ip exchange and finance: remarks on the viability of securitization
TRANSCRIPT
IP exchange and finance: remarks on the viability of securitization & Megafunds as IP financing tools
A presentation at the IP and exchange Finance workshop
Jose-Maria Fernandez Rodriguez [email protected]
June 2016
Disclaimer: This presentation is based on the work developed by Jose Maria Fernandez, Dr. Roger M. Stein and Professor Andrew W. Lo at the MIT Sloan Laboratory for Financial Engineering but the views expressed here are those of the author and do not represent the views of his co-authors, current or former employers, including those of the MIT Sloan Laboratory for Financial Engineering
1 © 2016 based on the research work by Fernandez,
Stein, and Lo.
Introduction
2 © 2016 based on the research work by Fernandez,
Stein, and Lo.
Securitization of biotech IP
3
• Existing drug development investment solutions offer limited options for investors and drug developers
• Financial engineering models offer other options that can be designed using principles of portfolio theory and securitization
• Risk of investing in scientific IP: project versus portfolio > appeal larger group of diverse investors
• Investment vehicle is diverse enough and has sufficient stamina
© 2016 based on the research work by Fernandez, Stein, and Lo.
Senior debt
Junior debt
Equity
Raise funds to buy collateral
cash flows used to pay back
CO
LLAT
ERA
L
Cas
h f
low
gen
erat
ing
asse
ts
Senior debt paid first
If CF remain, next bond paid
Remaining CF go to equity
Portfolio
$5 to $30 billion
Securitization 101
4 © 2016 based on the research work by Fernandez,
Stein, and Lo.
Simulating a bio R&D portolio
Phase I
Phase II
WD/Sold
Phase III
WD/Sold
Approved
WD/Sold
WD/Sold
Phase I
Phase II
WD/Sold
Phase III
WD/Sold
Approved
WD/Sold
WD/Sold
Phase I
Phase II
WD/Sold
Phase III
WD/Sold
Approved
WD/Sold
WD/Sold
Year 1 Year 2 Year 3 Year 4 … Year 10
1
2
150
5 © 2016 based on the research work by Fernandez,
Stein, and Lo.
Simulating the CFs of a RBO
Year 1 Year 2 Year 3 Year 4 … Year 10
• Residual Equity
• Interest Payments Sub Bonds
• Interest Payments Sr. Sub Bonds
• Interest Payments Sr. Bonds
6 © 2016 based on the research work by Fernandez,
Stein, and Lo.
RBO model for a cancer megafund
Exp B:Late stage = Pharma RBS
WITH-DRAWN
SLD/APP
NDA P 3 P 2 P 1 PRE
Exp A:Early stage = VC RBS
7 © 2016 based on the research work by Fernandez,
Stein, and Lo.
RBO model for a Cancer Megafund Summary of simulation inputs
Simulation A Simulation B
Equity RBS Equity RBS
Assets target
Preclinical 50 100 - -
Phase 1 50 100 - -
Phase 2 - - 40 100
Phase 3 - - - -
Capital structure
Sr debt - 1,250 - 6,000
Jr debt - 1,250 - 3,000
Equity 2,500 2,500 6,000 6,000
Total 2,500 5,000 - -
Leverage - 2x - 2.5x
Simulation A
Research impact All equity RBS
# drugs to Phase 2 52 101.7
# sold in Ph 3 & NDA 2.1 2.3
# sold once APP 0.6 1
Debt performance All equity RBS
Senior debt coupon - 5%
Junior debt coupon - 8%
PD/EL (Senior d) - 1 bp / <1 bp
PD/EL (Junior d) - 87 bp / 27 bp
Equity performance
Ann. Mean ROE 7.2% 8.9%
P (ROE<0) 17% 20%
P (ROE>5%) 61% 68%
P (ROE>10%) 36% 52%
P (ROE>15%) 15% 35%
P (ROE>25%) 0.7% 7.7%
8 © 2016 based on the research work by Fernandez,
Stein, and Lo.
RBO model for a Cancer Megafund Summary of simulation inputs
Simulation A Simulation B
Equity RBS Equity RBS
Assets target
Preclinical 50 100 - -
Phase 1 50 100 - -
Phase 2 - - 40 100
Phase 3 - - - -
Capital structure
Sr debt - 1,250 - 6,000
Jr debt - 1,250 - 3,000
Equity 2,500 2,500 6,000 6,000
Total 2,500 5,000 - -
Leverage - 2x - 2.5x
Simulation B
Research impact All equity RBS
# drugs to Phase 2 - -
# sold in Ph 3 & NDA 6 21.3
# sold once APP 5.1 7.6
Debt performance All equity RBS
Senior debt coupon - 5%
Junior debt coupon - 8%
PD/EL (Senior d) - 6 pb/<1pb
PD/EL (Junior d) - 60 pb / 30 pb
Equity performance All equity RBS
Ann. Mean ROE 7.2% 11.4%
P (ROE<0) 16% 10%
P (ROE>5%) 63% 79%
P (ROE>10%) 36% 61%
P (ROE>15%) 14% 40%
P (ROE>25%) 0.2% 7%
9 © 2016 based on the research work by Fernandez,
Stein, and Lo.
RBO model for a Cancer Megafund: Guarantees Summary of simulation inputs
Simulation A Simulation A1
Assets target
Equity RBS GT NO GT
Preclinical 50 100 100 100
Phase 1 50 100 100 100
Phase 2 - - - -
Phase 3 - - - -
Capital structure
Sr debt - 1,250 2,000 2,000
Jr debt - 750 750 750
Equity 3,000 3,000 2,250 2,250
Total 3,000 5,000 5000 5000
Guarantee - - 1,000 -
Research impact All equity RBS A A1 GT A1 NO GT
# drugs to Phase 2 52 103.1 99.0 99.0
Debt All equity RBS A1 GT A1 NO GT
Senior debt coupon
- 5% 5% 5%
Junior debt coupon
- 8% 8% 8%
PD/EL (Senior d) - 0.9/ <1 0.3/ <0.1 49/ 8
PD/EL (Junior d) - 36 / 10 39/ 15 200 / 121
Equity All equity RBS A1 GT A1 NO GT
Ann. Mean ROE 7.2% 9.1% 8.9% 8.9%
P (ROE<0) 17% 19% 21% 21%
P (ROE>5%) 61% 69% 69% 69%
P (ROE>15%) 15% 34% 41% 41%
GT cost All equity RBS A1 GT A1 NO GT
P(cost>0) in % - - 2.0 -
Avg. cost ($ m) - - 10 -
98% draw - - 17 -
99% draw - - 429 -
10 © 2016 based on the research work by Fernandez,
Stein, and Lo.
What can securitization/megafund structures offer?
11
• Megafunds present opportunities and also challenges
• Design to preferred risk profile of investable products
• Cheaper and efficient access to a larger pipeline
• Alignment > provide each stakeholder with the exposition they shall want > access to express views or goals
• A competitive edge/more effective allocation in a world where traditional resources will be more constrained
• Return to investors, stakeholders, workers and society
Read more about this research at: http://www.nature.com/nbt/journal/v30/n10/full/nbt.2374.html And find more articles about megafunds including FAQs at: http://cancerx.mit.edu/ http://alo.mit.edu/wp-content/uploads/2015/10/FAQ20151005.pdf
© 2016 based on the research work by Fernandez, Stein, and Lo.