Does Financing Have a Real Effect on Drug Development

We examine whether changes in financing availability affected the quantity and quality of drugs developed by biotech and pharmaceutical firms between 1989 and 2004. We find that financing does have a real effect on drug development, and this operates at both the aggregate and firm-specific levels. When it is relatively easy for U.S. firms to raise capital in a particular year, there is a relatively large amount of drug development activity in the subsequent two years. Firm specific access to financing also affects the quantity of drugs developed, but only in the relatively inexpensive preclinical stage. Aggregate and firm-specific financial constraints have opposite directional effects on the quality of drugs developed, as measured by the likelihood of advancing to the subsequent stage. Preclinical, Phase 1, Phase 2, and Phase 3 projects initiated when the capital markets are accessible are more likely to advance, whereas projects initiated when a firm is financially constrained are also more likely to advance. This is partially consistent with firms investing in projects of lower clinical quality when funds are plentiful, and vice versa when funds are scarce. Without information on the expected net present value of the projects initiated in periods of plentiful versus scarce capital, we cannot determine whether there is too much investment in the former case and/or too little investment in the latter case. Acknowledgements: Matthew White, Rachel Higbie, Jon Reinstein, and Tony Curnes provided outstanding research assistance on this project. Funding has been received by the Mack Center for Technological Innovation and the Research Foundation, both of the University of Pennsylvania. Jon Skinner and seminar participants at the Rand Corporation provided helpful suggestions.