Fernandez, Jose Maria, Roger M. Stein, and Andrew W. Lo, 2012, Nature Biotechnology 30, 964-975.
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 financial 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 equityholders 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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