Can Financial Engineering Cure Cancer?

Biomedical innovation has become riskier, more expensive and more difficult to finance with traditional sources such as private and public equity. We propose a financial structure in which a large number of biomedical programs at various stages of development are funded by a single entity to substantially reduce the portfolio’s risk. The portfolio entity can finance its activities by issuing debt, a critical advantage because a much larger pool of capital is available for investment in debt versus equity. By employing financial engineering techniques such as securitization, it can raise even greater amounts of more-patient capital. Our simulations, using historical data for new molecular entities in oncology from 1990 to 2011 suggest rates of return that are lower than typical venture-capital hurdle rates but potentially attractive to pension funds, insurance companies and other large institutional investors.