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.Download (PDF) >
The National Institutes of Health (NIH) is among the world’s largest investors in biomedical research, with a mandate to: “…lengthen life, and reduce the burdens of illness and disability.” Its funding decisions have been criticized as insufficiently focused on disease burden. We hypothesize that modern portfolio theory can create a closer link between basic research and outcome, and offer insight into basic-science related improvements in public health. We propose portfolio theory as a systematic framework for making biomedical funding allocation decisions–one that is directly tied to the risk/reward trade-off of burden-of-disease outcomes.
Using data from 1965 to 2007, we provide estimates of the NIH “efficient frontier”, the set of funding allocations across 7 groups of disease-oriented NIH institutes that yield the greatest expected return on investment for a given level of risk, where return on investment is measured by subsequent impact on U.S. years of life lost (YLL). The results suggest that NIH may be actively managing its research risk, given that the volatility of its current allocation is 17% less than that of an equal-allocation portfolio with similar expected returns. The estimated efficient frontier suggests that further improvements in expected return (89% to 119% vs. current) or reduction in risk (22% to 35% vs. current) are available holding risk or expected return, respectively, constant, and that 28% to 89% greater decrease in average years-of-life-lost per unit risk may be achievable. However, these results also reflect the imprecision of YLL as a measure of disease burden, the noisy statistical link between basic research and YLL, and other known limitations of portfolio theory itself.
Our analysis is intended to serve as a proof-of-concept and starting point for applying quantitative methods to allocating biomedical research funding that are objective, systematic, transparent, repeatable, and expressly designed to reduce the burden of disease. By approaching funding decisions in a more analytical fashion, it may be possible to improve their ultimate outcomes while reducing unintended consequences.Available Here >