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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… Click to show full 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.
Journal Title: Health Economics
Year Published: 2017
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