Can Financial Engineering Cure Cancer?: A New Approach to Funding Large-Scale Biomedical Innovation

Abstract

For investment projects with low probabilities of success, long time horizons, and large capital requirements, traditional financing sources such as private and public equity may not be ideal. Nevertheless, such projects may yield attractive risk-adjusted returns when combined into a single portfolio if they are not too highly correlated. The scale of such "megafund" portfolios may be too large to finance through private or public equity alone, but with sufficient diversification and risk analytics, debt financing via securitization may also be feasible. Additional credit enhancements through derivatives markets and government policy can also increase both the size and attractiveness of megafunds. We provide an analytical framework and an empirical example involving cancer drug-development programs to illustrate the mechanics of megafund financing.

Keywords: Financial Innovation, Securitization, Financial Engineering, Healthcare

JEL Classification: G11, G24, G32