Sharing R&D Risk in Healthcare via FDA Hedges

Adam Jørring; Andrew W. Lo; Tomas J. Philipson; Manita Singh; Richard T. Thakor

doi:10.1093/rcfs/cfab024

The Review of Corporate Finance Studies Vol. 11 No. 4 2022

Sharing R&D Risk in Healthcare via FDA Hedges

Adam Jørring¹; Andrew W. Lo ²; Tomas J. Philipson³; Manita Singh⁴; Richard T. Thakor⁵

¹ Carroll School of Management, Boston College · ² MIT Sloan School of Management, MIT Laboratory for Financial Engineering, MIT Computer Science and Artificial Intelligence Laboratory, NBER, and Santa Fe Institute · ³ University of Chicago and NBER · ⁴ Harvard Business School · ⁵ Carlson School of Management, University of Minnesota and MIT Laboratory for Financial Engineering

Abstract

Biomedical innovation suffers from a “funding gap” between the needs of drug development firms and the availability of funds. The requirement of large investments for drug development projects and the high pipeline risk associated with FDA approval causes this funding gap in part. In this paper, we propose a new financial instrument—the “FDA hedge”—that pays off upon FDA approval failure. We develop a theory to show that the FDA hedge can help eliminate the funding gap. Using novel project-level data, we establish empirically that FDA hedge risk is idiosyncratic, and show how better sharing this risk can spur welfare-enhancing R&D.

DOI: 10.1093/rcfs/cfab024
Volume: 11
Issue: 4
Pages: 880-922
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Sharing R&D Risk in Healthcare via FDA Hedges

Abstract

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