Biomedical innovation has become riskier, more expensive and more difficult to finance with traditional sources such as private and public equity. Here we propose a financial structure in which a large number of biomedical programs at various stages of development are funded by a single entity to substantially reduce the portfolio's risk. The portfolio entity can finance its activities by issuing debt, a critical advantage because a much larger pool of capital is available for investment in debt versus equity. By employing financial engineering techniques such as securitization, it can raise even greater amounts of more-patient capital. In a simulation using historical data for new molecular entities in oncology from 1990 to 2011, we find that megafunds of $5–15 billion may yield average investment returns of 8.9–11.4% for equity holders and 5–8% for 'research-backed obligation' holders, which are lower than typical venture-capital hurdle rates but attractive to pension funds, insurance companies and other large institutional investors.
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We thank J. Broderick for his advice and help in understanding the challenges of developing and financing new drugs, and for motivating our interest in this area in discussions with A.W.L. in 2007. We also thank J. Reichert and the Center for the Study of Drug Development (Tufts University School of Medicine) for sharing their data with us and for her guidance and support in accessing these data, and L. Natanson of Deloitte Recap for giving us access to Recap's DEAL builder and DEVELOPMENT optimizer online tools, which contained detailed information on the economics of licensing deals and clinical trials of oncology compounds.
L. Han, J. Noraky, A. Singhal and C. Wilfong provided research assistance throughout the entire project, and we also acknowledge A. Bernard, H.H. Chen, M.J. Chen, R. Das and R. Garcia for research support during various phases of the project. Finally we thank the editor, K. Aschheim, and three reviewers for constructive comments and editorial advice, and D. Agus, J. Broderick, L. Cantley, S. Chinchalkar, J. Cox, J. Cummings, O. Dar, A. Das, J. Evans, J. Frangioni, A. Gilman, J. Goldfield, D. Higgons, T. Kalil, E. Kandel, M. Kanef, A. Kimball, D. Jamison, E. Lander, P. Legorreta, L. Lerer, J. Lewent, F. Maisonrouge, P. Mallick, M. Mansoura, N. Marko, A. Metz, R. Merton, F. Murray, K. Murthi, L. Nagahara, R. O'Neill, A. Powers, R. Riggs, D. Roth, M. Said, M. Stevens, K. Swarna, T. Tombrello, I. Wolff, A. Wood, G. Yago, and participants at the Financial Innovations Lab Workshop hosted by the Milken Institute and FasterCures in July 2011, the 2012 Milken Institute Conference, and the 2012 University of Southern California and National Cancer Institute Emerging Approaches in Oncology conference for helpful comments and discussion. The views and opinions expressed in this article are those of the authors only and do not represent the views and opinions of AlphaSimplex, MIT, Moody's Corporation, any of their affiliates or employees, or any of the individuals acknowledged above. Research support from the MIT Laboratory for Financial Engineering is gratefully acknowledged.
J.M.F. declares no competing interests. R.M.S. declares the following competing interests: in addition to his MIT LFE position, R.M.S. is managing director at Moody's Corporation; member, Board of Directors, PlaNet Finance US; member, Advisory Council, Museum of Mathematics; president, Consortium for Systemic Risk Analytics. A.W.L. declares the following competing interests: in addition to his MIT faculty position, A.W.L. is a Research Associate, National Bureau of Economic Research; chief investment strategist, AlphaSimplex Group; consultant, Office of Financial Research; member, Moody's Advisory and Academic Research Committee; member, Financial Advisory Roundtable, Federal Reserve Bank of New York; member, Economic Advisory Committee, FINRA; member, Board of Overseers, Beth Israel Deaconess Medical Center; member, Academic Advisory Board, Consortium for Systemic Risk Analytics. No funding bodies had any role in study design, data collection and analysis, decision to publish or preparation of the manuscript. No direct funding was received for this study; general research support was provided by the MIT Laboratory for Financial Engineering and its sponsors. The authors were personally salaried by their institutions during the period of writing (though no specific salary was set aside or given for the writing of this paper).
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Fernandez, JM., Stein, R. & Lo, A. Commercializing biomedical research through securitization techniques. Nat Biotechnol 30, 964–975 (2012). https://doi.org/10.1038/nbt.2374
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