Abstract
How do innovative firms react when existing products experience negative shocks? We explore this question with detailed project-level data from drug development firms. Using the Food and Drug Administration public health advisories as idiosyncratic negative shocks to approved drugs, we examine how drug makers react through investment decisions. Following these shocks, affected firms increase research and development (R&D) expenditures, driven by a higher likelihood of acquiring external innovations rather than developing novel projects internally. Such acquisition activities are concentrated in firms with weak research pipelines. We also find that competing developers move resources away from the affected therapeutic areas. Our results show how investments in specialized commercialization capital create path dependencies and alter the direction of R&D investments.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 6552-6571 |
| Number of pages | 20 |
| Journal | Management Science |
| Volume | 68 |
| Issue number | 9 |
| DOIs | |
| State | Published - Sep 2022 |
| Externally published | Yes |
Bibliographical note
Funding Information:For helpful comments and discussions, the authors thank Hengjie Ai, Ashish Arora (the editor), Pierre Azoulay, Frederico Belo, Daniel Carpenter, Lauren Cohen, Nuri Ersahin (discussant), Joshua Feng, Murray Frank, Craig Garthwaite (discussant), Sabrina Howell, Manuel Hermosilla, Pinar Karaca-Mandic, Anne Marie Knott (discussant), Danielle Li, Song Ma, Jeff Macher (discussant), Mahka Moeen (discussant), Ramana Nanda, Dimitris Papanikolaou, Merih Sevilir (discussant), Myles Shaver, Andrei Shleifer, Ariel Stern, Anjan Thakor, Raj Vasu (discussant), Tracy Wang, Andy Winton, Yu Xu, Xintong Zhan (discussant); an associate editor and three anonymous referees; seminar participants at the University of Minnesota, Nanyang Technological University, National University of Singapore, City University of Hong Kong, University of Hong Kong, Massachusetts Institute of Technology Sloan, University of Utah Eccles School of Business; and participants at the Minnesota Corporate Finance Conference, 2019 American Economic Association Meetings, Utah-Brigham Young University Winter Strategy Conference, Duke-University of North Carolina Entrepreneurship Research Conference, Northwestern Kellogg Annual Healthcare Markets Conference, 2019 Financial Intermediation Research Society Conference, 12th Annual Northwestern/ United States Patent and Trademark Office (USPTO) Conference on Innovation Economics, 2019 American Society of Health Economists (ASHEcon) Conference, and 2019 China International Conference in Finance (CICF) Conference. Any remaining errors are the authors’ alone.
Publisher Copyright:
© 2022 INFORMS.
Keywords
- biopharmaceutical industry
- drug development
- FDA
- M&A
- product shocks
- R&D investments
