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Atlanta Marriott Marquis, International C
Hosted By:
American Economic Association
Innovation and Competition in Drug Development
Paper Session
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Leemore Dafny, Harvard Business School
Killer Acquisitions
Abstract
Firms may acquire innovative targets to discontinue the development of the targets' innovation projects in order to preempt future competition. We call such acquisitions ``killer acquisitions.'' We develop a parsimonious model and provide empirical evidence for this phenomenon in drug development by tracking detailed project-level development histories of more than 60,000 drug projects. We show theoretically and empirically that acquired drug projects are less likely to be continued in the development process, and this result is particularly pronounced when the acquired project overlaps with the acquirer's development pipeline and when the acquirer has strong incentives to protect its market power. We also document that alternative interpretations such as optimal project selection, organizational frictions, and human capital and technology redeployment do not explain our results. Conservative estimates indicate that about 7% of all acquisitions in our sample are killer acquisitions and that eliminating their adverse effect on drug project development would raise the pharmaceutical industry's aggregate drug project continuation rate by more than 5%. These findings have important implications for antitrust policy, startup exit, and the process of creative destruction.Reactive Outsourcing of Technological Innovations
Abstract
Large innovative firms routinely strengthen their new product pipelines by outsourcing developing technologies from other (typically startup) companies. This practice is portrayed by scholars and practitioners as a high-involvement, carefully planned and executed process. We contribute to their understanding by highlighting a novel concept and documenting an associated trade-off: technologies outsourced “reactively” (following development setbacks of other projects in their pipelines) are less likely to reach the market. Our argument is supported by evidence from the pharmaceutical industry, where outsourcing (drug candidate licensing) plays a central role for innovation, and where Phase 3 outcomes provide a rich source of quasi-experimental variation that we exploit for inference. The analysis takes advantage of recent methodological advances that leverage machine learning for causal inference. Compared to traditional methods, these techniques make more efficient use of data and allow for a more detailed description of the effects at play. Results suggest that, whereas reactive outsourcing behavior is not rare in the pharmaceutical industry, its incidence and consequences can be predicted to occur in specific environments.Find and Replace: R&D Investment Following the Erosion of Existing Products
Abstract
How do R&D-intensive firms react to negative shocks to their existing products? Such shocks have important implications for the investment decisions of such firms, given the frictions they face as well as the regulatory and competitive environment they operate in. 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 the profitability of approved drugs on the market, we examine how firms and their competitors react in terms of their investment and financing decisions. We document that these negative shocks lead affected firms to increase R&D expenditures, financing this with debt. In terms of investment behavior, these shocks lead affected firms to increase the likelihood of acquiring early-stage drugs projects from other firms, rather than developing new projects internally. We also find evidence of spillover effects, indicating that other firms in the industry learn about their own project prospects after competitors experience advisory shocks. Rather than turning to external acquisitions, these competing firms appear to re-shuffle their own drug portfolios—they are more likely to suspend trials of existing drugs, and are are also more likely to internally begin research of drugs in different therapeutic areas.Discussant(s)
Fiona Scott Morton
,
Yale University
Jason O’Connor
,
Federal Trade Commission
Ariel Dora Stern
,
Harvard Business School
Craig Garthwaite
,
Northwestern University
JEL Classifications
- O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
- L1 - Market Structure, Firm Strategy, and Market Performance