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Financing drug discovery via dynamic leverage.

Vahid Montazerhodjat1, John J Frishkopf2, Andrew W Lo3

  • 1MIT Laboratory for Financial Engineering, Sloan School of Management, Cambridge, MA, USA; MIT Department of Electrical Engineering and Computer Science, Cambridge, MA, USA.

Drug Discovery Today
|December 29, 2015
PubMed
Summary
This summary is machine-generated.

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This study introduces dynamic leverage for drug discovery megafunds, boosting equity returns by nearly twofold for orphan drug candidates compared to static structures. This funding strategy enhances returns without increasing investor risk.

Area of Science:

  • Drug discovery financing
  • Financial modeling
  • Pharmaceutical investment

Background:

  • The megafund concept offers a framework for drug discovery funding.
  • Traditional funding models may not optimally balance risk and return.
  • Orphan drug development presents unique financial challenges and opportunities.

Purpose of the Study:

  • To introduce and evaluate a dynamic leverage strategy for megafunds in drug discovery.
  • To assess the impact of dynamic leverage on return on equity and default risk.
  • To compare dynamic leverage with static capital structures and all-equity financing.

Main Methods:

  • Extending the megafund concept with a dynamic leverage approach.
  • Gradually introducing debt as therapeutic assets mature and generate cash flow.

Related Experiment Videos

  • Adjusting leverage to maintain a constant level of default risk.
  • Conducting numerical simulations on portfolios of orphan drug candidates.

    • Main Results:

    • Dynamic leverage nearly doubled the return on equity for orphan drug candidate portfolios compared to static securitization.
    • This strategy significantly enhanced equity returns in all-equity-financed portfolios.
    • The approach maintained debt performance and did not increase risk for equity investors.

    Conclusions:

    • Dynamic leverage is a viable and advantageous funding strategy for drug discovery megafunds.
    • This method optimizes financial returns for therapeutic asset portfolios, particularly for orphan drugs.
    • Dynamic leverage enhances investment value without compromising financial stability or increasing risk.