Redefining how pharmaceutical innovation gets done

The productivity of research and development in the bio-pharmaceutical industry has been constantly declining since the early 2000's. One possible reason is that biomedical projects are risky, take a long time, and require significant investment. Hence, substantial capital has been shifted away from the bio-pharmaceutical industry to other industries that are perceived less risky, creating a funding gap for early-stage pharmaceutical R&D. Here, we investigate and improve upon a novel financing technique that has been proposed to facilitate the R&D funding in the bio-pharmaceutical industry. This new financing method is a clear example of rapidly evolving innovation in the financial industry, from which the bio-pharmaceutical industry can benefit tremendously. Apart from funding challenges, pharmaceutical companies have to clear regulatory hurdles before they can commercialize their treatments. These drug-regulatory standards require a specific balance of benefits vs. risks for a therapy to be approved, and do not currently take into account the severity of the disease that the therapy is targeting. In the second part of this thesis, we propose an objective and quantitative Bayesian decision analysis framework to incorporate patients' feedback into the drug-approval process, and propose adjustment to the approval standards based on disease severity. When launching their drug, pharmaceutical companies set the drug's price such that expected revenues offset the costs of all the projects, failed or successful, that were pursued in order to lead to this successful treatment resulting in costly treatment. Recently, some highly curative therapies with high price tags have emerged for diseases with large prevalence, such as hepatitis C. These high prices, coupled with the large size of the patient population, have created an unsupportable financial burden for insurance companies in order to cover the broadest patient population who could benefit from these drugs. Despite delivering breakthrough discoveries, the pharmaceutical companies producing these drugs have experienced a public backlash due to drug prices. In the last part of this dissertation, we introduce a new financing paradigm to address the issue of high aggregate costs for these highly curative therapies. Thesis Supervisor: Andrew W. Lo Title: Charles E. and Susan T. Harris Professor Director, Laboratory for Financial Engineering