How HR 7539 Loans and BioBonds Work

  1. A biomedical venture (university lab, foundation, company) receives FDA clearance for the human trials essential to establish treatment safety and efficacy.
  2. The borrowing entity determines that debt financing is an attractive funding source. Entities are of course free to pursue venture capital or other investment funding.
  3. The biomedical entity applies for a loan from a bank or other lender willing to extend credit in accordance with HR 7539 regulations. The company need not demonstrate the likelihood of scientific success — they simply need clearance from the FDA to launch a clinical trial for their emerging therapy. Borrowers also need to demonstrate ability to repay under the terms of a loan. Loans are structured to ensure affordability thanks to the lender’s ability to sell the loan into a BioBond and thus take virtually no risk.
  4. The borrower’s ability to repay may be based on factors such as the likely value of its intellectual property, revenue streams from other sources, and/or a guarantee from a university, foundation, or philanthropist.
  5. Rules ensure that a wide spectrum of diseases and impairments are funded, with no borrower allowed to receive more than one loan of no more than $25 million each year on demonstration of continuing ability to repay. Further, no group of related diseases may account for more than 15 percent of the principal amount of a BioBond issuance. Clinical trials funded by BioBond loans are encouraged to ensure access and inclusion. A financial institution manages this process, purchasing loans eligible for the BioBond guarantee and structuring them into BioBonds in accordance with applicable rules.
  6. In the initial three-year period authorized in HR 7539, up to $10 billion a year in BioBonds could be issued backed by a federal guarantee (TBD) for principal.
  7. BioBonds might have a maturity of 10 or more years with no interest due to the investor until the maturity date (i.e., “zero-coupon bonds” common in financial markets). The bond does earn interest at a preset rate, but interest payments accrue over many years at which time they are payable to the investor.
  8. As a loan for a project is repaid, a trust established for each BioBond must invest the proceeds in U.S. Treasury obligations and approved securities until the bond comes due. This income further reduces taxpayer risk. The trust also addresses any failure to repay, pursuing collateral and otherwise seeking to make the loan whole and thus protect the taxpayer.
  9. An initial, one percent fee is charged to the borrower to minimize taxpayer cost.
  10. All cash proceeds received from the repayment of a BioBond are first used to reduce the amount of principal guaranteed by the government and the government has a senior claim on all assets and collateral to the extent the guarantee has not been extinguished.