How Excluding Some Benefits from Value Assessment of New Drugs Impacts Innovation
35 Pages Posted: 22 May 2015 Last revised: 15 Jul 2016
Date Written: July 14, 2016
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: Suggested Citation