Implicit in the drug-approval process is a trade-off between Type I and Type II error. We propose using Bayesian decision analysis (BDA) to minimize the expected cost of drug approval, where relative costs are calibrated using U.S. Burden of Disease Study 2010 data. The results for conventional fixed-sample randomized clinical-trial designs suggest that for terminal illnesses with no existing therapies such as pancreatic cancer, the standard threshold of 2.5% is too conservative; the BDA-optimal threshold is 27.9%. However, for relatively less deadly conditions such as prostate cancer, 2.5% may be too risk-tolerant or aggressive; the BDA-optimal threshold is 1.2%. We compute BDA-optimal sizes for 25 of the most lethal diseases and show how a BDA-informed approval process can incorporate all stakeholders’ views in a systematic, transparent, internally consistent, and repeatable manner.Download (PDF) >
The portfolio of the National Center for Advancing Translational Sciences (NCATS) rare-diseases therapeutic development program comprises 28 research projects initiated at the preclinical stage. Historical data reveal substantially lower costs and higher success rates but longer preclinical timelines for the NCATS projects relative to the industry averages for early-stage translational medical research and development (R&D) typically cited in literature. Here, we evaluate the potential risks and rewards of investing in a portfolio of rare-disease therapeutics. Using a “megafund” financing structure, NCATS data, and valuation estimates from a panel of industry experts, we simulate a hypothetical megafund in which senior and junior debt yielded 5 and 8%, respectively. The simulated expected return to equity was 14.7%, corresponding to a modified internal rate of return of 21.6%. These returns and the likelihood of private-sector funding can be enhanced through third-party funding guarantees from philanthropies, patient advocacy groups, and government agencies.Available Here >
Cancer is expected to continue as a major health and economic problem worldwide. Several factors are contributing to the increasing economic burden imposed by cancer, with the cost of cancer drugs an undeniably important variable. The use of expensive therapies with marginal benefits for their approved indications and for unproven indications is contributing to the rising cost of cancer care. We believe that expensive therapies are stifling progress by (1) encouraging enormous expenditures of time, money, and resources on marginal therapeutic indications and (2) promoting a me-too mentality that is stifling innovation and creativity. The modest gains of Food and Drug Administration—approved therapies and the limited progress against major cancers—is evidence of a lowering of the efficacy bar that, together with high drug prices, has inadvertently incentivized the pursuit of marginal outcomes and a me-too mentality evidenced by the duplication of effort and redundant pharmaceutical pipelines. We discuss the economic realities that are driving this process and provide suggestions for radical changes to reengineer our collective cancer ecosystem to achieve better outcomes for society.Available Here >
There exist scientifically promising treatments not being tested further because of insufficient financial incentives. Many of these therapies involve off-label uses of drugs approved by the Food and Drug Administration that are readily available and often inexpensive. Pharmaceutical companies—largely responsible for clinical drug development—cannot justify investing in such clinical trials because they cannot recoup the costs of these studies. However, without prospective data demonstrating efficacy, such treatments will never be adopted as standard of care.
In an era of increasing health care costs and the need for effective therapies in many diseases, it is essential that society finds ways to adopt these “financial orphans.” We propose several potential solutions for the non-profit sector, pharmaceutical companies, health insurers, patient driven research, and others to accomplish this goal.Available Here >
The biotechnology and pharmaceutical industries are facing significant challenges to their existing business models because of expiring drug patents, declining risk tolerance of venture capitalists and other investors, and increasing complexity in translational medicine. In response to these challenges, new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is the largest of these drug royalty investment companies, and in this case study, we profile its business model and show how its unique financing structure greatly enhances the impact it has had on the biopharma industry and biomedical innovation.Download (PDF) >
Recently proposed ‘megafund’ financing methods for funding translational medicine and drug development require billions of dollars in capital per megafund to de-risk the drug discovery process enough to issue long-term bonds. Here, we demonstrate that the same financing methods can be applied to orphan drug development but, because of the unique nature of orphan diseases and therapeutics (lower development costs, faster FDA approval times, lower failure rates and lower correlation of failures among disease targets) the amount of capital needed to de-risk such portfolios is much lower in this field. Numerical simulations suggest that an orphan disease megafund of only US$575 million can yield double-digit expected rates of return with only 10–20 projects in the portfolio.Available Here >
In this paper, we describe a new approach to financing biomedical innovation that we first proposed in Fernandez, Stein, and Lo (2012) and extend in several ways here: using portfolio theory and securitization to reduce the risk of translational medicine. By combining a large number of drug-development projects within a single portfolio, a “megafund,” it becomes possible to reduce the investment risk to such an extent that issuing bonds backed by these projects becomes feasible. Debt financing is a key innovation because the cost of each drug-development project can be several hundred million dollars; hence, a sufficiently diversified portfolio may require tens of billions of dollars of investment capital, and debt markets have much greater capacity than either private or public equity markets. If these bonds are structured to have different priorities, the most senior class or “tranche” may be rated by credit-rating agencies, opening up a much larger pool of institutional investors who can purchase such instruments, e.g., pension funds, sovereign wealth funds, endowments, and foundations.Download (PDF) >
As the prevalence of Alzheimer’s disease (AD) grows, so do the costs it imposes on society. Scientific, clinical, and financial interests have focused current drug discovery efforts largely on the single biological pathway that leads to amyloid deposition. This effort has resulted in slow progress and disappointing outcomes. Here, we describe a “portfolio approach” in which multiple distinct drug development projects are undertaken simultaneously. Although a greater upfront investment is required, the probability of at least one success should be higher with “multiple shots on goal,” increasing the efficiency of this undertaking. However, our portfolio simulations show that the risk-adjusted return on investment of parallel discovery is insufficient to attract private-sector funding. Nevertheless, the future cost savings of an effective AD therapy to Medicare and Medicaid far exceed this investment, suggesting that government funding is both essential and financially beneficial.Available Here >
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 >