Financing Correlated Drug Development Projects

24 Pages Posted: 7 Nov 2020

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Kien Wei Siah

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2020

Abstract

Current business models have struggled to support early-stage drug development. In this paper, we study an alternative financing model, the mega-fund structure, to fund drug discovery. We extend the framework proposed in previous studies to account for correlation between phase transitions in drug development projects, thus making the model a more realistic representation of bio-pharma research and development. In addition, we update the parameters used in our simulation with more recent estimates of the probability of success (PoS). We find that the performance of the mega-fund becomes less attractive when correlation between projects is introduced. However, the risk of default and the expected returns of the vanilla mega-fund remain promising even under moderate levels of correlation. In addition, we find that a leveraged mega-fund outperforms an equity-only structure over a wide range of assumptions about correlation and PoS.

Keywords: Securitization; Biotechnology; Research Backed Obligation; Biomedical Mega-Fund; Portfolio Theory; Monte Carlo Simulation

JEL Classification: G11, G17, G24, G32, I11, C15, L65, O31

Suggested Citation

Lo, Andrew W. and Siah, Kien Wei, Financing Correlated Drug Development Projects (September 18, 2020). Available at SSRN: https://ssrn.com/abstract=3695209 or http://dx.doi.org/10.2139/ssrn.3695209

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Kien Wei Siah

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

Cambridge, MA
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
232
Abstract Views
1,071
Rank
63,004
PlumX Metrics