Financing Biomedical Innovation

Andrew W. Lo () and Richard T. Thakor
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Andrew W. Lo: Sloan School of Management, Computer Science and Artificial Intelligence Laboratory, and Department of Electrical Engineering and Computer Science, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA
Richard T. Thakor: Laboratory for Financial Engineering, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA

Annual Review of Financial Economics, 2022, vol. 14, issue 1, 231-270

Abstract: We review the recent literature on financing biomedical innovation, with a specific focus on the drug development process and how it may be enhanced to improve outcomes. We begin by laying out stylized facts about the structure of the drug development process and its associated costs and risks, and we present evidence that the rate of discovery for life-saving treatments has declined over time while costs have increased. We make the argument that these structural features require drug development (i.e., biopharmaceutical) firms to rely on external financing and at the same time amplify market frictions that may hinder the ability of these firms to obtain financing, especially for treatments that may have large societal value relative to the benefits going to the firms and their investors. We then provide an overview of the evidence for various types of market frictions to which these drug development firms are exposed and discuss how these frictions affect their incentive to invest in the development of new drugs, leading to underinvestment in valuable treatments. In light of this evidence, numerous studies have proposed ways to overcome this funding gap, including the use of financial innovation. We discuss the potential of these approaches to improve outcomes.

Keywords: biotechnology; drug development; financial frictions; financial innovation; healthcare finance; innovation; pharmaceuticals; R&D investment (search for similar items in EconPapers)
JEL-codes: D25 D82 G31 G32 G34 L24 L65 O31 O32 O34 O38 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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DOI: 10.1146/annurev-financial-031721-081537

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