FAQs on Biomedical Megafund

FAQs on Biomedical Megafund

Since the publication of Fernandez, Stein, and Lo (2012) on using securitization techniques to raise funds from the private sector to support biomedical research, the MIT Laboratory for Financial Engineering (LFE) has received a number of stimulating comments and questions about these techniques. Rather than replying to each inquiry individually, we decided to respond via this “frequently asked questions” document so as to stimulate broader dialogue among those with an interest in this subject.

Commercializing biomedical research through securitization techniques

Commercializing biomedical research through securitization techniques

Fernandez, JM, R. M. Stein and A. W. Lo. 2012. nature biotechnology. 30. 10.

 

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.

read more

Can Financial Engineering Cure Cancer?

Can Financial Engineering Cure Cancer?

Fernandez, J-M, D. Fagnan, A. W. Lo &  R. M. Stein. 2013.  American Economic Review. 103. 3.

 

In this paper, we describe a new approach to financing biomedical innovation that we first proposed in Fernandez, Stein, and Lo (2012) and extend in several ways here: using portfolio theory and securitization to reduce the risk of translational medicine. By combining a large number of drug-development projects within a single portfolio, a “megafund,” it becomes possible to reduce the investment risk to such an extent that issuing bonds backed by these proj- ects becomes feasible. Debt financing is a key innovation because the cost of each drug-development project can be several hundred million dollars; hence, a sufficiently diversified portfolio may require tens of billions of dollars of investment capital, and debt markets have much greater capacity than either private or public equity markets. If these bonds are structured to have different priorities, the most senior class or “tranche” may be rated by credit-rating agencies, opening up a much larger pool of institutional investors who can purchase such instruments, e.g., pension funds, sovereign wealth funds, endowments, and foundations. Our results also suggest that even a small (in expected value) third-party guarantee can materially improve the economics of an RBO transaction.

read more

Financing drug discovery for orphan diseases

 

Financing drug discovery for orphan diseases

David E. Fagnan, Austin A. Gromatzky, Roger M. Stein, Jose-Maria Fernandez and Andrew W. Lo

 

Recently proposed ‘megafund’ financing methods for funding translational medicine and drug development require billions of dollars in capital per megafund to de-risk the drug discovery process enough to issue long-term bonds. Here, we demonstrate that the same financing methods can be applied to orphan drug development but, because of the unique nature of orphan diseases and therapeutics (lower development costs, faster FDA approval times, lower failure rates and lower correlation of failures among disease targets) the amount of capital needed to de-risk such portfolios is much lower in this field. Numerical simulations suggest that an orphan disease megafund of only US$575 million can yield double-digit expected rates of return with only 10–20 projects in the portfolio.

read more