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  • 2022
  • Article
  • Review of Financial Studies

Missing Novelty in Drug Development

By: Joshua Krieger, Danielle Li and Dimitris Papanikolaou
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Abstract

We provide evidence that risk aversion leads pharmaceutical firms to underinvest in radical innovation. We introduce a new measure of drug novelty based on chemical similarity and show that firms face a risk-reward trade-off: novel drug candidates are less likely to obtain FDA approval but are based on more valuable patents. Consistent with a simple model of costly external finance, we show that a positive shock to firms’ net worth leads firms to develop more novel drugs. This suggests that even large firms may behave as though they are risk averse, reducing their willingness to investment in potentially valuable radical innovation.

Keywords

Drug Development; Risk Aversion; Research and Development; Innovation and Invention; Investment; Pharmaceutical Industry

Citation

Krieger, Joshua, Danielle Li, and Dimitris Papanikolaou. "Missing Novelty in Drug Development." Review of Financial Studies 35, no. 2 (February 2022): 636–679.
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About The Author

Joshua Lev Krieger

Entrepreneurial Management
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    Evaluation and Learning in R&D Investment

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

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    Scoring and Funding Breakthrough Ideas: Evidence from a Global Pharmaceutical Company

    By: Joshua Krieger, Ramana Nanda, Ian Hunt, Aimee Reynolds and Peter Tarsa
More from the Authors
  • Evaluation and Learning in R&D Investment By: Alexander P. Frankel, Joshua L. Krieger, Danielle Li and Dimitris Papanikolaou
  • Find and Replace: R&D Investment Following the Erosion of Existing Products By: Joshua L. Krieger, Xuelin Li and Richard T. Thakor
  • Scoring and Funding Breakthrough Ideas: Evidence from a Global Pharmaceutical Company By: Joshua Krieger, Ramana Nanda, Ian Hunt, Aimee Reynolds and Peter Tarsa
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