AIEA Seminar Series
Exploration and the Value of Failed Drugs
- Danielle Li (Sloan School of Management, MIT)
- 2021 May 22, 9 AM Taipei/Beijing/HK/Singapore / May 21, 9 PM US EST
- Alexander Frankel (Univ. of Chicago), Danielle Li (MIT & NBER), Joshua Krieger (Harvard), Dimitris Papanikolaou (Northwestern & NBER)
- Discussant: Jeff Furman (Boston University)
- Registration: https://zoom.us/webinar/register/WN_evEFYOhER9-hzcd7aOcaTw
ABSTRACT We introduce a model in which firms have better information about incremental drug candidates, but investments in novel drug candidates generate dynamic knowledge spillovers that improve information about future drugs. Because the value of knowledge spillovers cannot be fully appropriated by the original firm, competition will blunt incentives to invest in novel drugs in particular. To explore these predictions empirically, we use information on chemical structure to link initial drugs with the market outcomes of their molecularly derivative successors. This new measure allows us to observe spillover value associated with drug candidates even when they fail. We show that incorporating the value of follow-on innovation disproportionately increases the measured value of novel drug candidates. This source of value, however, can accrue to rival firms; consequently we find that firms are less likely to invest in novel candidates when more firms work in the same research area.