This TED Talk by MIT Professor Andrew Lo describes how financial engineering can be used to help cure cancer.
In the video he describes what sounds like an ABS with several tranches that would be open to public investors. This way you could get around the inherent risk of investing in startup biotech companies that are reliant on an upcoming drug test.
He notes that the final drug tests tend to have 2 outcomes:
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Fail the drug test, 19/20 chance, investment lost
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Pass the drug test, 1/20 chance, multiples of ROI
The product he is describing is reminiscent of the MBS that were all the rage in the mid 2000's. Different tranches etc.
What do you guys think about using this structure to securitize investing in cancer startups?
I did an entire graduate thesis on this exact topic. My conclusion was no for 3 main reasons: 1. Institutional investors are not sophisticated or risk-happy enough to invest in these pretty complex multi drug derivative portfolios 2. The due diligence needed for a portfolio of even 100 drugs would be insane and even it was composed of 10-20 phase 1 products you would be making crazy wild valuation guesses 3. Pretty much all successful drugs that came from small companies have been bought or commercialised by big pharma. If you put a drugs's IP or royalty in a derivative a portion goes to investors. Big Pharma will not like a drug that only has 60-70% of the royalties or IP up for grabs. They tend to want almost all of it. If you don't get Big Pharma onboard in todays market you won't have that much success.
PM me if you like, I'm happy to share the original paper with you
Not sure what you mean by being “risk-happy.” The purpose of these instruments is to reduce risk to the level of any other derivative investment. Plenty of institutions still invest in derivatives of varying risk profiles.
I agree that the valuation of future drugs is the main challenge in this method. But again it’s not really that different from other derivatives. Also I believe Lo tries to capture this valuation uncertainty. He mentions it also helps if the drugs are less correlated from a biological perspective, obviously (e.g searching for a cancer drug plus another drug targeting a neurodegenerative disorder vs. two cancer drugs).
Not really sure what you mean here, as I’m pretty sure all Big Pharma cares about (like any other for profit) is risk-adjusted IRR. They would rather have 70% of a big pie than 100% of nothing.
Would be interested in your thesis! I come from an AM background so this idea intrigued me, but maybe I don’t understand the nuances of pharma AM.
I will send it to both you and @LeveredCat"
As for your point I will try to elaborate
So I've reached my PM limit and can't send PDF files via PM. If you PM me your email I can send it over
Is there any way I can read your graduate thesis? I'm interested in pharma too but don't have any formal training. It would be good to be informed.
So I've reached my PM limit and can't send PDF files via PM. If you PM me your email I can send it over
PMed
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