-044, December 2019.  View Details
    CiteView DetailsEducators Related
  • Working Paper | HBS Working Paper Series | 2018

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

    Joshua Krieger, Xuelin Li and Richard T. Thakor

    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.

    Keywords: R&D Investments; drug development; product shocks; System Shocks; Research and Development; Investment; Behavior; Pharmaceutical Industry;

    Citation:

    Krieger, Joshua, Xuelin Li, and Richard T. Thakor. "Find and Replace: R&D Investment Following the Erosion of Existing Products." Harvard Business School Working Paper, No. 19-058, December 2018.  View Details
    CiteView DetailsSSRN Read Now Related
  • Working Paper | HBS Working Paper Series | 2017

    Developing Novel Drugs

    Joshua Krieger, Danielle Li and Dimitris Papanikolaou

    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.

    Keywords: Research and Development; Investment; Decision Choices and Conditions; Pharmaceutical Industry;

    Citation:

    Krieger, Joshua, Danielle Li, and Dimitris Papanikolaou. "Developing Novel Drugs." Harvard Business School Working Paper, No. 18-056, January 2018.  View Details
    CiteView DetailsSSRN Read Now Related
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