By Vishal Chinchwadkar, Research Analyst, LSN
Can a novel financing tool be the answer to cure some of mankind’s greatest medical challenges? Andrew W. Lo, a hedge fund manager and a finance professor at MIT, recently proposed a revolutionary idea to promote research for cancer. Mr. Lo has suggested the creation of a $30 billion “megafund” targeted at the singular goal of maximizing cancer therapy development. The concept aims to create a diversified portfolio in a single broad indication to mitigate risk by diversifying the fund’s portfolio. At the most basic level, it allows a single large investment entity to tolerate early stage risk by diversifying its allocations along the entire pipeline. This is critical in an indication that affects millions, but remains a major therapeutic challenge (largely due to funding gaps).
Private partnership structures, such as those used by venture capital funds, can’t justify the creation of a diversified portfolio because of the timeline associated with the full development cycle of a therapeutic. Thus they often focus on a specific development stage and hope to pass their investment off to another entity further down the line. The megafund structure is different in that it has enough capital to tolerate the broad diversification of capital across the entire therapeutic development landscape.
Even more interestingly, the megafund structure is organized in such a way that It could draw on capital (at least in part) via the public capital markets via securitization. Securitization is a common financing tool in which capital is obtained from a diverse group of investors by means of equity and debt in order to have claims in the biomedical research. It may seem naïve that so much capital could be raised in a generally poor economic climate, but given the low-interest rate environment, the timing may be ideal for issuing long-term debt.
The megafund concept signifies a paradigm shift in how capital could be allocated to major diseases in the future through a broad-based investor audience, but allocated by experts. Having a skilled management team in control of a portfolio, is a major factor. The public market capitalization of such a fund allows universal participation (like crowdfunding), but keeps experts in control of the vetting of technologies. Within a single portfolio, the open sharing of data, knowledge, and resources across hundreds of research projects can be of great benefit to scientists, investors, and society as a whole. Megafunds might just be the biggest shift in how companies are funded in the life sciences arena moving forward.