Can Financial Engineering Cure Cancer?
This may seem an odd question, but can financial engineering cure cancer? No less of an intellectual light than Andrew W. Lo of the Massachusetts Institute of Technology and member of the Future of Finance Advisory Council believes financial engineering may be a potent weapon in the quest to find a cure. In fact, this was the topic of Lo’s presentation at the recent Fixed-Income Management Conference in Boston.
Lo’s thesis rests on several key points:
- Applying portfolio theory to finding a cure for cancer helps increase expected returns and lower expected risks for the capital deployed.
- Applying financial engineering through securitization allows for financing a cure for cancer in a smarter way that ensures greater participation from prospective investors.
- Recent anecdotal evidence suggests that human genome mapping allows for the identification of problematic genes that may be targeted by customized medicines to fight specific cancers.
Notorious capital destroyers, biotech investments of more than $400 billion have never generated returns in the aggregate covering their costs of capital. In fact, venture capital firms are so discouraged by their returns that the number and size of biotech investments has steadily declined from their peaks in 2007–2008.
Lo thinks he knows why biotech investments have generated such poor returns: the industry is financed incorrectly. Specifically, he thinks the business models are bad because as biotech gets more knowledgeable, the business gets riskier. Lo believes that cures for cancers are unique to each patient and therefore require unique drug treatments as opposed to massively scalable compounds. Yet, the pharmaceutical industry cannot recoup its massive investment in research unless it has blockbuster drugs that can generate returns to compensate for massive upfront costs.
This is where portfolio management comes in. To find cures for cancer, investors must fund about 150 projects in order to lower the standard deviation of possible returns from cancer cure projects. With such a high number of viable projects, it becomes possible to issue debt. Once it is possible to issue debt, securitization concepts may be layered on top of portfolio theory to find viable cancer cures.
As with traditional securitization, various tranches would be created for different risk appetites and with different guarantees for creditors buying those differently segmented risky tranches. Equity portions of the return stream could then be financed by the traditional risk preference buyers, such as private equity and venture capital. Now the combination of portfolio management and securitization makes for a viable business, according to Lo.
This plan rests on a critical assumption: that researchers can find a cure for cancer. To support his belief that a cure for cancer may be found, Lo pointed to:
- The mapping of the human genome.
- The ability to analyze an individual patient’s genes and compare these genes to known genetic defects that lead to unique cancers.
- Customized drugs that suppress the expression of “bad” genes.
Specifically, Lo offered up the story of Lukas Wartman, a cancer researcher who himself developed a very rare form of cancer with only a 5% survival rate. Wartman’s colleagues were so moved by his personal calamity that they set to finding a cure. After mapping his genes and noticing an overexpressed gene in his RNA, they then used a drug, Sutent, designed specifically to suppress that gene. Though Sutent was originally designed for a different disease, Wartman was almost immediately cured of his cancer.
While this may sound encouraging, as evidence, it strikes me as weak. First, the evidence is anecdotal and based on one person’s very unique circumstances. Yes, genome mapping is widely available and was able to identify an overexpressed gene in Wartman’s RNA that might have been responsible for his cancer; but what a fortunate coincidence that there was an extant drug, Sutent, available to suppress the overexpressed gene. With estimates for the number of genes in the human genome of at least 21,000 there would clearly need to be many more drugs developed. Further, development costs for Sutent, while not precisely available, are known to be in the tens of millions of US dollars.
Lo imagines a $30 billion cancer fund being established and funded by 10 million households investing $3,000 each. According to Lo, this would be relatively easy to procure and to make his point, he queried delegates on how many people would be willing to participate in such a fund. Nearly the entire audience raised their hands. Yet, Lo overlooks one important fact, a room full of investment managers and analysts see the possible marginal loss of $3,000 as small in comparison to their overall net worth. I am not sure that this perception would hold for middle class families, in general.
Financial engineering may have a place in helping to find a cure for cancer, but at what price tag will the niche targeted drugs be developed?
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: iStockphoto.com/enot-poloskun
Jonas Edward Salk (1914 – 1995) was an American medical researcher and virologist who discovered and developed the first successful polio vaccine but did NOT patent it. “Could you patent the sun?” he famously said in a tv interview. He could not care less about financial incentives, what economic irrationality and human greatness! Even by your own account, Wartman’s cure was developed by his friends, not by financial incentives (aka greed). Financial incentives and engineering may be a potent weapon in the quest to create a financial cancer (such as the global debt overhang) rather than cure a human cancer.
Hi Billy,
Thank you for your comments and for sharing the story of JE Salk.
With smiles,
Jason
Jason, I have always enjoyed your thought provoking and off the beaten path blog posts – thank you for sharing this one.
There is a constant tussle between patent holders and generics (in Canada the courts are after Shoppers Drug Mart for selling generics), and what Andrew Lo suggests seems to be a simple solution to two problems – the financial incentive to produce a targeted drug for a small population and the opportunity to participate in one or more potentially rewarding pooled fund for retirees at low cost (I think $3000 was just a number – it can just as easily be $3, or the cost of a lottery ticket) in the absence of defined benefit pension plans.
Kudos to both you for sharing this and Andrew Lo for presenting his idea – I think we need more imaginative ideas like this if we are to cope both physically and financially with longer lives.
Hi Savio,
First, thank you for your feedback! It brings a big smile to my face to know that you enjoy my posts.
Second, I agree that Lo (and others among his colleagues) has made a bold proposal that does, in fact, provide a solution to the two problems you described above. For me the crux of the issue is whether or not cancer is ‘curable.’ Given the many carcinogens and the massive capital already thrown at the problem, it may be that cancer is treatable only in the same way that the common cold is treatable. In other words, it may turn out that applying financial engineering to finding a cure for cancer simply finances projects that are just as spurious as were sub-prime mortgages. I am not questioning the financial engineering aspect, but the offering up of anecdotal evidence (essentially, hope in narrative form) as evidence that cancer may be cured.
Third, yes you are correct that people could purchase into the “cancer cure fund” for $3 but then you need a thousand more contributors, or 10 billion lottery tickets issued. This also presupposes that: a cure for cancers may be found, and that $30 billion is all that is needed to substantially change the problem. So far $400 billion in biotech investments (the technology called upon to cure cancers) has not resulted in returns on capital. As always, that $30 billion needs to compete with other investments on a benefits vs. costs and returns vs. risks framework. Could we better change the world by deploying that $30 billion to better vaccinations? Better education? Mosquito nets? And so forth. The nature of hope is that it always exists by human will power alone, even in the face of strong evidence against for what is hoped. In this case, the cost of hope has been enormous.
With big smiles!
Jason
Dr. Tony Blau from UW Seattle and the Center for Cancer Innovation is taking the approach of openly sharing information, patients while targeting therapy specifically for individual patients. All-for-one and One-for-all approach. Check out this interview with Dr. Blau: http://drpullen.com/cancercar-redefiningbestcando
Hello Ed,
Thank you for sharing the link to the interview with Tony Blau. It will be interesting to see how the gradual accumulation of knowledge, coupled with the sharing of that same knowledge, results in advances in healthcare. If a “cure” is possible I am certain that many separate disciplines will end up playing a part.
Cheers,
Jason