A paper published today, "Financing translation: Analysis of the NCATS rare-diseases portfolio" in Science Translational Medicine, demonstrates the potential of a new financing technique to reduce the risk associated with investing in the treatment of new diseases and potentially unlock new levels of funding for developing so-called "orphan" drugs.
The product of a unique collaboration between scientists at the National Center for Advancing Translational Sciences (NCATS), part of the National Institutes of Health, (NIH), and financial economists at the MIT Laboratory for Financial Engineering, the study documents the potential of megafunds—large diversified portfolios of biomedical projects—to provide attractive returns to investors while mitigating some of the risks involved in investing in early stage exploration of new medicines for rare diseases.
Rare diseases are defined by the Orphan Drug Act of 1983 as diseases that affect fewer than 200,000 people in the U.S. Historically these diseases have not attracted significant funding from pharmaceutical companies because of their low incidence, hence the term "orphan" diseases.
Yet research published today shows that megafunds may be particularly well-suited to fund orphan drug development. By diversifying the risk of drug development across many projects, the likelihood of success grows and the financial risk/reward profile of an investment in a megafund becomes more attractive to a larger pool of investors.
To gauge the potential efficacy of a megafund, the authors used data from two of NCATS' rare diseases programs to evaluate the risks and rewards of a simulated portfolio calibrated according to data from 28 active projects funded and currently managed by NCATS. These projects spanned a diverse range of therapeutic areas including oncology, hematology, and endocrine disorders. The average simulated annualized returns of this hypothetical megafund were 5% and 8% for senior and junior bondholders, respectively, and 14.7% for equity holders which is equivalent to an internal rate of return of 21.6% using typical venture-capital metrics.
Andrew W. Lo, one of the authors of the study and Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management, believes that these rates of return are sufficient to attract new capital to underfunded and neglected diseases. "Thanks to our collaboration with NCATS and their data, we now have more direct evidence that the enormous power of financial markets can be directed to developing badly needed therapies for rare and neglected diseases while earning attractive rates of return for investors at the same time," says Professor Lo.
The findings are significant: Although each rare disease may have low prevalence, an estimated 25 to 30 million Americans are affected by several thousand rare diseases recognized by the NIH. "Taken collectively, rare diseases are not very rare at all," says Professor Lo.
"This remarkable collaboration exemplifies a number of NCATS core principles," said Christopher P. Austin, M.D., NCATS director. "Bringing distinct expertise together — in this case drug development and financial engineering — leads to the greatest advances in science."
NCATS Feature Story on the Study:
Study Title and Link: Financing Translational Medicine: A Portfolio Analysis of the NCATS Rare Diseases Portfolio, February 25, 2015.
Authors: David E. Fagnan, MIT Operations Research Center, Cambridge, MA.
Nora Yang, director, Portfolio Management and Strategic Operations, National Center for Advancing Translational Sciences, NIH, Rockville, MD.
John C. McKew, former director of TRND, National Center for Advancing Translational Sciences, NIH, Rockville, MD.
Andrew W. Lo, MIT Sloan School of Management and Laboratory for Financial Engineering, Cambridge, MA
Principal Research Institutions Involved: National Center for Advancing Translational Sciences and the MIT Laboratory for Financial Engineering
Study Design: Data were collected for 28 rare-disease projects—15 from the Therapeutics for Rare and Neglected Diseases (TRND) program and 13 from Bridging Interventional Development Gaps (BrIDGs) program. The projects spanned a diverse range of therapeutic areas: oncology (3), hematology (5), musculoskeletal diseases (5), cardiovascular (2), central nervous system diseases (6), endocrine disorders (4), ophthalmology (2), and respiratory disorders (1) (see Table S.4 in Supplemental Information for a complete list of the 28 projects). Projects within BrIDGs that are not rare-disease focused are not included in our dataset or analysis. For treatment modalities, there were 5 projects involving existing drugs repurposed for orphan indications, 13 NMEs, 8 large molecules, 1 stem cell therapy, and 1 gene vector therapy. The collaborating organizations varied across the sample and include 15 academic institutions, 9 small biotech companies, 3 NIH intramural laboratories or clinical groups, and 2 large pharmaceutical companies. The diversity of the portfolio in terms of therapeutic area, modality, and collaborating organization is purposefully designed to achieve maximum impact of limited program funding through "multiple shots on goal," as well as to help the National Center for Advancing Translational Sciences (NCATS) staff identify system-wide bottlenecks and develop models and tools to help improve the efficiency of the translational medicine pipeline.
For this analysis, the data cutoff date was December 31, 2013. Within the 28 rare-disease projects, 20 were ongoing at the data cutoff date, requiring measurement at intermediate milestones to capture the depth of the data.
MIT Sloan School of Management