Securitization of a Drug Development Mega-Fund: The Time-Certain Research-Backed Obligation

Without sufficient capital, the cost of engaging in sustainable clinical development of a drug or drug compound is exceedingly difficult. Fagnan, Fernandez, Lo, and Stein have proposed the securitization of a drug development “mega-fund” as a means of attracting capital from traditional long-term corporate bond investors to the clinical stage of drug development. Our contribution to this line of thinking is the modeling of the cash flows of such a biopharmaceutical mega-fund and their distributions over time to develop an innovative design of securities that control the timing risk of cash flows. This modeling offers a more efficient means of allocating the cash flows that the mega-fund consumes and generates, in an effort to lower the overall yields required to place the research-backed obligations. The new securities control the cash flow timing risk and the lower cost of funding ultimately means more funds are available to clinically test a treatment or cure. We obtain the cash flow profile of this new security, called ‘the time-certain research-backed obligation’, by isolating cash flows from two different time distribution of cash flow scenarios, so that investors will be assured of the time frame over which they will receive repayment of their investment. We have offered a security design that will lower the cost of funding the drug mega-fund. Success or failure of a drug is uncorrelated with the performance of the stock or bond markets, thus this asset class that is backed by a portfolio of drugs in the clinical stages of development should have little correlation with other asset markets, making them a valuable addition to diversified portfolios.