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Commercializing biomedical research through securitization techniques


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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Figure 1: Timeline of cash flow for simplified example of a typical drug-development program in which out-of-pocket costs with present value of $200 million at year 0 generate annual net income of $2 billion in years 11–20, implying a present value of $12.3 billion at year 10 (based on a 10% cost of capital).
Figure 2
Figure 3: Business structure of a biomedical megafund special-purpose vehicle.
Figure 4: Simulating two distinct business stages of a biomedical megafund.

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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.

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Authors and Affiliations



All authors contributed equally to this research. A.W.L. first developed the idea for securitizing biomedical research after conversations with J. Broderick in March 2007 about a portfolio approach to biomedical innovation. A.W.L. assembled key members of the project team, provided funding through the MIT Laboratory for Financial Engineering and was responsible for overall project management. J.-M.F. was responsible for coordinating all aspects of the project, including directing research assistants, obtaining and processing all input data, calibrating the simulation parameters, running the simulations, and preparing the initial draft of the manuscript, with input and oversight from A.W.L. and R.M.S. R.M.S. developed the analytic framework for modeling the portfolio of drug compounds. R.M.S. and L. Han developed the R code with assistance from J. Noraky and J.-M.F., and input from A.W.L. and A. Singhal. A. Bernard converted the R code to Matlab. A.W.L. and J.-M.F. validated the final version of the Matlab code. R.M.S. also prepared the description of the simulation results, which was reviewed and revised by J.-M.F. and A.W.L. A.W.L. constructed the illustrative portfolio example and prepared the final draft of the manuscript, with input and revisions from J.-M.F. and R.M.S.

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Correspondence to Andrew W Lo.

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Competing interests

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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Supplementary Analytics, Supplementary Methods, Supplementary Discussion and Supplementary Empirical Results (PDF 283 kb)

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Zipped file containing all our simulation software in Matlab and R. (ZIP 163 kb)

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Fernandez, JM., Stein, R. & Lo, A. Commercializing biomedical research through securitization techniques. Nat Biotechnol 30, 964–975 (2012).

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