Funding Late Stage Clinical Development of a Novel Antimalarial
Molecule Case Study Series
Thanks to Titian Steiger for his insights and contributing toward the bonding curve modelling for this article.
This article examines a potential use case for Molecule, identifying various ways that the platform could enable universities to compete in an increasingly complex and expensive drug development landscape. Although the article examines this use case from the perspective of a university, the same story could apply broadly to small- and medium-sized pharmaceutical companies and biotechs, as well as private research organisations and NGOs.
While Molecule may eventually prove to be an effective new business model that could be applied broadly to all pharmaceutical R&D, one of the core goals of our initiative is to bolster the research and development of therapeutics that would otherwise fall outside of the purview of a traditional pharmaceutical company — primarily, drugs that are unlikely to be financial blockbusters or where development lacks a strong financial incentive. The primary therapeutic and disease areas initially targeted by the platform are: infectious disease, rare and tropical disease, genetic disease, paediatric illness, neurodegenerative conditions, and ageing. These therapeutic areas are those which have been traditionally underfunded and for which few drugs are brought to market. They often represent a significant financial risk for pharmaceutical companies, with smaller affected patient cohorts or less proven business models than more common disease areas, such as cardiovascular disease and cancer.
A university with an interest in rare and tropical disease is developing a novel treatment for malaria. The university receives support to develop the therapeutic from several partners and grant-issuing organisations. The research team is given access to a small-molecule library against the human malaria parasite, Plasmodium falciparum, from a development partner, and identifies a chemical class with potent antimalarial activity. The grant funds received are adequate to support the pre-clinical work to identify and optimise a lead candidate. The optimised compound from this class, compound X, displays activity against multiple parasite life cycle stages, in both the mammalian host and the mosquito vector, and also kills drug-resistant parasites. The compound kills the malaria parasite by blocking the parasite’s phosphatidylinositol 4-kinase (PI4K) and is able to protect monkeys from malaria infection. The drug has potential as a new antimalarial drug that may contribute to global malaria eradication efforts, and the university patents the discovery.
The initial grant is adequate to support the bulk of preclinical development, as well as some of the initial clinical development. The university is able to sponsor Phase I clinical trials for the therapeutic. Following the completion of Phase I clinical trials with positive results supporting further clinical efforts, the research team assesses their funding needs for subsequent trials. The grant money received is inadequate to support the trials in their entirety, and a new source of funding must be identified to bring the drug through additional testing and ultimately to market.
Representatives from the university’s experimental therapeutics department propose trialling an innovative new funding approach. After consulting with the university’s tech transfer office and legal counsel, the primary investigator for the project creates an institutional account with Molecule and establishes an open market to sell shares in their novel antimalarial compound. The university establishes appropriate market parameters that correspond with their desired funding needs.
The following figures are used purely for illustrative purposes. It is expected that an additional $2 million will be needed to carry the drug through the subsequent clinical trial stages required for market approval. They decide that they want to retain at least 50% of the intellectual property rights and to prevent any further dilution the share supply is fixed at 100’000 which decides the level of divisibility. The creator stake is locked up in an escrow contract and only vests if the fundraising campaign is successful. This is necessary since his shares were distributed without any attached value and would otherwise give him the possibility to profit from immediately dumping his stake at the detriment of other investors. Lastly, the market creator decides on a “development tax” of 20% that determines how much of the capital is allocated to research funding and providing market liquidity, respectively. This is needed to bootstrap a liquid market that allows buyers and sellers to trade in and out of the market with little friction. Moreover, this tax incentivises investing over active trading and prevents exploitation of token bonding curves as a pump and dump scheme. This is a flexible parameter that can be modified to fit different types of funding scenarios and risk profiles.
Since the initial capital injection needs to happen in bulk to support clinical trial efforts, the university starts off with a dutch auction for price discovery. 10% of the total supply (10’000 shares) is offered to the public in an initial sale and bids from five different investors are received. The shares are placed in decreasing order of the buy orders and based on the last bid that filled the offered supply, the auction was able to determine an initial share price of $150. Since the offering was oversubscribed, the orders need to be rebalanced proportionally and we end up with the following share and investment distribution:
In summary, this means that the university managed to raise $1.5M of which $300k can immediately be accessed for research spendings while the other 80% remain locked as sell curve collateral. To make sure that the auction is a success, IP creators can further parameterise the setup by providing share price ranges that meet initial funding needs as well as criteria that invalidate the offering.
The remaining 40% of shares will be distributed continuously using a token bonding curve that acts as an automated market maker. There are several market parameterisation options that could be explored and need to be chosen to match the underlying economics. For more information, please see our article Designing Different Fundraising Scenarios with Sigmoidal Token Bonding Curves. For exemplary purposes, we are continuing with linear price curves that are set up in such a way that at least the missing $1.7M can be raised by selling the remaining shares.
This can be achieved using some simple math. The capital needed to issue a specific amount of shares is given by the area below the price function and the available funding F corresponds with the difference between the buy and sell curve collateral:
We can define the buy price functions based on the supply and price at the beginning (x1=60’000 shares, y1=$150) and end (x2=100’000 shares, y2):
while the sell curve is proportionally lower according to the fixed tax rate t:
Using these relations we can solve for the only unknown y2, that represents the maximum share token price and initialise the market contract with the correct functions:
The graph below shows the calculated supply functions for the outlined example.
Investments into these markets can come from any source, but a core goal of the platform is to identify institutional investors with an interest in supporting the development of therapeutics in ways that go beyond traditional investment and directly connect them with IP creators. The investors could be other universities, pharmaceutical companies and VCs, biotechs, retail investors, or patient advocacy groups, for example. They could also come in the form of philanthropic investors or grant agencies that are interested in exploring novel alternative, sustainable funding and investment practices. For example, grant agencies could explore return-based investments, where profits from successful drug commercialisation fund future projects and grants.
The university uses the funds raised from the initial sale to continue with the clinical development. They are incentivised to publish positive results that act as buy signals for new investors that want to contribute later in the research life cycle. Funders can always buy new shares at a price determined by the buy curve. The more parties buy into the project, the higher the distributed supply and the higher the price. Due to the sell collateral locked up in the market contract, shareholders can always liquidate their holdings at a discount given by the sell curve. This is a major benefit compared to more traditional financing models that require a company to go public at a stock exchange before any investments can be redeemed.
Ideally, all the trial results end up being positive and the offered shares are bought up until the full amount of capital has been raised. This introduces a new, fluid feedback model that incentivises the immediate open-sourcing of research data to attract new capital and ultimately speeds up data production and financing cycles. On the other hand, it is very likely that the project will suffer some setbacks from negative experiments which trigger sell orders or that early investors cash out their holdings when certain profit margins are reached. This reduces the distributed share supply, increases creator ownership and makes new investments more appealing due to reduced prices.
To clarify this concept, let us consider a set of transactions with generic timestamps that could occur in the described market:
The first entry is the initial sale via the auction. Following the release of additional data indicating further antimalarial activity in human subjects, three additional deals occurred where new and existing investors decided to buy more shares according to the prices set by the predetermined functions. At this point, one of the initial auction contributors (Investor A) decided to take profits and sold his shares which released $660k from the curve collateral leaving him with a 10% ROI. The potential of shorter-term gains fundamentally differentiates the Molecule platform from traditional crowdfunding providers and encourages contribution. The development continues to be positive, a new sponsor joins in and an existing one increases his stake. Close to the end of the trial stages, an early investor’s (transaction 3) assessment of success changes and he decides to sell his full stake for a good return (20% ROI). A royalty fund sees huge potential in the new drug candidate, jumps in and buys up all the remaining shares (limited by overall funding goal) on the market.
Reaching Funding Goals, Regulatory Approval & Production
Once the funding goal of $2M has been reached, the bonding curve market is locked and no additional shares can be minted. At this stage, ownership percentage and shareholder rights are frozen. If the collected funds are not sufficient to finish the process and reach regulatory approval, the creator could put more of his own stake up for sale to initialise a new market offering making this approach a modular building block for new drug candidates that are stuck in a much earlier development stage. Other options would be to align with current shareholders to raise more capital through over-the-counter (OTC) deals or revert to traditional financial means such as stock splits to boost liquidity. The choice of procedure also determines what happens with the collateral that is still locked up the market maker contract.
If regulatory approval was successful and the drug is ultimately brought to market, governance around the drug’s commercialisation, production, and distribution are coordinated amongst shareholders in the market, ultimately led by the original market creator: in this case, the university. The locked-up collateral only needed to provide market liquidity can be redistributed amongst investors while a share is kept in a mutual trust to cover future legal and post-market surveillance expenses. If additional stakeholders in the market are well-equipped to support the drug’s commercialisation in other ways, for example, from a manufacturing perspective, they may do so in the collective interest of bringing the drug to market more efficiently. Those that have invested in the drug’s development are ultimately entitled to a proportional share in the drug’s royalties. The bought shares now directly represent the securitised revenue streams and can be priced accordingly in a free market environment. Later articles will examine this process in additional detail and explore possible outcomes and scenarios.
Increasingly, the business model for drug discovery and development is predicated on recouping costs barely manageable for first-world, affluent nations. In an effort to combat this trend, various stakeholders in the drug discovery ecosystem — academia, industry, foundations, governments, and regulators — have been identifying and exploring novel models based on collaboration and distribution of risk that provide new schemes for incentivising and rewarding drug discovery.
Molecule proposes a model that demonstrates promise for creating sustainable change in the industry. It achieves this through the creation of a platform that connects IP creators in drug development directly with investors, while simultaneously encouraging open and transparent scientific practices. The underlying technology — blockchain-powered tokenised assets coupled with automated market-making via token bonding curves — allows for a low friction and low cost way to bootstrap public markets for both early- and late-stage IP in need of research funding. Further, this innovation introduces an entirely new asset class to the public: securitised pharmaceutical intellectual property. Anyone — from institutional investors to researchers to patient advocate groups — can invest in these new assets to effectively crowdfund the development of a drug, and potentially be rewarded by future revenues. This new form of “liquid crowd financing” provides new possibilities for benefitting from early-stage investments.
Markets on Molecule can be parameterised to accommodate almost any funding scenario. The platform is designed to foster collaboration, with the introduction of a bounty and grant system that distributes continuous funding to parties with the best chance of further developing the IP. Transparent and open data publishing is encouraged to create fast financing feedback loops and quickly move intellectual property towards development. The overall approach of Molecule reduces investment risk for individual parties to make the development of treatments for rare/neglected disease viable. Unlike traditional crowdsourcing platforms, there remains the opportunity for return on investment. All of these factors come together to make Molecule an innovative and timely new economic model for drug development in an industry in the midst of an innovation crisis.
This is the first in a series of case studies that examine possible scenarios on Molecule.