Curious cases of financial engineering in biotech
Bundling 50 drug programs could make biotech investing survivable.
Biotech drug development is a high-stakes gamble: a $250 million, 10-year investment has a 5% chance of yielding a $5 billion blockbuster. Despite flat expected values, the industry persists because society needs new drugs for cancer, heart failure, and rare diseases. MIT finance professor Andrew Lo proposed a solution in a 2012 Nature paper: bundle 50 uncorrelated drug programs into a single $5-15 billion entity. This portfolio approach ensures that at least one program hits, covering all failures and making the investment survivable. His student Neil Kumar founded BridgeBio Pharma in 2015 to implement this model.
Beyond portfolio theory, Lo envisioned issuing debt against such portfolios to sell as bonds, tapping into non-venture capital seeking stable returns. While this specific strategy hasn't fully materialized, the core idea of financial engineering—slicing and dicing risk into manageable pieces—has gained traction. These structural tricks allow investors to hold more tickets or buy fractions of successful ones, potentially altering what the pharmaceutical industry values. The key challenge remains achieving truly uncorrelated programs, but the approach offers a path to make drug development less punishing for all involved.
- Individual drug programs fail 95% of the time, with $250M upfront costs and 5% chance of $5B payout.
- Andrew Lo's 2012 Nature paper proposed bundling 50 uncorrelated programs into a $5-15B portfolio to reduce risk.
- BridgeBio Pharma, founded by Lo's student Neil Kumar in 2015, directly implements this portfolio model.
Why It Matters
Financial engineering could make biotech investing viable, unlocking more capital for life-saving drug development.