The process of drug discovery is expensive and highly uncertain. Because of this, risk-averse firms facing financial constraints may be less likely to invest in novel drugs than may be socially optimal. We examine this hypothesis by studying how resource constraints impact firms' decisions to invest in novel drug compounds. This paper has two contributions. First, we develop a new molecule-based measure of the chemical novelty of new drug candidates. Second, we use variation in the expansion of Medicare prescription drug coverage in the United States (which differentially benefited firms with more drugs targeted toward the elderly, as well as firms with more remaining market exclusivity on those drugs) to isolate exogenous variation in cash flow to firms. We find that firms which benefit more from the expansion of drug coverage develop more drug candidates as a result and, moreover, this increase is driven by an increase in the development of more chemically novel drug compounds.