Financing drug discovery

 Bloomberg has a nice story about financial innovation in funding drug discovery startups:

Out of Grief, MIT’s Andrew Lo Invented a Better Way to Finance Biomedical Innovation.  A company he inspired, BridgeBio Pharma, is worth $9 billion and is creating cures for orphan diseases   by Peter Coy

"The main factor in the dearth of financing, Lo realized, was the lack of diversification. Let’s say a drug costs $200 million to develop and has only a 5% chance of success. If it does succeed after 10 years of development, it could earn $2 billion a year annually for 10 years. Intriguing, but too much of a lottery ticket for most investors. 

"But what if you could raise $30 billion to fund 150 startups at once? If the success of each was independent—that is, uncorrelated with the success of any other drug in the portfolio—then the chance of at least three becoming blockbusters was 98% and the chance of at least five becoming blockbusters was 87%. Those odds were so attractive, Lo realized, that even conservative fixed-income investors who like single-A-rated bonds would be willing to finance such a fund.

"Lo had been lecturing and publishing papers along these lines for several years when a former student, Neil Kumar, told him he wanted to put Lo’s ideas into practice in a company that would focus on treatments for orphan diseases caused by single-gene defects and cancers with clear genetic drivers. It was a perfect test of the concept because each rare disease was unique; their causes were uncorrelated, as in Lo’s thought experiment.

"Lo made a small investment and was listed as a co-founder of what became BridgeBio Pharma Inc. in Palo Alto, Calif. According to Bloomberg data, the company had a market value of $9.3 billion as of Feb. 4, making Kumar’s 5.6% stake worth more than $500 million. In the webinar, Lo said, “I’m most proud of the fact that they have 20 projects of which four are in Phase 3 trials.” The company anticipates approval of one by the end of 2021 and another by the end of 2022, he said, adding, “These are therapies that would not have been developed” if not for BridgeBio."