IDEAS home Printed from https://ideas.repec.org/a/wly/hlthec/v26y2017i12p1813-1825.html
   My bibliography  Save this article

How excluding some benefits from value assessment of new drugs impacts innovation

Author

Listed:
  • Joseph P. Cook
  • Joseph Golec

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.

Suggested Citation

  • Joseph P. Cook & Joseph Golec, 2017. "How excluding some benefits from value assessment of new drugs impacts innovation," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 1813-1825, December.
    • Handle: RePEc:wly:hlthec:v:26:y:2017:i:12:p:1813-1825
    DOI: 10.1002/hec.3507
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/hec.3507
    Download Restriction: no
    File URL: https://libkey.io/10.1002/hec.3507?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Joseph Cook & Joseph Golec & John Vernon & George Pink, 2011. "Real Option Value and Path Dependence in Oncology Innovation," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(2), pages 225-238.
    2. Johnson, R Stafford & Pawlukiewicz, James E & Mehta, Jayesh M, 1997. "Binomial Option Pricing with Skewed Asset Returns," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 89-101, July.
    3. Thornton Snider Julia & Romley John A. & Vogt William B. & Philipson Tomas J., 2012. "The Option Value of Innovation," Forum for Health Economics & Policy, De Gruyter, vol. 15(1), pages 1-19, April.
    4. Henry Grabowski & John Vernon, 1990. "A New Look at the Returns and Risks to Pharmaceutical R&D," Management Science, INFORMS, vol. 36(7), pages 804-821, July.
    5. John A. Vernon & Joseph H. Golec & Joseph A. Dimasi, 2010. "Drug development costs when financial risk is measured using the Fama–French three‐factor model," Health Economics, John Wiley & Sons, Ltd., vol. 19(8), pages 1002-1005, August.
    6. Grabowski, Henry G. & Vernon, John M., 1994. "Returns to R&D on new drug introductions in the 1980s," Journal of Health Economics, Elsevier, vol. 13(4), pages 383-406.
    7. Palmer, Stephen & Smith, Peter C., 2000. "Incorporating option values into the economic evaluation of health care technologies," Journal of Health Economics, Elsevier, vol. 19(5), pages 755-766, September.
    8. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    9. Nancy Devlin & David Parkin, 2004. "Does NICE have a cost‐effectiveness threshold and what other factors influence its decisions? A binary choice analysis," Health Economics, John Wiley & Sons, Ltd., vol. 13(5), pages 437-452, May.
    10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    11. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    12. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yuan Hu & Abootaleb Shirvani & W. Brent Lindquist & Frank J. Fabozzi & Svetlozar T. Rachev, 2020. "Option Pricing Incorporating Factor Dynamics in Complete Markets," Papers 2011.08343, arXiv.org.
    2. Yuan Hu & Abootaleb Shirvani & W. Brent Lindquist & Frank J. Fabozzi & Svetlozar T. Rachev, 2020. "Option Pricing Incorporating Factor Dynamics in Complete Markets," JRFM, MDPI, vol. 13(12), pages 1-33, December.
    3. Gregor Dorfleitner & Felix Rößle, 2018. "The financial performance of the health care industry: a global, regional and industry specific empirical investigation," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 19(4), pages 585-594, May.
    4. Peter Christoffersen & Ruslan Goyenko & Kris Jacobs & Mehdi Karoui, 2018. "Illiquidity Premia in the Equity Options Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 811-851.
    5. Baeho Kim & Da‐Hea Kim & Haehean Park, 2020. "Informed options trading on the implied volatility surface: A cross‐sectional approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 776-803, May.
    6. Lin, Zih-Ying & Chang, Chuang-Chang & Wang, Yaw-Huei, 2018. "The impacts of asymmetric information and short sales on the illiquidity risk premium in the stock option market," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 152-165.
    7. Bernales, Alejandro & Guidolin, Massimo, 2014. "Can we forecast the implied volatility surface dynamics of equity options? Predictability and economic value tests," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 326-342.
    8. Ramachandran, Lakshmi Shankar & Tayal, Jitendra, 2021. "Mispricing, short-sale constraints, and the cross-section of option returns," Journal of Financial Economics, Elsevier, vol. 141(1), pages 297-321.
    9. Haehean Park & Baeho Kim & Hyeongsop Shim, 2019. "A smiling bear in the equity options market and the cross‐section of stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1360-1382, November.
    10. Goyal, Amit & Saretto, Alessio, 2009. "Cross-section of option returns and volatility," Journal of Financial Economics, Elsevier, vol. 94(2), pages 310-326, November.
    11. van den Goorbergh, R.W.J., 2004. "Essays on optimal hedging and investment strategies and on derivative pricing," Other publications TiSEM 4b4b16af-8621-463f-bbfa-0, Tilburg University, School of Economics and Management.
    12. Chichernea, Doina & Huang, Kershen & Petkevich, Alex & Teterin, Pavel, 2024. "Options trading imbalance, cash-flow news, and discount-rate news," Journal of Empirical Finance, Elsevier, vol. 77(C).
    13. Khorram, Mehdi & Mo, Haitao & Sanger, Gary C., 2023. "Information flow and credit rating announcements," Journal of Financial Markets, Elsevier, vol. 65(C).
    14. Sirio Aramonte & Mohammad Jahan-Parvar & Samuel Rosen & John W. Schindler, 2017. "Firm-Specific Risk-Neutral Distributions : The Role of CDS Spreads," International Finance Discussion Papers 1212, Board of Governors of the Federal Reserve System (U.S.).
    15. Sirio Aramonte & Mohammad R. Jahan-Parvar & Samuel Rosen & John W. Schindler, 2022. "Firm-Specific Risk-Neutral Distributions with Options and CDS," Management Science, INFORMS, vol. 68(9), pages 7018-7033, September.
    16. Tobias Basse & Christoph Schwarzbach & J.-Matthias Schulenburg, 2023. "Dividend policy issues in the European pharmaceutical industry: new empirical evidence," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 24(5), pages 803-816, July.
    17. Yan, Shu, 2011. "Jump risk, stock returns, and slope of implied volatility smile," Journal of Financial Economics, Elsevier, vol. 99(1), pages 216-233, January.
    18. Scherer, F.M., 2010. "Pharmaceutical Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 539-574, Elsevier.
    19. Giaccotto, Carmelo & Santerre, Rexford E & Vernon, John A, 2005. "Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 195-214, April.
    20. Filson, Darren & Oweis, Ahmed, 2010. "The impacts of the rise of Paragraph IV challenges on startup alliance formation and firm value in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(4), pages 575-584, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:hlthec:v:26:y:2017:i:12:p:1813-1825. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/5749 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.