More favourable financial terms can bring investors back to the pharmaceutical industry, finance professor claims
Uncertainty around how long it will take to find a cure for different forms of cancer is forcing investors to reconsider pumping hundreds of millions of dollars into pharmaceuticals.
But offering long-term debt rather than venture capital can help draw them back, according to Andrew Lo, Professor of Finance at the MIT Sloan School of Management. He was speaking at the Financial Innovations in Healthcare conference, held at London Business School (LBS) and supported by the AQR Asset Management Institute.
“Using debt as a different vehicle changes the dynamics; by using a better form of financing, you can get better incentives and take on longer-term projects,” he said.
“Because of the milestone payments and shorter horizons with traditional venture capital, a lot of good projects get destroyed. If you miss your milestone, investors pull out their money. If they shut down the lab, people leave and a lot of the value that has been destroyed becomes impossible to recoup.”
Professor Lo said the potential returns were huge for investors willing to wait 10–15 years – the typical time taken for completing all clinical trials and securing FDA approval in the US.
Reducing the risk for investors was crucial, he added. To do this, backers could invest in a megafund that would finance 150 drug development projects simultaneously. While each project has a 5% chance of success, the probability of getting three “hits” independently is 98%, according to Professor Lo. If that happened, the return for investors would be US$37 billion.
“In the past, returns from the healthcare and pharmaceutical industries have been rewarding,” Professor Lo said. “But the risks for investors have since gone up. In finance, the more you know about a particular issue or investment, the less risk there is. With drug development, it’s the opposite – with more knowledge comes more investment and risk.”
Despite the risks, Professor Lo believes investors who back pharmaceuticals potentially stand to make billions of dollars – while helping develop a cure for global diseases. “With your help, financial engineering can help cure cancer,” he said.
Professor Lo was one of several high profile speakers at the event, which opened and closed with remarks from Francisco Gomes and Ralph Koijen, both Professors of Finance and Academic Directors at the AQR Asset Management Institute at LBS.
He was joined by Dr Eliot Forster, Chairman of MedCity, who spoke about the financial challenges UK medical researchers face. Dr Forster said: “London and the south east of England is a world-leading life sciences cluster, however more needs to be done to encourage large pools of new capital to fund the plethora of opportunities in the sector. Increasing access to capital, including patient or permanent capital, will further enable our life sciences community to bring innovative therapies to patients, with these healthcare and economic benefits – for London, Europe and globally.”
Tomas Philipson, Daniel Levin Professor of Public Policy at the University of Chicago, focused on financial and real healthcare markets and ways to mitigate government and development risk in pharmaceutical research. Finally, a panel of experts talked about how to stimulate financial innovations in healthcare.