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Financial Innovations for Faster Cures: Securitization of Medical Solutions I
November 29, 2005
Santa Monica, CA

Much progress has been made against some of our most deadly and debilitating diseases. But despite these advances, cancer, Alzheimer's, diabetes and other illnesses continue to devastate individuals and families.

One of the primary weapons in this battle is the development of new drugs that can cure or offset the effects of these diseases. But because of the enormous costs of developing new drugs, the length of time to get them to market and the high risks for investors, the discovery of new life-saving medicines has slowed.

This financial innovations lab, and a similar one in New York City on Dec. 13, focused on how we can use creative financial techniques to increase investment in medical research and commercialization. A diverse group of experts in finance, medicine, philanthropy and intellectual property met to help figure out what new financial instruments and strategies could be created to break the drug-discovery finance logjam.

"People are dying who shouldn't be dying," said Glenn Yago, Director of Capital Studies at the Institute, who hosted the event.

Attendees agreed that fundamental shifts that have taken place in the pharmaceutical industry over the past five years that make it more difficult to fund research for promising, but early-stage drugs.

With the cost of getting a new drug to market estimated at $800 million, many drug companies now rely on smaller biotechnology firms to pay the bill for this research. But venture capital funding for these small companies has dried up because investors don't want to take the risk of losing their money on unproven drugs. They're more interested in drugs that have proven themselves in late-stage clinical trials.

As a result, it's tough to put deals together that will help move these potentially life-saving drugs along the research pipeline, they said.

"Pharmacology is the most difficult (industry) I've faced," said Joe Daniele, chief operating officer of Acorn Technologies, Inc., who has completed more than 350 IP deals over the years.

Lab members talked about what has worked and not worked to help fill this funding gap, such as special purpose vehicles and structured finance, and how you value intellectual property such as drug patents.

But much of the focus was on a financial instrument strongly supported by research at the Milken Institute: securitization — or the pooling of assets that can be sold as a security.

Is there a way, for example, to estimate the future value of royalties over a number of years from a portfolio of patents relevant to a particular disease group or medical problem? This portfolio could then be turned into marketable securities, which would provide capital to accelerate research.

Attendees also discussed how insurance companies or foundations whose missions are aligned with particular diseases might help bridge the financing gap by, for instance, providing loan-loss guarantees. This would require a fundamental shift in the thinking of foundations, many agreed.

The objective of the labs is to explore a range of market-based alternatives to closing the early-stage funding gap and accelerate cure development for infectious and chronic diseases. Designing capital structures with credit enhancement, advanced sales and other financial, marketing or business strategies that align interests of foundations, investors, patients, governments and businesses is expected to advance health solutions.

The findings and results of the two labs are summarized in a report available here.

The labs were made possible, in part, thanks to the generous support of Adjoin and Bioacclerate.