title: Commercializing biomedical research through securitization techniques.
abstract: 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.
authors.affiliation: MIT Sloan School of Management and Laboratory for Financial Engineering, Cambridge, Massachusetts, USA.
authors.forename: Jose-Maria
authors.initials: JM
authors.lastname: Fernandez
authors.forename: Roger M
authors.initials: RM
authors.lastname: Stein
authors.forename: Andrew W
authors.initials: AW
authors.lastname: Lo
mesh_terms: D035843:Biomedical Research / Q000191:economics*; D002202:Capital Financing / Q000191:economics*; D005376:Financial Management; D006801:Humans; D007449:Investments / Q000191:economics*; D009369:Neoplasms / Q000191:economics; D018581:Technology Transfer