Publications
Publications
- Forthcoming
- Review of Financial Studies
Missing Novelty in Drug Development
By: Joshua Krieger, Danielle Li and Dimitris Papanikolaou
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 (forthcoming). (Pre-published online March 18, 2021.)
About The Author
