Can Financial Engineering Cure Cancer? -...

Can Financial Engineering Can Financial Engineering Cure Cancer?Cure Cancer?

Andrew W. Lo, Andrew W. Lo, MITMIT(joint work with David(joint work with David FagnanFagnan Jose MariaJose Maria(joint work with David (joint work with David FagnanFagnan, Jose Maria , Jose Maria

Fernandez and Roger M. Stein)Fernandez and Roger M. Stein)LGO WebinarLGO WebinarMarch 1, 2013March 1, 2013

© 2013 by Andrew W. LoAll Rights Reserved

CancerConundrumConundrum

Great Progress In Biomedical R&D: 2001: Gleevec, first of a new class of drugs based on molecular biology (tyrosine kinase inhibitor)

2004: Avastin, angiogenesis inhibitor (VEGF) 2008: first cancer genome (leukemia) sequenced by2008: first cancer genome (leukemia) sequenced by Wash U. Genome Institute, Nature 456 (2008):66‐72.

2012: Dr Lukas Wartman Wash U “cured” of acute 2012: Dr. Lukas Wartman, Wash U. cured of acute lymphoblastic leukemia via RNA analysis

FLT3 d i d– FLT3 gene overexpressed; using drug‐gene interaction database, identified Sutent

© 2013 by Andrew W. Lo All Rights Reserved

1 Mar 2013 Slide 2


Weak Performance In Biopharma Investments January 2002 to January 2012, NYSE/ARCA PharmaIndex return: 1.2%

2001 to 2010 VentureXpert average biotech IRR: 1.0%1 yr IRR (LHS) 10 yr trailing IRR (RHS)

20%

30%

40%

65%

95%

125%

1 yr IRR (LHS) 10 yr trailing IRR (RHS)

0%

10%

20%

5%

35%

65%

‐10%‐25%

12/319

86

12/31/90

12/31/94

12/31/98

12/31/02

12/31/06

12/31/10

fiercebiotech.com (19 Jul 2012)


1 Mar 2013 Slide 3


Why??C j bi h b i d l b b k Conjecture: biopharma business model may be broken

As we get smarter, business risk increases (why?) Additional uncertainty due to recent economic events VC private equity and public equity are not idealVC, private equity, and public equity are not ideal Funding is declining despite/because of better science

Financial Engineering May Offer A Solution Portfolio theory Portfolio theory Securitization


1 Mar 2013 Slide 4

CancerLessons From The Financial Crisis?Lessons From The Financial Crisis?

1000250

U.S. Real Home Price Index, 1890 –2012

800

900

200

600

700

150

Millions

rice Inde

x

H P i

300

400

500

100

pulatio

n in

al Hom

e P Home Prices

100

200

300

50

Pop

Re

Population

001880 1900 1920 1940 1960 1980 2000 2020

Source: Robert J. Shiller


1 Mar 2013 Slide 5

CancerLessons From The Financial Crisis?Lessons From The Financial Crisis?

U.S. Bond Market Debt Issuance ($Billions)

Corporate Federal AgencyMunicipal Treasury1 Mortgage‐Related2 Debt3 Securities Asset‐Backed Total

1996 185.2 612.4 479.7 343.7 277.9 168.4 2,067.21997 220.7 540.0 577.6 466.0 323.1 223.1 2,350.51998 286.8 438.4 1,118.1 610.7 596.4 286.6 3,336.91999 227.5 364.6 985.4 629.2 548.0 287.1 3,041.82000 200.8 312.4 660.0 587.5 446.6 281.5 2,488.82001 287.7 380.7 1,663.9 776.1 941.0 326.2 4,375.62002 357.5 571.6 2,283.0 636.7 1,041.5 373.9 5,264.22002 357.5 571.6 2,283.0 636.7 1,041.5 373.9 5,264.22003 382.7 745.2 3,084.3 775.8 1,267.5 461.5 6,717.02004 359.8 853.3 1,879.0 780.7 881.8(4) 651.5 4,524.32005 408.2 746.2 2,182.4 752.8 669.0 753.5 5,512.12006 386.5 788.5 2,088.8 1,058.9 747.3 753.9 5,823.92007 429 3 752 3 2 186 2 1 127 5 941 8 509 7 5 946 82007 429.3 752.3 2,186.2 1,127.5 941.8 509.7 5,946.82008 389.5 1,037.3 1,362.2 707.2 984.5 139.5 4,620.22009 409.8 2,185.5 2,041.4 901.8 1,117.0 150.9 6,806.42010 433.1 2,303.9 1,742.7 1,062.7 1,032.6 109.4 6,684.5

H Did Thi H ??1 Interest bearing marketable coupon public debt.2 Includes GNMA, FNMA, and FHLMC mortgage‐backed securities and CMOs and private‐label MBS/CMOs.3 Includes all non‐convertible debt, MTNs and Yankee bonds, but excludes CDs and federal agency debt. 4 Beginning with 2004 Sallie Mae has been excluded due to privatization Source: SIFMA

How Did This Happen??


1 Mar 2013 Slide 6

4 Beginning with 2004, Sallie Mae has been excluded due to privatization. Source: SIFMA

CancerLessons From The Financial Crisis?Lessons From The Financial Crisis?Who Benefited From This Trend?: Commercial banks Commercial banks Credit rating agencies (S&P, Moody’s, Fitch) Economists Government sponsored enterprises HomeownersI i ( l ili li ) Insurance companies (multiline, monoline) Investment banks and other issuers of MBSs, CDOs, and CDSs Investors (hedge funds pension funds mutual funds others)Investors (hedge funds, pension funds, mutual funds, others) Mortgage lenders, brokers, servicers, trustees Politicians Regulators (CFTC, Fed, FDIC, FHFA, OCC, OTS, SEC, etc.)

“A Rising Tide Lifts All Boats” (Everybody Benefits)


1 Mar 2013 Slide 7

g

CancerWhy Is Finance Becoming More Important?Why Is Finance Becoming More Important?

Innovation Requires Financial Infrastructure!P i i Private investment

Accounting, legal, regulatory structures Systemic stability Well‐functioning capital marketsWell functioning capital markets Proper design of securities

Incentives to Motivate ActionIncentives to Motivate ActionFear Works Faster; Greed Lasts LongerIs More SustainableFear Works Faster; Greed Lasts Longer Greed and altruism not always incompatible

Is More Sustainable


1 Mar 2013 Slide 8

CancerThe Power of Global Capital MarketsThe Power of Global Capital MarketsConsider The DARPA Network Challenge Find 10 red balloons in fixed locations in U S Find 10 red balloons in fixed locations in U.S. $40K prize to first team to find all 10 locations MIT team won 8:52:41!8:52:41! How?? Financial engineering! $4,000 per balloon if they won= $2 000 to locator += $2,000 to locator +

$1,000 to person who asked locator +$ 500 to person who asked person + …+ remainder to charity


1 Mar 2013 Slide 9

remainder to charity

CancerThe Power of Global Capital MarketsThe Power of Global Capital MarketsReal Home Price Index (1890-2006)

200

E = mcE = mc22

160

180

Rat

e

120

140

or In

tere

st R

80

100

120

Inde

x o

60

80

1880 1900 1920 1940 1960 1980 2000 2020

Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition.

Year


1 Mar 2013 Slide 10

CancerThe Power of Global Capital MarketsThe Power of Global Capital Markets

What If We Could Focus This Power For “Good”? Financial engineering with a “conscience” Financial engineering with a conscience Apply expertise to solving society’s biggest challenges Finance facilitates collaboration; collective intelligence Finance facilitates collaboration; collective intelligence With the proper financial engineering, I believe we can

solve the following problems in 20 years or less:solve the following problems in 20 years or less:1. Cancer2 Energy Crisis2. Energy Crisis3. Global Warming

??How?How?


1 Mar 2013 Slide 11

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?

Typical Drug Development Program:$200MM t f k t t 10 l $200MM out‐of‐pocket costs, 10‐year approval process

Probability of success in oncology is 5% If successful, annual profits of $2B for 10‐year patent


1 Mar 2013 Slide 12


Typical Drug Development Program:$200MM t f k t t 10 l $200MM out‐of‐pocket costs, 10‐year approval process

Probability of success in oncology is 5% If successful, annual profits of $2B for 10‐year patent

$p = 5%

+51.0%

$200MM

1 p = 95% –100 0%

100.0%


1 Mar 2013 Slide 13


What If We Invest In 150 Programs Simultaneously?:R i $30B f it l Requires $30B of capital

Assume programs are IID (can be relaxed) Diversification changes the economics of the business:

But can we raise $30B??


1 Mar 2013 Slide 14


What If We Invest In 150 Programs Simultaneously?:Gi th d ti i i k d bt fi i i ibl ! Given the reduction in risk, debt‐financing is possible!

$16.7B of high‐quality debt can be issued With securitization, debt capacity is even larger See Fernandez, Stein, Lo, Nature Biotech 30(2012)


1 Mar 2013 Slide 15


Nature Biotech Oct 2012 American Economic Review May 2013


1 Mar 2013 Slide 16



1 Mar 2013 Slide 17

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?Simulating A Cancer Megafund: Tufts Medical School CSDD + Deloitte/RECAP cancer compoundsTufts Medical School CSDD + Deloitte/RECAP cancer compounds

database from 1990–2011 2,000+ compounds 733 after cleaning data, p g Cost and revenue assumptions from historical data and

literature (e.g., Bloomberg, DiMasi et al. 2003, etc.) Estimate transition probability matrix and valuations


1 Mar 2013 Slide 18

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?Simulation Results:


1 Mar 2013 Slide 19

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?Simulation Results With Guarantee:


1 Mar 2013 Slide 20

CancerIs This Realistic?Is This Realistic?

With Some Imagination, This Is Achievable!I i ti $30B “C F C ” f d Imagine creating a $30B “Cure For Cancer” megafund

Imagine creating an advisory board of experts:– Francis Collins, Al Gilman, Eric Lander, Bob Langer, Larry Norton, Harold

Varmus; Warren Buffett, Bill Gates, Jacob Goldfield, Bob Merton, Jim Simons, George Soros, Bill Sharpe, g , p

Imagine 10MM households investing $3,000 each Imagine corporate pension funds foundations Imagine corporate pension funds, foundations, endowments, insurance companies investing as wellI i i i di Imagine government tax incentives, credit enhancement, etc. (think Fannie Mae, Freddie Mac!)


1 Mar 2013 Slide 21

CancerIs This Realistic?Is This Realistic?

Is There Capacity From Investors? In 2010:U S b d k t $35T U.S. bond market: $35T

Mutual funds: $12T Money‐market funds: $1T Norwegian sovereign wealth fund: $537BNorwegian sovereign wealth fund: $537B CalPERS: $226BT t t f 126 bli f d (2010) 8%7 5% Target return of 126 public funds (2010): 8%

In 2010 the Size of the Entire VC Industry Was:

7.5%

In 2010, the Size of the Entire VC Industry Was:$176B


1 Mar 2013 Slide 22

CancerIs This Realistic?Is This Realistic?What Are Some of the Potential Challenges? Size: managing large portfolios of complex R&D projects may Size: managing large portfolios of complex R&D projects may require new management and governance structures (e.g., Manhattan Project) Centralization: must preserve the benefits of diversity as scale increases C it i th t l t l l h t t h th l f Capacity: is the talent pool large enough to match the scale of this venture? Complexity: can investors understand the risks and rewards ofComplexity: can investors understand the risks and rewards of RBOs? Excesses: if successful, the potential for abuse will also increase Ethics: how to balance profit motive vs. social objectives for cures?


1 Mar 2013 Slide 23

CancerConclusionConclusion

Don’t Declare War On Put A Price Tag On ItsDon t Declare War On Cancer…

Put A Price Tag On Its Head Instead!

With S ffi i t S l W C D W ll B D i G dWith Sufficient Scale, We Can Do Well By Doing Good Finance does not always have to be a zero‐sum game


1 Mar 2013 Slide 24

Thank You!Thank You!

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?Summary Statistics of Data:


1 Mar 2013 Slide 26

CancerCuring Cancer: Would You Invest?Curing Cancer: Would You Invest?Key Simulation Parameter Values:


1 Mar 2013 Slide 27

Date post:	18-May-2018
Category:	Documents
Upload:	dinhlien
View:	214 times
Download:	1 times

Can Financial Engineering Cure Cancer? -...

Documents