Commercializing Biomedical Research Through Securitization Techniques
Author(s)Fernandez, Jose-Maria; Stein, Roger Mark; Lo, Andrew W.
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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.
DepartmentMassachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory; Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science; Sloan School of Management; Sloan School of Management. Laboratory for Financial Engineering
Nature Publishing Group
Fernandez, Jose-Maria, Roger M Stein, and Andrew W Lo. “Commercializing Biomedical Research Through Securitization Techniques.” Nature Biotechnology 30.10 (2012): 964–975. CrossRef. Web. 4 Apr. 2013.
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