How Excluding Some Benefits from Value Assessment of New Drugs Impacts Innovation

35 Pages Posted: 22 May 2015 Last revised: 15 Jul 2016

See all articles by Joseph Cook

Joseph Cook

Pfizer, Inc.

Joseph H. Golec

University of Connecticut - Department of Finance

Date Written: July 14, 2016

Abstract

Payers often assess the benefits of new drugs relative to costs for reimbursement purposes, but they frequently exclude some drugs’ option-related benefits, reducing their reimbursement chances, and making them less attractive R&D investments. We develop and test a real options model of R&D investment that shows that excluding option-related benefits heightens drug developers’ incentives to avoid high-risk (volatile) R&D investments, and instead encourages them to focus on “safer” (positively skewed) investments. Our model and empirical results could partly explain the decline in the number of risky new molecular entities (NMEs).

Keywords: Biopharmaceuticals, cost effectiveness, options

JEL Classification: I18, I10, I11, G14

Suggested Citation

Cook, Joseph and Golec, Joseph, How Excluding Some Benefits from Value Assessment of New Drugs Impacts Innovation (July 14, 2016). Available at SSRN: https://ssrn.com/abstract=2608791 or http://dx.doi.org/10.2139/ssrn.2608791

Joseph Cook

Pfizer, Inc. ( email )

235 East 42 Street
New York, NY 10017
United States

Joseph Golec (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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