Bundling Biotech Innovation: How Financial Engineering Can Save Science — and Lives

The time is ripe for new financial solutions to reshape the biotech industry.

One voice at the forefront of financial innovation in biotech is an MIT professor, researcher, and economist named Andrew W. Lo. In recent years, Lo has called attention to a worrying trend in science finance: Even as humans get smarter and technology becomes more powerful, our ability to turn that intelligence into efficient and profitable biomedical outcomes has dwindled.

Part of the problem is our capacity to evaluate risk vs. reward in biotech, which has been steadily declining over the last decade, making it harder to raise money for the early, crucial part of drug discovery.

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The science of risk

A research paper by Lo and his MIT colleague, Richard T. Thakor, titled “Financing Biomedical Innovation”, presents unique paths toward advancing biomedicine and early-stage drug development through financial engineering.

In the paper, Lo and Thakor discuss the long, expensive, and risky journey drugs must take to approval, and how unpredictable market conditions have made capital for biopharma firms, especially smaller ones, increasingly scarce. “During market downturns, it will typically be harder for biopharma firms to finance their drug development programs. This realization suggests that the smaller cash-poor biotech companies are much more sensitive to financing risk,” they write.

This friction and the unpredictable nature of funding and clinical trial outcomes has led to “underinvestment in R&D and therapies that are potentially valuable from a societal perspective.”

Lo and Thakor present solutions addressing the high-risk, high-cost challenges of drug development, so that more funding can be “channeled toward drug development, particularly in areas where there may be greater societal need but higher risks for firms.”