Competition Threats and Rival Innovation Responses: Evidence from Breakthrough Therapies

Competition Threats and Rival Innovation Responses: Evidence from Breakthrough Therapies

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Mosab Hammoudeh

University of Iowa - Henry B. Tippie College of Business

Abstract

We study the effect of competition on firm innovation at the product level. We instrument shocks to competition in therapeutic areas with the FDA’s breakthrough designation therapy (BTD) indication. BTDs strongly associate with several indicators of future success, including announcement returns and eventual FDA approval to market the drug. BTD shocks discourage rivals’ innovation in that therapeutic area. The effect varies with the ex-ante competitiveness of the therapeutic area, as well as with the rival’s position (leader vs. follower) in that area, in a manner consistent with the theory by Aghion et al. (2005).