Paper Spotlight: Sharing R&D Risk in Healthcare via FDA Hedges

Adam Jørring

Andrew W. Lo

Tomas J. Philipson

Manita Singh

Richard T. Thakor

 

 

 

 

 

 

 

 

 

 

 

 

 

Recent estimates suggest that the cost of developing a single new drug in the biopharmaceutical sector is $2.6 billion, confirming the very large amounts of money that medical companies invest to develop a new treatment. Biomedical companies also face the risk of very low rates of success, not only due to the inherent scientific risk of developing new drugs, but also due to the risk of the Food and Drug Administration’s (FDA) regulatory approval process. The question that ought to be asked is what financial markets can do to promote more efficient risk sharing in the healthcare and drug development areas from which our societies can benefit. This is the question investigated by Adam Jørring, Andrew Lo, Tomas Philipson, Manita Singh, and Richard Thakor in their paper “Sharing R&D Risk in Healthcare via FDA Hedges.” They address the problem highlighted by many in the medical fields that investors are unwilling to provide financing due to these risks, resulting in a “funding gap” and underinvestment in biomedical R&D that causes many potentially valuable drugs either not being realized or not pursued beyond a certain stage. The authors propose a new form of financial instrument, FDA hedges, which allow biomedical R&D investors to share the pipeline risk associated with the FDA approval process with capital markets. Such instruments are shown to avoid the market failure that leads to an R&D “funding gap.” Using FDA approval data, the authors discuss the pricing of FDA hedges and mechanisms by which they can be traded and use novel panel dataset of FDA approval probabilities to explore the risks inherent in these contracts. The paper finds evidence that the risk associated with FDA hedges is mostly idiosyncratic, and argue that these instruments are appealing to both investors and issuers. Ultimately, FDA hedges should accelerate the development of new biomedical products by providing the necessary funding to support such risky projects, and will undoubtedly improve the health of countless patients. The significant social welfare implications are very clear for all of us.

Spotlight by Andrew Ellul
Photos courtesy of Adam Jørring, Andrew W. Lo, Tomas J. Philipson, Manita Singh, and Richard T. Thakor
First published December 10, 2021

RCFS Award Winners at the Cavalcade

Photos from the SFS Cavalcade are now available on the conference website.

Paige Ouimet and Elena Simintzi, Best Paper winners, with Executive Editor Andrew Ellul

Paige Ouimet and Jesse Davis, Best Registered Report winners, with Editor Isil Erel

Ashleigh Eldemire, Best Registered Report winner, with Editor Camelia Kuhnen

Michael D. Wittry, Rising Scholar winner, with Editor Camelia Kuhnen

Jessica Jeffers, Referee of the Year, with Editor Isil Erel

Forthcoming Papers

“COVID-19 and Corporate Finance” by Marco Pagano and Josef Zechner

“How Does Corporate Governance Impact Equity Volatility? Worldwide Evidence and Theory” by Alexandre Jeanneret and Louis Gagnon

Prior Review Process

RCFS has a submission option for papers that were previously reviewed by other journals. The goal of such review process is to help the editors arrive at a quick and informed decision on a paper based on feedback received by the authors from previous submissions. A paper is eligible for this optional review process if it was previously submitted to a few select journals; please see Prior Review Policy for details. If you choose this option, you will be asked to upload the reviews from previous submissions of your paper to other journals. All material and correspondence sent to RCFS will be treated as private and confidential.

Call for Papers and Proposals: RCFS Winter Conference 2023

The 2023 RCFS Winter Conference is now accepting submissions. Please see the Call for Papers and the Call for Proposals on “Corporate Market Power: Drivers and Financial Consequences” for more details. The conference, which features a dual submission option with RCFS, will take place February 18-19, 2023, at the Royal Sonesta in San Juan, Puerto Rico.

The sponsoring editors are Andrew Ellul, Isil Erel, Camelia Kuhnen, and Robert Marquez. The submission deadline is November 10, 2022, for papers and November 30, 2022, for registered reports.

Special Issue: August 11(3)

The August issue of RCFS has published! It is a Special Issue on “Discrimination, Disparity, and Diversity in Finance.”

The Editor’s Choice paper is:

Does Homeownership Reduce Wealth Disparities for Low-Income and Minority Households?
Ashleigh Eldemire, Kimberly F. Luchtenberg, and Matthew M. Wynter

The introduction is:

Discrimination, Disparities, and Diversity in Finance
Andrew Ellul, Isil Erel, Camelia Kuhnen, Uday Rajan, editors