University of Chicago
Booth School of Business
Institutional Affiliation: University of Chicago
NBER Working Papers and Publications
|April 2017||Sharing R&D Risk in Healthcare via FDA Hedges|
with Andrew W. Lo, Tomas J. Philipson, Manita Singh, Richard T. Thakor: w23344
The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We analyze new and simple financial instruments, Food and Drug Administration (FDA) hedges, to allow medical R&D investors to better share the pipeline risk associated with FDA approval with broader capital markets. Using historical FDA approval data, we discuss the pricing of FDA hedges and mechanisms under which they can be traded and estimate issuer returns from offering them. Using various unique data sources, we find that FDA approval risk has a low correlation across drug classes as well as with other assets and the overall mar...