Big orphan ante: MIT professor refines megafund idea to lure investors

The prospect of establishing a specially focused orphan drug megafund, through which investors put money down and collect on the spoils as drugs and intellectual property rights are sold to venture capitalists or pharma firms, is one due to be explored during a panel talk at the Allicense 2015 conference by Andrew Lo, Sloan professor of finance at the Massachusetts Institute of Technology (MIT).

"Two things are going on here," Lo told BioWorld Today: a form of crowdsourcing, and the ensuing possibility of funding many more experiments. "The more trials you [conduct], the more likely it is you'll have one or two winners. If a large pool of investors decides to put their resources together, you're going to be able to afford more shots on goal."

Lo, who will discuss his ideas further at the Allicense meeting in San Francisco May 5-6, co-authored a paper about the megafund concept's promise in Science Translational Medicine, published earlier this year. He noted that the portfolio of the NIH's National Center for Advancing Translational Sciences (NCATS, specializing in rare diseases) includes 28 research projects begun at the preclinical stage. Data show substantially lower costs and higher success rates but longer preclinical timelines for the NCATS projects, relative to the industry averages for early stage translational medical research and development typically cited in literature, his study found.

Lo's paper used NCATS data and valuation estimates from a panel of industry experts to simulate a megafund in which senior and junior debt yielded 5 percent and 8 percent, respectively. The projected return to equity would be 14.7 percent, which corresponds to a modified internal rate of return of 21.6 percent, likely helped in real life by third-party funding guarantees from philanthropies, patient advocacy groups and government agencies.

"It's not all theoretical," Lo said. "When we wrote the paper, it certainly was. But unknown to us, there were a number of examples in the industry that have come close to the megafund, and there are more in development now of various sizes." He pointed to royalty investment firms such as New York-based Royalty Pharma as "probably the closest thing that currently exists" to the megafund concept. Royalty Pharma "invests in approved drugs and some phase II and phase III compounds. What I'm suggesting is that a megafund would be very much along the same lines, except it would invest even in preclinical projects."

Venture capital funds "do play an important role," Lo said. "They are obviously diversified to an extent. What we're suggesting is that the business model may need to be changed, so that they can achieve even greater diversification with a larger pool of assets" – all in rare diseases. There's a "variety of estimates about how many rare diseases there are. I've seen estimates as high as 6,000. A conservative guess is about 3,000 [the number used by NIH], and of those, we currently have therapies for about 300. So we think that a portfolio of 10 or 20 rare disease therapeutics could make quite an attractive investment. I would suggest there are many players out there that could get into the business."

What's more, Lo said, although "we think of rare diseases as affecting a relatively small number of patients, because of breakthroughs in molecular biology, we have orphanized certain diseases that previously we would never think of as being rare" – such as breast cancer. Herceptin (trastuzumab, Roche AG) for HER2-positive metastatic breast cancer was approved as a rare disease drug thanks to genetic assays that can determine subsets where certain drugs work. "More and more now, we're engaging in a divide-and-conquer strategy," he said.

The rare disease megafund concept "was my idea, in the sense that I had looked at what happened in the financial crisis, and I was trying to put the pieces of this puzzle together," Lo said. Some of his family members had developed cancer, he said, needing treatments of a caliber that still isn't available. "Why is it the case that we've been making so many breakthroughs in biomedicine while at the same time funding is declining?" For an answer to that question he needed help. Two of the four co-authors of his paper are scientists with NCATS, and one of them is Nora Yang.

"It comes down to risk," Yang told BioWorld Today. With "distinctively different groups of people and activities" in drug development, persuading private investors to come aboard early is the challenge. "Scientists and investors speak different languages. We live in our own worlds. I'm hoping to start the field of financial investors and scientists working together to figure out the risk-benefit profile of that stage of activity," especially with regard to orphan drugs. "That's another layer of complexity, but hopefully we're turning that into an advantage," she said, even though investors have "not been very enthusiastic about investing in drug development overall, and if you talk about rare diseases, it's even more daunting because the market is small and the financial return is even less likely."

'MUCH LARGER POOL'

Yang noted that "Congress has done a lot" to grease the skids for rare disease therapies, and developing them brings "two distinct types of advantages. One is on the scientific front. The majority of rare diseases are single-gene defect or single-protein defect [diseases] where we know the science really well. We know exactly what went wrong, compared to something like depression or hypertension." The second realm of upside is regulatory, where the FDA has expedited review mechanisms in place.

"Our goal and our role is to publicize those," Yang said. "[Lo] has done pioneer work on the financial engineering front, and put out a model that looks very promising. Our collaboration really highlighted the possibility and the practicality of how this works. Hopefully, the private sector will pick it up and put it into practice."

MIT's Lo is sharply aware of what he's up against. Add innovative treatments, experimental dosing regimens and combination therapies to the genetic subsets constantly being discovered and "you very quickly generate so many possibilities and hypotheses that it is virtually impossible to go through them exhaustively, so you really do have to pick and choose, and you'll have to get more resources to do that picking and choosing," he said. Eventually, drugs become more precise and tailored to smaller groups of patients. "I would argue that's a wonderful thing, but at the same time it wipes out 90 percent of the market for drug companies," he said. "Economics are changing very rapidly as well, and we have to be cognizant of that."

Last summer, two of the NCATS portfolio firms were acquired by big pharma companies: Aesrx LLC, of Newton, Mass., was bought by Deerfield, Ill.-based Baxter International Inc., and Bikam Pharmaceuticals Inc., of Cambridge, Mass., was taken over by Dublin-based Shire plc. (See BioWorld Insight, March 25, 2015.)

"As with most biopharma acquisitions, even these observable market transactions are not trivial to value because of the many contingent payments that are triggered by confidentially specified events," Lo and his co-authors wrote. "However, a crude but commonly used approximation of the economic value of these transactions can be computed by measuring the one-day impact on the stock prices of the acquirers when these deals were announced: $238.3 million for Baxter and $423.1 million for Shire, for a total of $661.4 million." Though the figures are "noisy" and imprecise, they do "provide the most current commercial assessment of the potential economic value generated by the NCATS rare disease portfolio," he wrote, adding that "the fact that NCATS does not use financial return as a metric of its success suggests that our simulated megafund returns are conservative estimates of what can be achieved by a purely profit-driven private-sector institution."

Bottom line, Lo said: "If you were able to create the kind of vehicle that I'm talking about, we could get a much larger pool – investors who have traditionally never invested in biomedicine, let alone rare diseases. I'm talking about retail investors."

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