Financing Research and Development

Abstract

AbstractThis article examines whether market distortions and failures prevent biopharmaceutical firms from raising the optimal level of R&D funding and, if market failures exist, how markets have adapted to ameliorate their impact. The first section reviews the amount and sources of biomedical R&D spending in the United States over the last ten years and presents limited information on spending in other developed countries. The second section explores how pharmaceutical and biotech firms finance their R&D and whether either type of firm appears to be at risk of not raising enough to finance all projects with positive net present value. The third section discusses the theoretical arguments for why biopharmaceutical firms may spend either more or less on R&D than the socially optimal amount. The fourth section reviews empirical studies of whether firms in general are financially constrained and then, more specifically, whether pharmaceutical and biotech firms are financially constrained. The final section reviews whether venture capital firms and the market for alliances between biotech and pharmaceutical firms are able to address possible underinvestment in R&D due to financial constraints.