Venture Capitalists’ Perspectives on Incentives for R&D

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.