Roger Stein TED Talk: New way to fund drugs?

[yoosty]

Just saw this on the TED site and hadn't seen any Mustachian commentary on it.

http://www.ted.com/talks/roger_stein_a_bold_new_way_to_fund_drug_research.html

Seems interesting... Thoughts?

[dragoncar]

Can we get a summary?  Most TED talks can be boiled down to 2-3 sentences without all that slow talking stuff.

[arebelspy]

Can we get a summary?  Most TED talks can be boiled down to 2-3 sentences without all that slow talking stuff.

Yes please.

Here's the short summary from the TED Talk page:

Believe it or not, about 20 years' worth of potentially life-saving drugs are sitting in labs right now, untested. Why? Because they can't get the funding to go to trials; the financial risk is too high. Roger Stein is a finance guy, and he thinks deeply about mitigating risk. He and some colleagues at MIT came up with a promising new financial model that could move hundreds of drugs into the testing pipeline.

What exactly was that funding model?

[Shor]

Drug funding has to go through a series of trials for which the end result is unknown, so it's a large upfront investment requirement with large risk. At the moment there's a large backlog of unfunded drugs.

The concept given is to take a batch of 50-80 drugs and offer it as investment pool. Investors would put up the investment funding for these batches, and out of those a few might actually get further along in the trial process and have more value with each stage, until it reaches the end where it's worth a ton to sell and give returns back to the investors.

Extremely similar in style to a zero-coupon bond, where it starts at the invested value which increases in value as it matures (hopefully) and you don't see any money from it until the expiration (i.e. when one of your drugs gets through all of its trials and is sold as a product)

The overall math was claimed to be worth about as much as bonds would with interest, and have similar risks to other fixed income risky securities like bonds (which also have a chance of default). So basically turn it in to a mortgage backed security where we take a bunch of potential products and bundle them all together as a single asset that has an unknown likelihood of success starting out which increases in value as it matures via passing trial stages, or flops when all 80 drugs turn out to be loony ideas?
The funding would be provided by Wall St. by presenting it as a risky fixed income no interest asset with potentially large value (is my interpretation).

[dragoncar]

Drug funding has to go through a series of trials for which the end result is unknown, so it's a large upfront investment requirement with large risk. At the moment there's a large backlog of unfunded drugs.

The concept given is to take a batch of 50-80 drugs and offer it as investment pool. Investors would put up the investment funding for these batches, and out of those a few might actually get further along in the trial process and have more value with each stage, until it reaches the end where it's worth a ton to sell and give returns back to the investors.

Extremely similar in style to a zero-coupon bond, where it starts at the invested value which increases in value as it matures (hopefully) and you don't see any money from it until the expiration (i.e. when one of your drugs gets through all of its trials and is sold as a product)

The overall math was claimed to be worth about as much as bonds would with interest, and have similar risks to other fixed income risky securities like bonds (which also have a chance of default). So basically turn it in to a mortgage backed security where we take a bunch of potential products and bundle them all together as a single asset that has an unknown likelihood of success starting out which increases in value as it matures via passing trial stages, or flops when all 80 drugs turn out to be loony ideas?
The funding would be provided by Wall St. by presenting it as a risky fixed income no interest asset with potentially large value (is my interpretation).

So just start a pharmaceutical company?

[arebelspy]

Not a terrible idea, but I can immediately think of a dozen scams, way people could be taken advantaged of, etc.

If it was profitable to test all those, the pharmaceutical companies would be doing so.

[NWstubble]

If it was profitable to test all those, the pharmaceutical companies would be doing so.

It's not profitable to test all of them because it costs so much to run trials, so the companies screen the drugs and choose the ones that have the highest potential for approval combined with the greatest potential for profit. Not a bad model, but it leaves a lot to be desired in my opinion.

For example, let's say a hypothetical potential drug could treat condition x. There are already drugs on the market that treat condition x, but this new drug is potentially 20% more effective and has less side effects. Now, unless the financial projections leaned heavily towards the new drug taking over a significant share of the market a pharm company might not be too excited to invest in trying to get the new drug approved. However, I bet people with condition x sure would appreciate a more effective drug with less side effects.

There is a backlog of untested drugs because of the time and cost it takes to trial and seek approval. In that pool of untested drugs could be an effective treatment for Alzheimer's or something else that would be revolutionary. Why not allow those who are willing to take on the financial risk do so, with the possibility of saving or improving an untold amount of lives, instead of leaving it to the current system of "if we think it will be profitable, then it's worth it".

[arebelspy]

If it was profitable to test all those, the pharmaceutical companies would be doing so.

It's not profitable to test all of them because it costs so much to run trials, so the companies screen the drugs and choose the ones that have the highest potential for approval combined with the greatest potential for profit. Not a bad model, but it leaves a lot to be desired in my opinion.

For example, let's say a hypothetical potential drug could treat condition x. There are already drugs on the market that treat condition x, but this new drug is potentially 20% more effective and has less side effects. Now, unless the financial projections leaned heavily towards the new drug taking over a significant share of the market a pharm company might not be too excited to invest in trying to get the new drug approved. However, I bet people with condition x sure would appreciate a more effective drug with less side effects.

There is a backlog of untested drugs because of the time and cost it takes to trial and seek approval.

All of this is exactly my point.  It doesn't make sense to do so.

So why would investors want to do so, in order to lose money?

In that pool of untested drugs could be an effective treatment for Alzheimer's or something else that would be revolutionary. Why not allow those who are willing to take on the financial risk do so, with the possibility of saving or improving an untold amount of lives, instead of leaving it to the current system of "if we think it will be profitable, then it's worth it".

Because people wouldn't take on that financial risk, which is not a profitable one, as an investment.

Maybe out of altruism.  But trying to do it under the guise of capitalism and crowd sourced investments, when it clearly doesn't make sense as an investment is silly.

It's not profitable to do this for the drug companies, or they would do it.  So we're going to instead have "investors" throw in money to do the unprofitable trials under the guise that it will suddenly become profitable?  Hah, sure.

A better idea would be a nonprofit pharma company that took donations from people to run tests, and took the less promising drugs from big pharma as tax write off donations from them, and did so.

It's still not profitable, but at least we're up front about it and get the same result (potentially discover the cure for XYZ).

[ShavinItForLater]

I think the other TED talk about creating human body parts on chips to more cheaply and safely test drugs on human cells is a more promising idea than just pooling investments. 

http://www.ted.com/talks/geraldine_hamilton_body_parts_on_a_chip.html

The pooling idea sounds rather like the packaging of mortgages into pools of securities that helped cause the whole 2008 debacle.

[KingCoin]

The current problem is that drug development is driven by a profit motive rather than a net benefit motive. Drugs like vaccines are notoriously unprofitable, while drugs that treat the symptoms of chronic conditions (or vanity conditions like hair-loss) are very profitable.

This implies to me that this idea would be better instituted as a quasi-philanthropic endeavor than a pure investment.  Financially independent experts could offer up a portfolio of the largest net-benefit undeveloped drugs, and individuals or foundations could step in and fund them at a lower IRR hurdle than drug companies are willing to. So while drug companies plow money into the newest iteration of Viagra that promises a 25% IRR, the Gates foundation can fund a promising malaria vaccine at 5% IRR.

[aclarridge]

I thought this was going to be about marijuana.

I doubt the returns would be stellar but some SRI funds might pick it up, and though they may not do well over time, at least the drugs will get tested.

Maybe this would work better as a charity...although if it's done that way, with people not worried about the risk, and essentially not looking for a return, then why securitize? Why not have charitable foundations fund individual drug testing of the most promising drugs?

[KingCoin]

I thought this was going to be about marijuana.

I doubt the returns would be stellar but some SRI funds might pick it up, and though they may not do well over time, at least the drugs will get tested.

Maybe this would work better as a charity...although if it's done that way, with people not worried about the risk, and essentially not looking for a return, then why securitize? Why not have charitable foundations fund individual drug testing of the most promising drugs?

Yeah, we kind of see this model with funding solar installations (Mosaic). People are willing to accept sub-market returns because of the positive externalities of their investment. Seems like it should work for drugs as well. The benefit of making it a portfolio rather than funding individual drugs is to spread the risk.  I imagine that an individual drug would have a fairly binary return.

[aclarridge]

I thought this was going to be about marijuana.

I doubt the returns would be stellar but some SRI funds might pick it up, and though they may not do well over time, at least the drugs will get tested.

Maybe this would work better as a charity...although if it's done that way, with people not worried about the risk, and essentially not looking for a return, then why securitize? Why not have charitable foundations fund individual drug testing of the most promising drugs?

Yeah, we kind of see this model with funding solar installations (Mosaic). People are willing to accept sub-market returns because of the positive externalities of their investment. Seems like it should work for drugs as well. The benefit of making it a portfolio rather than funding individual drugs is to spread the risk.  I imagine that an individual drug would have a fairly binary return.

Emphasis added. I just meant in the case that it's a charity, i.e. it doesn't care at all about returns, then why not avoid the overhead costs associated with securitization, and instead just pick only a few of the "best shot" drugs to test.

[KingCoin]

Emphasis added. I just meant in the case that it's a charity, i.e. it doesn't care at all about returns, then why not avoid the overhead costs associated with securitization, and instead just pick only a few of the "best shot" drugs to test.

Right, but even charities and foundations would prefer to preserve capital and mitigate risk through a portfolio rather than invest in a drug that will return -100% or 300%. They might still prefer to target single drugs, but a portfolio (even a focused one, perhaps of malaria medications) will likely have more broad appeal.

[Leisured]

KingCoin and F140 are moving in the right direction. A standard corporation looks for for returns on investment of 8% to 12%, but if the testing of potential drug candidates is farmed out to a tax free charity which only aims to break even, then it is possible to test more candidate drugs.

An aside: you can read the transcript of a TED talk more quickly than listening to the speaker.

[arebelspy]

KingCoin and F140 are moving in the right direction. A standard corporation looks for for returns on investment of 8% to 12%, but if the testing of potential drug candidates is farmed out to a tax free charity which only aims to break even, then it is possible to test more candidate drugs.

An aside: you can read the transcript of a TED talk more quickly than listening to the speaker.

That was exactly my point - it would have to be a charitable thing.

Repackaging it as an "investment" is disingenuous, IMO.

[Leisured]

I have just remembered the development of penicillin during WW2. The military advantages of an effective antibiotic were so obvious that the US government supported the completion of testing, sketchy by modern standards, and the development of large scale production of penicillin.

Most new drugs are nowhere as advantageous as penicillin, particularly as old codgers like me use more drugs than young people, but I can see an argument that first world governments pay most or all of the costs of clinical trials. We need new antibiotics, and it is perhaps unfair for private corporations to have to fund all the considerable costs of testing new drugs. Same applies to vaccines, particularly vaccines aimed at poor countries. The cost of testing vaccines destined for poor, tropical countries would be set against the foreign aid budget.