When I set out to write this article, I had the idea of naming it 'How Money Shapes Science'. The original plan was to neatly summarise how funding shapes science - a spin-off topic from my undergraduate dissertation on the factors driving scientific progress. However, as I was researching and writing this, it soon became obvious that one article really could not do this topic justice. Hence, 'The Business of Science', a new series that looks at science from an accountant's perspective.
Can financial engineering cure cancer?
In the fall of 2012, a team from the Massachusetts Institute of Technology Sloan School of Management (MIT Sloan) put forth the provocative idea that institutions should start harnessing the power of financial engineering to fund cancer drug development.
Financial engineering? You mean collateralised debt obligations, credit default swaps and derivative securities, otherwise known as the tools that brought on the 2008 financial crisis? Yes. The one and the same. In the 2012 paper, Andrew Lo, a Professor of Finance at MIT Sloan, and his co-authors proposed a structure for a new kind of financial tool: a cancer megafund that funnels $30 billion into cancer drug development. "It was studying the financial crisis that got me thinking along these lines. The financial crisis didn't happen because these techniques didn't work - it happened because these techniques worked way too well," says Lo in his seminal TEDxCambridge talk in 2015. "In fact, these techniques are called the 'financial weapons of mass destruction' for a reason. There is tremendous power locked up in financial markets around the world...if we use these tools carefully, and responsibly, we get virtually unlimited power for fuelling innovation and economic growth."
Cool idea, but so what? Why should anyone care about how drug development is funded? Because funding for early-stage, risky drug development projects is fundamentally broken. In biomedical research, the pharmaceutical industry often euphemistically refer to the "Valley of Death" to describe the gap between proving that a drug works in the lab (the basic science research phase) and proving that it works in humans (the clinical trial phase). The Valley of Death is where promising discoveries ultimately meet their demise. One of the main causes of this is a lack of funding.
Translating exciting discoveries in the lab into approved drugs is a challenging, and often painfully expensive, process. Venture capital funding for early-stage programs are difficult to secure due to the potentially high failure rate and advancing a product through the clinical development phase (Phase I, Phase II, Phase III) is a costly process that can potentially span over more than a decade.
The name is Bond
This is obviously a problem that the pharmaceutical industry is trying to solve, but perhaps it is too big of a problem to solve without the ingenuity of quants or financial engineers. One of the things that attracted me to this idea of a cancer megafund was how conceptually elegant it was - why invest in one anti-cancer therapy when you could invest in 150 potential therapies at the same time? Given the high failure rates of these projects, constructing a portfolio of 150 independent projects will make it more palatable for investors because now you have diversified away a significant portion of the risk. You only need a few drugs to succeed to offset the failures and generate sufficient return for your investors.
In The Science and Business of Biotechnology, a MITx course co-taught by Lo and Harvey Lodish, a Professor of Biology and Professor of Biological Engineering at MIT, Lo credits taking inspiration from the so-called slate financing model used by Wall Street financiers to invest in Hollywood productions. As Lo illustrates in the course, film development follows a similar high risk/high reward trajectory to drug development. It is virtually impossible to predict how a movie will perform in the box office and therefore, whether an investor will be able to recoup their investment.
Similar to Lo's cancer megafund idea, the banks and investment firms structured a portfolio of films or 'multi-film credit lines' with the Hollywood studios. Since the investment was in a portfolio of films rather than in just one film, this mitigated most of the risk for the investors.
In terms of how the cancer megafund will raise the required funding, Lo suggests the issuance of cancer bonds, not unlike the war bonds issued to finance military operations during World War I and World War II. War bonds are essentially a loan to the government to help fund a war. Cancer bonds would therefore be a loan to help fund the war...on cancer.
So where do we go from here?
How do we get more investors to invest in drug development? How do we harness the power of the financial markets to increase funding to translational research and give life to the Valley of Death?
The solution proposed by Lo and his contemporaries at MIT is a start but we need to get more people on board. We need experts in the fields of finance and biomedical sciences talking to each other. We need shrewd finance professionals on board to structure these products and even shrewder scientists to develop potential therapies. There are unquantifiable opportunities at the intersection of science and finance.
If this topic interests you, then I highly recommend The Science and Business of Biotechnology on edX. It's free to audit and, in my opinion, a great primer to help you understand the nuances of each field. I thoroughly enjoyed it and the contents of the course served as a basis for this article.
"It's become pretty clear that we need a course like this in order to get more students that have interests and backgrounds in both finance and biomedical expertise to collaborate," says Lo in the course. "We believe [in] bringing students together to collaborate and to develop a basic lexicon where we can start communicating with each other and talking about these processes and how to make them more efficient."
We cannot afford to be too conservative with scientific funding. Everyone will need a pharmaceutical solution at some point in their lives. We are all current and future patients, and therefore stakeholders in the drug development process. The solution proposed by Lo and team is conceptually elegant. Investors do not like risk, but they like return. They want to have their cake and eat it too. So why don't we give them what they want? I'll leave you with a final quote from Andrew Lo, which aptly summarises the seething rage of all of us that have lost a loved one to a disease with no cure:
When my mother was dealing with lung cancer, I was introduced to a very successful biotech company developing an experimental therapy for this disease. I was privileged to meet with the chief scientific officer, as well as the chief financial officer, and I asked what I thought was an innocent question. I asked them if their financing had any influence on their scientific agenda. The chief scientific officer looked to the CFO, shook his head sadly and turned back to me and said, "Influence? Our financing drives our scientific agenda". Now, as an economist, I guess I understand. But as the son of a dying patient, I was absolutely outraged. What do interest rates, stock market volatility and Fed policy have to do with whether you should treat non-small cell lung cancer with angiogenesis inhibitors or immunotherapy? Nothing. But it drives their scientific agenda.
Wall Street's extreme sport: Financial Engineering. Steve Lohr. The New York Times.
Fernandez, J.M., Stein, R. & Lo, A. Commercializing biomedical research through securitization techniques. Nat Biotechnol 30, 964–975 (2012). https://doi.org/10.1038/nbt.2374
Can Financial Engineering Cure Cancer? Andrew Lo. TEDxCambridge.
Seyhan, A.A. Lost in translation: the valley of death across preclinical and clinical divide – identification of problems and overcoming obstacles. transl med commun 4, 18 (2019). https://doi.org/10.1186/s41231-019-0050-7