Working Paper: NBER ID: w10933
Authors: Ilan Guedj; David Scharfstein
Abstract: This paper compares the clinical trial strategies and performance of large, established ("mature") biopharmaceutical firms to those of smaller ("early stage") firms that have not yet successfully developed a drug. We study a sample of 235 cancer drug candidates that entered clinical trials during the period 1990-2002 and were sponsored by public firms. Early stage firms are more likely than mature firms to advance drug candidates from Phase I to Phase II clinical trials. However, early stage firms have much less promising clinical results in their Phase II trials and their Phase II drug candidates are also less likely to advance to Phase III and to receive Food and Drug Administration approval. This pattern is more pronounced for early stage firms with large cash reserves. The evidence points to an agency problem between shareholders and managers of single-product early stage firms who are reluctant to abandon development of their only viable drug candidates. By contrast, the managers of mature firms with multiple products in development are more willing to drop unpromising drug candidates. The findings appear to be consistent with the benefits of internal capital markets identified by Stein (1997).
Keywords: No keywords provided
JEL Codes: G3; L2; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Organizational scope (L25) | Investment behavior (G11) |
| Early-stage firms (L26) | Advance drug candidates from phase I to phase II trials (L65) |
| Early-stage firms (L26) | Worse clinical outcomes in phase II trials (I12) |
| Early-stage firms (L26) | Less likely to advance drug candidates from phase II to phase III trials (L65) |
| Agency problems in early-stage firms (L26) | Overinvestment in unpromising drug candidates (G31) |
| Mature firms (D25) | Willingness to discontinue less promising projects (H43) |