A paper by Gracia, David and Conti (2022) in Health Affairs Forefront poses the question ‘how do financial incentives impact venture capitalist’s (VC) investment decisions in early-stage biotech companies, and ultimately innovation?’ To get the answer, the authors interviewed 5 venture capitalists to get their thoughts. Based on these interviews, the authors had 7 key findings.
- Biotech VCs view their investments as central to bringing new drugs to market and are aware of the significant benefits and risks associated with their investments.
- Biotech VCs largely invest with the aim of being acquired by a large pharma company.
- Many biotech VCs evaluate potential investments through the lens of expected returns to potential acquirers.
- Unmet medical needs and associated premium pricing drive many biotech VCs’ investment decisions, with antibiotics as a major outlier.
- Biotech VCs were open to drug price reforms that would preserve “value-based pricing” for clinically transformative therapies.
- For non-price innovation incentives to meaningfully encourage R&D, they need to increase the likelihood of M&A exits.
- Antibiotics represent a unique case of market failure where additional price and non-price incentives are needed.
More detail on the rationale behind each of these findings is contained in the full article here.