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Financing translation: Analysis of the NCATS rare-diseases portfolio

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Science Translational Medicine  25 Feb 2015:
Vol. 7, Issue 276, pp. 276ps3
DOI: 10.1126/scitranslmed.aaa2360
  • Fig. 1. Value proposition.

    Summarized are the valuation estimates (log scale), from panel members (selected by A.W.L.) for the NCATS rare-disease portfolio compared with literature estimates (4) based on project phase alone. Vertical bars represent the range of the panelists’ lower and higher values. Projects are sorted by the stage at which they were valued, from lead optimization to phase 3 clinical trials. The responses of the panel members were formulated independently. The identities of panelists (who received no compensation or recognition for their participation) were not disclosed to each other or to NCATS personnel (including this article’s NCATS coauthors), and minimal direction was provided on how they should complete their task (supplementary materials).

    CREDIT: H. MCDONALD/SCIENCE TRANSLATIONAL MEDICINE
  • Fig. 2.

    Simulation calibration. Shown are weighted averaging of parameter estimates based on NCATS rare-disease portfolio, valuation panel, and literature estimates (4), using prior belief weights (methodological details are provided in the supplementary materials).

    CREDIT: H. MCDONALD/SCIENCE TRANSLATIONAL MEDICINE
  • Table 1. Structure and function.

    Simulated performance comparing an all-equity structure (using no debt financing); an RBO structure using a senior and junior debt tranche paying 5 and 8% annual coupon rates, respectively; and a second RBO structure with a single guaranteed senior tranche. The senior tranche is paid before the junior (mezzanine) tranche, which is paid before the equity holder. In the event that the fund defaults or fails to meet its debt obligations, the guarantor will pay the difference. Each structure acquires only preclinical compounds, with a target goal of reaching phase 3 within a maximum horizon of 11 years. Dashes indicate cases in which the corresponding type of financing and/or guarantee is not used. IRR, internal rate of return; ROE, return on equity.

    Simulation resultsAll equity
    (similar equity)
    Research-backed
    obligation (RBO)
    RBO with guarantee
    (no mezzanine)
    Number of compounds
    Preclinical or IND-enabling91616
    Research impact
    Number sold in phase 20.41.91.6
    Number sold in phase 33.45.35.6
    Liabilities
    Capital ($ millions)230420420
    Senior tranche ($ millions)105189
    Junior tranche ($ millions)84
    Equity tranche ($ millions)230231231
    Guarantee ($ millions)100
    Equity tranche performance
    Equity tranche performance3.255.145.32
    Average IRR26.7%N/AN/A
    Average MIRR (0% financing)18.3%21.6%22.7%
    Average annualized ROE11.6%14.7%15.4%
    Probability (equity wiped out)1.3 bp0.52%0.34%
    Probability (return on equity <0)8.0%6.2%5.1%
    Probability (return on equity >10%)61.9%76.8%78.6%
    Probability (return on equity >25%)2.2%10.4%11.0%
    Debt tranches performance
    Senior tranche: default probability, expected loss (bp)0.1, <0.1<0.1, <0.1
    Junior tranche: default probability, expected loss (bp)50, 15
    Guarantee performance
    Probability (cost of guarantee >0)0.3%
    Expected cost, 2% discount ($)65,000
    No-arbitrage cost of guarantee ($)110,000

Supplementary Materials

  • www.sciencetranslationalmedicine.org/cgi/content/full/7/276/276ps3/DC1

    Table S1. Observations of NCATS rare-disease projects including success, duration, and cost of trials.

    Table S2. Prior weight given to literature data for orphan diseases (4), with lower values relying more on the NCATS observations.

    Table S3. Posterior estimates of parameters for simulating an NCATS rare-disease megafund, combining literature estimates for orphan diseases (4).

    Table S4. NCATS portfolio of rare-disease projects in TRND and BrIDGs.

    Table S5. Summary of key comments from valuation panel respondents when asked to value a portfolio of rare-disease projects within NCATS.

    Table S6. Panel median valuations compared with literature estimates for orphan diseases (4).

    Table S7. Parameters and distributions used in simulation framework for an NCATS rare-disease megafund.

    Fig. S1. Plot of density functions for various Phase 2 clinical trial time distributions calibrated by matching first and second moments.

    Table S8. Performance metrics for RBO structure (without guarantee) from Table S2 for alternative clinical trial time distributions.

    Table S9. Calibrated parameters for valuation distributions at phase 3.

    Fig. S2. Plot of density functions for various Phase 3 valuation distributions calibrated using first and second moment matching.

    Table S10. Performance metrics for RBO structure (without guarantee) from Table S2 for alternative valuation distributions.

    Table S11. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted probability of success applied to all stages.

    Fig. S3. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted probability of success applied to all stages.

    Fig. S4. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted mean and standard deviation of Phase 3 valuation.

    Table S12. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted mean and standard deviation of Phase 3 valuation.

    Fig. S5. NCATS rare-disease portfolio diversity by disease and drug modality.

  • Supplementary Material for:

    Financing translation: Analysis of the NCATS rare-diseases portfolio

    David E. Fagnan, N. Nora Yang, John C. McKew, Andrew W. Lo*

    *Corresponding author. E-mail: alo-admin{at}mit.edu

    Published 25 February 2015, Sci. Transl. Med. 7, 276ps3 (2015)
    DOI: 10.1126/scitranslmed.aaa2360

    This PDF file includes:

    • Table S1. Observations of NCATS rare-disease projects including success, duration, and cost of trials.
    • Table S2. Prior weight given to literature data for orphan diseases (4), with lower values relying more on the NCATS observations.
    • Table S3. Posterior estimates of parameters for simulating an NCATS rare-disease megafund, combining literature estimates for orphan diseases (4).
    • Table S4. NCATS portfolio of rare-disease projects in TRND and BrIDGs.
    • Table S5. Summary of key comments from valuation panel respondents when asked to value a portfolio of rare-disease projects within NCATS.
    • Table S6. Panel median valuations compared with literature estimates for orphan diseases (4).
    • Table S7. Parameters and distributions used in simulation framework for an NCATS raredisease megafund.
    • Fig. S1. Plot of density functions for various Phase 2 clinical trial time distributions calibrated by matching first and second moments.
    • Table S8. Performance metrics for RBO structure (without guarantee) from Table S2 for alternative clinical trial time distributions.
    • Table S9. Calibrated parameters for valuation distributions at phase 3.
    • Fig. S2. Plot of density functions for various Phase 3 valuation distributions calibrated using first and second moment matching.
    • Table S10. Performance metrics for RBO structure (without guarantee) from Table S2 for alternative valuation distributions.
    • Table S11. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted probability of success applied to all stages.
    • Fig. S3. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted probability of success applied to all stages.
    • Fig. S4. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted mean and standard deviation of Phase 3 valuation.
    • Table S12. Performance metrics for RBO structure (without guarantee) from Table S2 for adjusted mean and standard deviation of Phase 3 valuation.
    • Fig. S5. NCATS rare disease portfolio diversity by disease and drug modality.

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