A proposed megafund would combine debt securities with equity investments to help pay for high-risk biomedical research.
Looking for a scary investment? Try drug development. New drug compounds in preclinical development today have a more than 90% chance of commercial failure. Unsurprisingly, investors increasingly shy away from early-stage biomedical ventures.
But what if it were possible to minimize risks by pooling dozens or even hundreds of new drug ventures into a single investment fund? That's the brainchild of a group of finance experts from Massachusetts Institute of Technology (MIT).
Valued at between $2.5 and $30 billion, their proposed “megafund” would combine debt securities (such as bonds) with traditional equity (stocks).
Debt holders would be paid interest on varying time scales, while equity holders would cash in only when development transactions are completed, explains Roger Stein, PhD, an MIT research affiliate and a managing director at Moody's in New York. “Insurance companies, pension funds, and others who steer away from high-risk investments might be interested in this approach because it offers more reliable, albeit modest, returns,” he says.
Stein and his coauthors, Jose-Maria Fernandez, MBA, a researcher at MIT's Laboratory for Financial Engineering (LFE), and Andrew Lo, PhD, an MIT professor and head of the LFE, say the success of a few funded ventures could generate enough profit to offset losses incurred by the majority that fail. Simulations with a hypothetical cancer drug megafund, described in an article in the October issue of Nature Biotechnology, suggest that yields on debt securities could range from 5% to 8%, while returns on the high-risk equity could range up to 11.4%.
The megafund might advance drug approvals in cancer and other diseases, Stein says, because it would allow more compounds to cross a financial “valley of death” between early- and late-stage development. “So many new compounds are waiting for funding,” he says. “We think our approach can help address that problem.”