Milken Report Provides Suggestions for Better Biotech Funding

In a time of tightening budgets and funding shortfalls, many institutions are searching for innovative sources of capital to finance their investment needs. Financial Innovations for Accelerating Medical Solutions, a recent report from the Milken Institute, provides some insight on inventive ways to raise capital for the biotechnology industry. 

 

Milken convened two workshops in the fall of 2005, one in Santa Monica and one in New York City, of various stakeholders in the drug development process. These workshops included patent brokers and intellectual property lawyers, private equity investors and analysts, insurance consultants, biotechnology entrepreneurs, academics, and members of foundations. The report decries the lack of venture capital for early-stage product investments, especially between the preclinical and clinical stages of development.

 

Six main recommendations are provided to reduce credit risk, attract investors, and accelerate commercialization in a broad range of disease areas:

• Reduce the scientific risk through the diversification or pooling of intellectual property.
• Use foundation funds to enhance credit quality and attract potential investors.
• Use directors and officers (D&O) liability insurance to enhance credit quality.
• Tap into the emerging market for intellectual property-backed securities.
• Use advanced purchases to underwrite medical research and drug delivery to under-funded patient groups.
• Use donor bonds to underwrite medical research and drug delivery to under-funded patient groups.

The report states that since only about 5 percent of innovations have any commercialization value, a large portfolio of early-stage projects may increase confidence and funding, as compared to financing a single project. Much attention is given to the concept of securitization, or the clustering of assets that can be sold as a security or some other type of structured finance. Since the royalties over time from this diverse collection of pooled resources may be better estimated, the portfolio can then be turned into a marketable security to attain capital.

 

Besides those recommendations intended to minimize risk, other recommendations attempt to create a market for pharmaceutical products by using pull mechanisms such as advanced purchasing by governments and foundations, and donor bonds that create immediate financing based upon future stream of payments. But the report also cautions that some pull systems might not finance the most effective cure for diseases, as the funding system rewards the first solution to the market. There also exists the potential for corruption, as governments choose certain companies to participate in advanced purchasing.

 

The report may be downloaded from Milken's website upon free registration at:

http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=580&cat=finlab