Finsen, the son of a leading civil servant, was born at Thorshavn on the Faeroe Islands, which are part of Denmark; he was educated in Reykjavik and at the University of Copenhagen, where he qualified as a physician in 1890. After teaching anatomy for some time Finsen founded (1895) the Institute of Phototherapy, which he directed until his early death at the age of 43.

In the 1890s, following up some earlier work suggesting that light had the ability to kill bacteria, Finsen began a systematic appraisal of its therapeutic effects. Arguing that it was light, acting slowly and weakly, rather than heat that was effective, he devised various filters and lenses to separate and concentrate the different components of sunlight. He found that it was the short ultraviolet rays, either natural or artificial, that turned out to have the greatest bactericidal power.

Finsen found phototherapy to be of most use against lupus vulgaris, a skin infection produced by the tubercle bacillus. He claimed that on exposure to ultraviolet rays the skin regained its normal color and the ulcerations began to heal. For this Finsen received the third Nobel Prize for physiology or medicine in 1903.

It was, however, an avenue that few physicians were willing to explore. The use of ultraviolet radiation was mainly restricted to the treatment of lupus vulgaris and even this was superseded by x-rays and, more importantly, by such drugs as cortisone when they became available in the 1950s.