Financial Innovations for Faster Cures: Securitization of Medical Solutions II


Following up on the first Financial Innovations Lab, which examined how creative financial techniques may be able to bridge the funding gaps in medical research, a diverse group of financial, legal, philanthropic, insurance and medical-research experts met in New York to discuss the specifics of how this can be done.

With the cost to produce new drugs growing more expensive (reportedly, as much as $800 million), increased regulatory scrutiny and fewer blockbuster drugs to help the bottom line, research-and-development activity has declined at the major pharmaceutical companies, resulting in fewer new drugs being discovered.

One problem is the enormous risk to investors because of the long time frame involved for bringing new drugs to market, and the huge uncertainty of whether they'll pan out.

So the question to those attending this lab was simple: What innovative financial structures have evolved that could be applied to the biopharmaceutical industry that would reduce this risk to investors and pump more money into medical research — especially early-stage drug discovery?

"Why is it that the large pharmaceutical industry, which was once a full-service provider in drug development, has continued to withdraw from risky early-stage discovery and development?" asked Glenn Yago, Director of Capital Studies at the Milken Institute. "Why is it that the venture capital market and equity investors have been avoiding support for risky early-stage discovery and development? And how do we overcome this?"

Attendees spent the day looking at a variety of potential mechanisms, such as special-purpose vehicles, structured finance and the securitization — the pooling of assets that can be sold as a security — of intellectual property, like drug patents.

Jeffrey Brandt, a patent attorney, agreed that a well-assembled portfolio can have a value greater than the sum of its parts. But there are risks.

"Owning intellectual property is like having a tiger by the tail," said Brandt, who is President of JLB Consulting Inc. "The good news is you own a tiger. The bad news is you've got it by the tail. You're probably going to have to do something with it. You need to understand what you own in terms of using it."

Among the major issues are finding the right financial instrument, the right disease, the right patents and the right stakeholders to reduce the risk and ensure the best outcome. Jay Eisbruck, Managing Director of Moody's Investors Service, said this would not be easy.

"The only way to make it work would be to cross-collateralize all these different drugs into one deal," he said. But "everyone is going to think their drug is going to be more successful than everyone else's, so they're going to not necessarily want to share the benefits of that. To make this work, you would have to find a way to get people to at least subordinate some of the benefit of their drugs for the benefit of the overall transaction to make it work."

Many venture capitalists have pulled out or cut back on their investments, attendees said.

"Venture capitalists are becoming more risk-averse," said Martha Amram, an author and Founder of Growth Options Insights, LLC. "So we have a gap here of how to reduce the risk further so additional funding sources will come in."

By involving many of the different players in these discussions — insurance companies and foundations, for example, that could help bridge the financing gap — Milken Institute researchers hope to forge agreement on new ways to fund drug research.

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.

The findings and results of this lab and the first one, held in Santa Monica on Nov. 29, 2005, are summarized in a report available here.