BACKGROUND: We consider two key challenges that early-stage biotechnology firms face in developing a sustainable financing strategy and a sustainable business model: developing a valuation model for drug compounds, and choosing an appropriate operating model and corporate structure. We use the specific example of Unravel Biosciences—a therapeutics platform company that identifies novel drug targets through off-target mechanisms of existing drugs and then develops optimized new molecules—throughout the paper and explore a specific scenario of drug repurposing for rare genetic diseases.

RESULTS: The first challenge consists of producing a realistic financial valuation of a potential rare disease repurposed drug compound, in this case targeting Rett syndrome. More generally, we develop a framework to value a portfolio of pairwise correlated rare disease compounds in early-stage development and quantify its risk profile. We estimate the probability of a negative return to be for a single compound and for a portfolio of 8 drugs. The probability of selling the project at a loss decreases from (phase 3) for a single compound to (phase 3) for the 8-drug portfolio. For the second challenge, we find that the choice of operating model and corporate structure is crucial for early-stage biotech startups and illustrate this point with three concrete examples.

CONCLUSIONS: Repurposing existing compounds offers important advantages that could help early-stage biotech startups better align their business and financing issues with their scientific and medical objectives, enter a space that is not occupied by large pharmaceutical companies, and accelerate the validation of their drug development platform.

A fixed one-sided significance level of 5% is commonly used to interpret the statistical significance of randomized clinical trial (RCT) outcomes. While it is necessary to reduce the false positive rate, the threshold used could be chosen quantitatively and transparently to specifically reflect patient preferences regarding benefit–risk tradeoffs as well as other considerations. How can patient preferences be explicitly incorporated into RCTs in Parkinson’s disease (PD), and what is the impact on statistical thresholds for device approval? In this analysis, we apply Bayesian decision analysis (BDA) to PD patient preference scores elicited from survey data. BDA allows us to choose a sample size (n) and significance level (α) that maximizes the overall expected value to patients of a balanced two-arm fixed-sample RCT, where the expected value is computed under both null and alternative hypotheses. For PD patients who had previously received deep brain stimulation (DBS) treatment, the BDA-optimal significance levels fell between 4.0% and 10.0%, similar to or greater than the traditional value of 5%. Conversely, for patients who had never received DBS, the optimal significance level ranged from 0.2% to 4.4%. In both of these populations, the optimal significance level increased with the severity of the patients’ cognitive and motor function symptoms. By explicitly incorporating patient preferences into clinical trial designs and the regulatory decision-making process, BDA provides a quantitative and transparent approach to combine clinical and statistical significance. For PD patients who have never received DBS treatment, a 5% significance threshold may not be conservative enough to reflect their risk-aversion level. However, this study shows that patients who previously received DBS treatment present a higher tolerance to accept therapeutic risks in exchange for improved efficacy which is reflected in a higher statistical threshold.

BACKGROUND: The statistical significance of clinical trial outcomes is generally interpreted quantitatively according to the same threshold of 2.5% (in one-sided tests) to control the false-positive rate or type I error, regardless of the burden of disease or patient preferences. The clinical significance of trial outcomes—including patient preferences—are also considered, but through qualitative means that may be challenging to reconcile with the statistical evidence.

OBJECTIVE: We aimed to apply Bayesian decision analysis to heart failure device studies to choose an optimal significance threshold that maximizes the expected utility to patients across both the null and alternative hypotheses, thereby allowing clinical significance to be incorporated into statistical decisions either in the trial design stage or in the post-trial interpretation stage. In this context, utility is a measure of how much well-being the approval decision for the treatment provides to the patient.

METHODS: We use the results from a discrete-choice experiment study focusing on heart failure patients’ preferences, questioning respondents about their willingness to accept therapeutic risks in exchange for quantifiable benefits with alternative hypothetical medical device performance characteristics. These benefit–risk trade-off data allow us to estimate the loss in utility—from the patient perspective—of a false-positive or false-negative pivotal trial result. We compute the Bayesian decision analysis-optimal statistical significance threshold that maximizes the expected utility to heart failure patients for a hypothetical two-arm, fixed-sample, randomized controlled trial. An interactive Excel-based tool is provided that illustrates how the optimal statistical significance threshold changes as a function of patients’ preferences for varying rates of false positives and false negatives, and as a function of assumed key parameters.

RESULTS: In our baseline analysis, the Bayesian decision analysis-optimal significance threshold for a hypothetical two-arm randomized controlled trial with a fixed sample size of 600 patients per arm was 3.2%, with a statistical power of 83.2%. This result reflects the willingness of heart failure patients to bear additional risks of the investigational device in exchange for its probable benefits. However, for increased device-associated risks and for risk-averse subclasses of heart failure patients, Bayesian decision analysis-optimal significance thresholds may be smaller than 2.5%.

CONCLUSIONS: A Bayesian decision analysis is a systematic, transparent, and repeatable process for combining clinical and statistical significance, explicitly incorporating burden of disease and patient preferences into the regulatory decision-making process.

The COVID-19 pandemic has raised awareness about the global imperative to develop and stockpile vaccines against future outbreaks of emerging infectious diseases (EIDs). Prior to the pandemic, vaccine development for EIDs was stagnant, largely due to the lack of financial incentives for pharmaceutical firms to invest in vaccine research and development (R&D). This R&D requires significant capital investment, most notably in conducting clinical trials, but vaccines generate much less profit for pharmaceutical firms compared with other therapeutics in disease areas such as oncology. The portfolio approach of financing drug development has been proposed as a financial innovation to improve the risk/return trade-off of investment in drug development projects through the use of diversification and securitization. By investing in a sizable and well-diversified portfolio of novel drug candidates, and issuing equity and securitized debt based on this portfolio, the financial performance of such a biomedical “megafund” can attract a wider group of private-sector investors. To analyze the viability of the portfolio approach in expediting vaccine development against EIDs, we simulate the financial performance of a hypothetical vaccine megafund consisting of 120 messenger RNA (mRNA) vaccine candidates in the preclinical stage, which target 11 EIDs, including a hypothetical “disease X” that may be responsible for the next pandemic. We calibrate the simulation parameters with input from domain experts in mRNA technology and an extensive literature review and find that this vaccine portfolio will generate an average annualized return on investment of −6.0% per annum and a negative net present value of −$9.5 billion, despite the scientific advantages of mRNA technology and the financial benefits of diversification. We also show that clinical trial costs account for 94% of the total investment; vaccine manufacturing costs account for only 6%. The most important factor of the megafund’s financial performance is the price per vaccine dose. Other factors, such as the increased probability of success due to mRNA technology, the size of the megafund portfolio, and the possibility of conducting human challenge trials, do not significantly improve its financial performance. Our analysis indicates that continued collaboration between government agencies and the private sector will be necessary if the goal is to create a sustainable business model and robust vaccine ecosystem for addressing future pandemics.

Gene therapy is a new class of medical treatment that alters part of a patient’s genome through the replacement, deletion, or insertion of genetic material. While still in its infancy, gene therapy has demonstrated immense potential to treat and even cure previously intractable diseases. Nevertheless, existing gene therapy prices are high, raising concerns about its affordability for U.S. payers and its availability to patients. We assess the potential financial impact of novel gene therapies by developing and implementing an original simulation model which entails the following steps: identifying the 109 late-stage gene therapy clinical trials underway before January 2020, estimating the prevalence and incidence of their corresponding diseases, applying a model of the increase in quality-adjusted life years for each therapy, and simulating the launch prices and expected spending of all available gene therapies annually. The results of our simulation suggest that annual spending on gene therapies will be approximately $20.4 billion, under conservative assumptions. We decompose the estimated spending by treated age group as a proxy for insurance type, finding that approximately one-half of annual spending will on the use of gene therapies to treat non-Medicare-insured adults and children. We conduct multiple sensitivity analyses regarding our assumptions and model parameters. We conclude by considering the tradeoffs of different payment methods and policies that intend to ensure patient access to the expected benefits of gene therapy.

Natural language processing (NLP) has revolutionized the financial industry, providing advanced techniques for the processing, analyzing, and understanding of unstructured financial text. The authors provide a comprehensive overview of the historical development of NLP, starting from early rules-based approaches to recent advances in deep learning–based NLP models. They also discuss applications of NLP in finance along with its challenges, including data scarcity and adversarial examples, and speculate about the future of NLP in the financial industry. To illustrate the capability of current NLP models, a state-of-the-art chatbot is employed as a co-author of this article.

The measurement of financial risk premia, the amount that a risky asset will outperform a risk-free one, is an important problem in asset pricing. The noisiness and non-stationarity of asset returns makes the estimation of risk premia using machine learning (ML) techniques challenging. In this work, we develop ML models that solve the problems associated with risk premia forecasting by separating risk premia prediction into two independent tasks, a time series model and a cross-sectional model, and using neural networks with skip connections to enable their deep neural network training.These models are tested robustly with different metrics, and we observe that our models outperform several existing standard ML models. A known issue with ML models is their ‘black box’ nature, i.e. their opaqueness to interpretability. We interpret these deep neural networks using local approximation-based techniques that provide explanations for our model’s predictions.

Use of robust, quantitative tools to measure patient perspectives within product development and regulatory review processes offers the opportunity for medical device researchers, regulators, and other stakeholders to evaluate what matters most to patients and support the development of products that can best meet patient needs. The medical device innovation consortium (MDIC) undertook a series of projects, including multiple case studies and expert consultations, to identify approaches for utilizing patient preference information (PPI) to inform clinical trial design in the US regulatory context. Based on these activities, this paper offers a cogent review of considerations and opportunities for researchers seeking to leverage PPI within their clinical trial development programs and highlights future directions to enhance this field. This paper also discusses various approaches for maximizing stakeholder engagement in the process of incorporating PPI into the study design, including identifying novel endpoints and statistical considerations, crosswalking between attributes and endpoints, and applying findings to the population under study. These strategies can help researchers ensure that clinical trials are designed to generate evidence that is useful to decision makers and captures what matters most to patients.

OBJECTIVE: Provide US FDA and amyotrophic lateral sclerosis (ALS) society with a systematic, transparent, and quantitative framework to evaluate the efficacy of the ALS therapeutic candidate AMX0035 in its phase 2 trial, which showed statistically significant effects (p-value 3%) in slowing the rate of ALS progression on a relatively small sample size of 137 patients. 

METHODS: We apply Bayesian decision analysis (BDA) to determine the optimal type I error rate (p-value) under which the clinical evidence of AMX0035 supports FDA approval. Using rigorous estimates of ALS disease burden, our BDA framework strikes the optimal balance between FDA’s need to limit adverse effects (type I error) and patients’ need for expedited access to a potentially effective therapy (type II error). We apply BDA to evaluate long-term patient survival based on clinical evidence from AMX0035 and Riluzole. 

RESULTS: The BDA-optimal type I error for approving AMX0035 is higher than the 3% p-value reported in the phase 2 trial if the probability of the therapy being effective is at least 30%. Assuming a 50% probability of efficacy and a signal-to-noise ratio of treatment effect between 25% and 50% (benchmark: 33%), the optimal type I error rate ranges from 2.6% to 26.3% (benchmark: 15.4%). The BDA-optimal type I error rate is robust to perturbations in most assumptions except for a probability of efficacy below 5%. 

CONCLUSION: BDA provides a useful framework to incorporate subjective perspectives of ALS patients and objective burden-of-disease metrics to evaluate the therapeutic effects of AMX0035 in its phase 2 trial.

We review the literature on financial intermediation in the process by which new medical therapeutics are financed, developed, and delivered. We discuss the contributing factors that lead to a key finding in the literature—underinvestment in biomedical R&D—and focus on the role that banks and other intermediaries can play in financing biomedical R&D and potentially closing this funding gap. We conclude with a discussion of the role of financial intermediation in the delivery of healthcare to patients.

We examine the contagion of investment ideas in a multiperiod setting in which investors are more likely to transmit their ideas to other investors after experiencing higher payoffs in one of two investment styles with different return distributions. We show that heterogeneous investment styles are able to coexist in the long run, implying a greater diversity than predicted by traditional theory. We characterize the survival and popularity of styles in relation to the distribution of security returns. In addition, we demonstrate that psychological effects such as conformist preference can lead to oscillations and bubbles in the choice of style. These results remain robust under a wide class of replication rules and endogenous returns. They offer empirically testable predictions, and provide new insights into the persistence of the wide range of investment strategies used by individual investors, hedge funds, and other professional portfolio managers.

We propose a quantitative framework for assessing the financial impact of any form of impact investing, including socially responsible investing; environmental, social, and governance (ESG) objectives; and other nonfinancial investment criteria. We derive conditions under which impact investing detracts from, improves on, or is neutral to the performance of traditional mean-variance optimal portfolios, which depends on whether the correlations between the impact factor and unobserved excess returns are negative, positive, or zero, respectively. Using Treynor–Black portfolios to maximize the risk- adjusted returns of impact portfolios, we derive an explicit and easily computable measure of the financial reward or cost of impact investing as compared with passive index bench-marks. We illustrate our approach with applications to biotech venture philanthropy, a semiconductor research and development consortium, divesting from “sin” stocks, ESG investments, and “meme” stock rallies such as GameStop in 2021.

In this work, the authors create machine learning (ML) models to forecast home equity credit risk for individuals using a real-world dataset and demonstrate methods to explain the output of these ML models to make them more accessible to the end user. They analyze the explainability for various stakeholders: loan companies, regulators, loan applicants, and data scientists, incorporating their different requirements with respect to explanations. For loan companies, they generate explanations for every model prediction of creditworthiness. For regulators, they perform a stress test for extreme scenarios. For loan applicants, they generate diverse counterfactuals to guide them with steps toward a favorable classification from the model. Finally, for data scientists, they generate simple rules that accurately explain 70%–72% of the dataset. Their study provides a synthesized ML explanation framework for all stakeholders and is intended to accelerate the adoption of ML techniques in domains that would benefit from explanations of their predictions.

We develop a theory of optimal financing for R&D-intensive firms. With only market financing, the firm relies exclusively on equity financing and carries excess cash, but underinvests in R&D. We use mechanism design to examine how intermediated financing can attentuate this underinvestment. The mechanism combines equity with put options such that investors insure firms against R&D failure and firms insure investors against high R&D payoffs not being realized.

We provide a review of macro-finance models featuring nonlinear dynamics. We survey the models developed recently in the literature, including models with amplification effects of financial constraints, models with households' leverage constraints, and models with financial networks. We also construct an illustrative model for those readers who are unfamiliar with the literature. Within this framework, we highlight several important limitations of local solution methods compared with global solution methods, including the fact that local-linearization approximations omit important nonlinear dynamics, yielding biased impulse-response analysis.