Financing drug discovery via dynamic leverage

Montazerhodjat, Vahid; Frishkopf, John J.; Lo, Andrew W.

doi:10.1016/j.drudis.2015.12.004

Cited by 13 publications

(4 citation statements)

References 7 publications

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“…But as assets progress through the clinical trials process and eventually begin generating cash flows, leverage becomes possible. Montazerhodjat, Frishkopf & Lo (2016) show that a dynamic leverage policy-in which a constant level of default risk is maintained as a megafund's capital structure shifts from all-equity to a mix of equity and an increasing amount of debt-can boost equity returns and create significant value for both investors and patients.…”

Section: Rare Disease Megafundsmentioning

confidence: 99%

Financing Biomedical Innovation

Thakor

2022

Annu. Rev. Financ. Econ.

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We review the recent literature on financing biomedical innovation, with a specific focus on the drug development process and how it may be enhanced to improve outcomes. We begin by laying out stylized facts about the structure of the drug development process and its associated costs and risks, and we present evidence that the rate of discovery for life-saving treatments has declined over time while costs have increased. We make the argument that these structural features require drug development (i.e., biopharmaceutical) firms to rely on external financing and at the same time amplify market frictions that may hinder the ability of these firms to obtain financing, especially for treatments that may have large societal value relative to the benefits going to the firms and their investors. We then provide an overview of the evidence for various types of market frictions to which these drug development firms are exposed and discuss how these frictions affect their incentive to invest in the development of new drugs, leading to underinvestment in valuable treatments. In light of this evidence, numerous studies have proposed ways to overcome this funding gap, including the use of financial innovation. We discuss the potential of these approaches to improve outcomes.

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Section: Rare Disease Megafundsmentioning

confidence: 99%

Financing Biomedical Innovation

Thakor

2022

Annu. Rev. Financ. Econ.

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“…This is explained by the projects acquired later having less time for development over the tenor of the megafund. In these cases, the use of more sophisticated securitization techniques like dynamic leverage (Montazerhodjat, Frishkopf, and Lo 2016) can help improve its performance.…”

Section: Sensitivity Of the Guarantee-backed Rbo Performance To Diffementioning

confidence: 99%

Financing Correlated Drug Development Projects

Siah

2020

JSF

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Current business models have struggled to support early-stage drug development. In this paper, we study an alternative financing model, the megafund structure, to fund drug discovery. We extend the framework proposed in previous studies to account for correlation between phase transitions in drug development projects, thus making the model a more realistic representation of biopharma research and development. In addition, we update the parameters used in our simulation with more recent estimates of the probability of success (PoS). We find that the performance of the megafund becomes less attractive when correlation between projects is introduced. However, the risk of default and the expected returns of the vanilla megafund remain promising even under moderate levels of correlation. In addition, we find that a leveraged megafund outperforms an equity-only structure over a wide range of assumptions about correlation and PoS.

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“…Modeling suggests that it will take an estimated $38.4 billion over a decade to deliver a robust pipeline of AD therapeutics [82]. No single investment entity can undertake such a financial burden; a combination of federal and private equity would allow the development of a mega-fund structure to cover the costs and underwrite AD therapeutic development [83]. This would accommodate a high failure rate and decrease the risk of the investment by distributing the opportunity for success among multiple agents and allowing parallel development of multiple treatment approaches.…”

Section: Innovations In Financing Translational Researchmentioning

confidence: 99%

The price of progress: Funding and financing Alzheimer's disease drug development

Cummings

Reiber

Kumar

2018

A&D Transl Res & Clin Interv

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IntroductionAdvancing research and treatment for Alzheimer's disease (AD) and the search for effective treatments depend on a complex financial ecosystem involving federal, state, industry, advocacy, venture capital, and philanthropy funding approaches.MethodsWe conducted an expert review of the literature pertaining to funding and financing of translational research and drug development for AD.ResultsThe federal government is the largest public funder of research in AD. The National Institute on Aging, National Institute of Mental Health, National Institute of General Medical Sciences, and National Center for Advancing Translational Science all fund aspects of research in AD drug development. Non-National Institutes of Health federal funding comes from the National Science Foundation, Veterans Administration, Food and Drug Administration, and the Center for Medicare and Medicaid Services. Academic Medical Centers host much of the federally funded basic science research and are increasingly involved in drug development. Funding of the “Valley of Death” involves philanthropy and federal funding through small business programs and private equity from seed capital, angel investors, and venture capital companies. Advocacy groups fund both basic science and clinical trials. The Alzheimer Association is the advocacy organization with the largest research support portfolio relevant to AD drug development. Pharmaceutical companies are the largest supporters of biomedical research worldwide; companies are most interested in late stage de-risked drugs. Drugs progressing into phase II and III are candidates for pharmaceutical industry support through licensing, mergers and acquisitions, and co-development collaborations.DiscussionTogether, the funding and financing entities involved in supporting AD drug development comprise a complex, interactive, dynamic financial ecosystem. Funding source interaction is largely unstructured and available funding is insufficient to meet all demands for new therapies. Novel approaches to funding such as mega-funds have been proposed and more integration of component parts would assist in accelerating drug development.

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Financing drug discovery via dynamic leverage

Cited by 13 publications

References 7 publications

Financing Biomedical Innovation

Financing Biomedical Innovation

Financing Correlated Drug Development Projects

The price of progress: Funding and financing Alzheimer's disease drug development

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