Let’s re-emphasize the ‘social’ aspect of our ESG investments
Premium- Federal loan backstops could fill funding gaps in medical research
Environment, social and governance investing is all the rage, but most all investment goes into the ‘E’ and, to a lesser extent, the ‘G’ and not the ‘S’. We neglect social-welfare investment at grave risk. But there is a way to quickly change this by making ESG meaningful for an urgent social good: speeding treatment and even cure for diseases and disability.
Covid has seriously delayed promising research across the spectrum of disease and disability. In one case, a major study finds that the pandemic threatens “the viability of cancer research as a whole."
Vast resources are spent caring for the sick, but far too little on the prevention, detection, treatment and cure that reduce needless suffering and grief. One solution to this funding gap would be more public spending and another might be a new philanthropic age, but neither is likely in the near term. As with climate change, private investment needs to be mobilized not just to do well but also good in this most urgent of social-welfare arenas.
Typically, US biomedical funding comes at the basic level from the National Institutes of Health or philanthropy. When a treatment or cure shows promise, it then needs to be tested in clinical trials of increasing size, complexity and cost. At the start of these trials, researchers usually organize a company to protect their intellectual property, getting funding mostly from university tech-transfer operations, philanthropy and outside investors. When a trial shows promise, the next step is another clinical trial and the price-tag for advancing the proposed cure goes up.
It takes a lot of expensive trials before the odds of success generally become clear enough to find third-party investors willing to carry promising research through the end-stage trials essential for drug or medical-device approval. The gap between promising early-stage clinical research and the end stage at which big money shows up is known as the “translational valley of death." It got this sad moniker because it’s in this valley where projects that should be translated into cures sit neglected for years.
The valley of death is deep because the equity investors on which biomedical research now depends demand major stakes in high-profile projects with big-ticket drug prices to meet their own market imperatives. Many nations bypass this equity-based, high-cost, high-risk business model with public investment, but the US has never done so in large part due to its historic aversion to direct federal investment in for-profit firms.
The best way to bridge the translational valley of death is to change the biomedical-funding model from one dependent on equity investments to one that also offers lower-cost debt suitable for research too early in the translational process to have proved its profit proposition. There are many ways for early-stage researchers to demonstrate the ability to repay small loans and still more for the government and philanthropists to leverage their resources to help them do so. However, building a debt market for translational biomedical research will take years if we rely solely on private financial institutions.
The sums translational researchers need are too small and the nature of their organizations too different from traditional commercial ventures to entice sustainable lending. The proven way to create safe, sound, sustainable, and affordable financing is via a limited federal guarantee. This is how green bonds started and how we need to start a new ‘biobond’ asset class. With this backstop, packages of loans with strong probability of repayment can be originated for packaging into bonds in which risk is dramatically reduced not just via the guarantee, but also thanks to an array of eligibility and diversification requirements.
These requirements also ensure that guaranteed debt funding isn’t soaked up by big biopharma in the form of a new subsidy for still higher profits or as a back-door backstop for venture capital. We know from housing finance and the 2008 cataclysm how important it is to align debt-market incentives with social-welfare objectives and this lesson must be reflected in the design of new federal guarantees.
Legislation in Congress shows one way to craft such a guarantee with built-in controls is to create a secondary market for high-quality loans to promising scientists suitable not only for local lenders, but also institutional investors. Others are possible in the context of broader, “ARPA-H" legislation, where guarantees for new bonds would power up the federal spending.
Adding an ‘S’ component to ESG offerings is urgent and possible. The US will unlock billions of dollars by deploying well-established loan-underwriting and securitization practices without adding to the federal deficit. ©bloomberg
Karen Petrou is the managing partner of Federal Financial Analytics Inc. and author of ‘Engine of Inequality: The Fed and the Future of Wealth in America’.
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