This report shows how a Swedish megafund for life science innovation could, by applying financial engineering techniques, provide adequate early-stage funding to start-ups. The report also reveals how other countries are considering setting up this type of financing tool and lists several aspects that require further investigation before implementation.

An ageing population is directly associated with the rise of chronic diseases and the subsequent increase in healthcare costs. Unless something changes, the percentage of GDP dedicated to healthcare in Sweden, as well as in many other countries, will dramatically escalate, making the situation unsustainable. Innovation is key to face this development and create a better and more cost-efficient health and elderly care. Although Sweden has a strong tradition and expertise in all segments of the life science industry early-stage venture capital investments have decreased over the last decade, hampering the development of new companies.

This exploratory study investigates whether a novel investment structure termed “megafund” could fill the financing gap in the Swedish life science sector. The megafund would apply financial engineering techniques, such as portfolio theory, securitisation, and dynamic leverage to fund a large number of high-risk/high-reward projects. Theoretically, the size and structure of the megafund would simultaneously reduce risks and provide significant returns. Moreover, by issuing both equity and debt, the megafund would pave the way for investments from institutional investors who traditionally do not invest in the early stages.

In order to investigate the appropriateness and feasibility of a Swedish megafund for life science innovation, 23 interviews were conducted with leaders from the Swedish life science industry, academia, venture capital industry, pension funds and healthcare system.

The results show that a Swedish megafund for life science innovation may be an effective tool to bridge the existing funding gap in the early stages. Furthermore, the megafund could promote disruptive ideas by integrating knowledge from the different life science segments (i.e. pharma, biotech, medtech and ICT) and thereby realise a larger part of the country’s innovation potential. The report enumerates a number of countries currently implementing, or considering the implementation of, “megafund-like” solutions and lists several aspects that require further investigation before implementing a megafund. Among other things future analyses may take a closer look at the investment focus, size, duration and governance of the megafund, as well as to what models to apply for risk and profitability forecasts.

Overall, the establishment of a Swedish megafund for life science innovation is considered a timely and viable opportunity to foster innovation, attract global talent, and boost the competitiveness and growth of the Swedish life science sector.