After several close friends were diagnosed with cancer, Andrew Lo began looking into cancer therapeutics. What he found was a weak pharmaceutical industry experiencing a decline in productivity and suffering from a lack of funding. However, he maintains that financial engineering has the potential to reshape the industry and enable the development of a cure for cancer, as well as other diseases.
Lo spoke to a packed audience of faculty and students at Ray Auditorium as part of the 2014 Dean’s Distinguished Scholar Lecture Series, a forum that presents distinguished scholars from an array of business disciplines.
Lo is currently the Charles E. and Susan T. Harris Professor of Finance and Director of the MIT Laboratory for Finance Engineering at MIT’s Sloan School of Management. Lo holds a bachelor’s degree in economics from Yale University and an AM and PhD in economics from Harvard University.
He has published numerous articles in top finance and economics journals and has written several books, including “The Economics of Financial Markets, A Non-Random Walk Down Wall Street” and “Hedge Funds: An Analytic Perspective.” In 2012, Lo was included in Time Magazine’s list of the “100 most influential people in the world” and has received awards for teaching from the University of Pennsylvania and MIT.
The lecture highlighted Lo’s research on how financial engineering can support translational medicine in cancer, orphan diseases and Alzheimer’s disease. Specifically, Lo has investigated a paradox in the pharmaceutical industry: even with many recent breakthroughs in biomedicine, pharmaceutical companies have continued to suffer from mediocre financial performance. “From January 2002 through January 2012, biopharmaceutical companies saw a -1.2 percent rate of return,” said Lo.
The number of biotech firms decreased from 201 in 2008 to just 136 in 2012, and public and private funding continues to decline, Lo said. He explained that the biotech “bubble” has burst due to increasing risk and uncertainty associated with these types of investments. In fact, there is a 95 percent chance of failure, or put differently, a mere 5 percent chance of payoff. “If you are investing, you don’t want to put your money into this,” said Lo. “It’s way too risky.” For long-term investments that range in the hundreds of millions of dollars, this is an especially bleak outlook.
However, according to Lo, financial engineering can help. Specifically, diversifying investments in multiple programs simultaneously would help reduce risks and would dramatically raise the probability of discovering at least one successful drug.
Reduced risk increases the feasibility of debt financing, which is a source of funding that has remained untapped. By offering “cancer bonds,” the biopharmaceutical industry would be able to grow without the need for public and private funding. “This is what we did in the ’90s for real estate,” Lo said.
He also emphasized the need to invest in early-stage research, especially for neurodegenerative diseases where the basic science is not as developed as in oncology. This is a need not currently being met by pharmaceutical companies. “The business of pharma is changing,” explained Lo. “These businesses are keeping cash so they can buy late-stage portfolios rather than investing in early-stage research.”
Lo said that with some imagination, the concept of debt financing is viable. In addition to creating a multibillion-dollar cancer mega fund, he discussed creating an advisory board of experts; one-time mutual funds offered to households across the nation; corporate pension funds, foundations and endowments; and governmental tax incentives.
Despite many challenges facing the biopharmaceutical industry, Lo maintains a positive outlook. “Don’t declare war on disease,” he said. “Instead, put a price tag on its head.” He explained that finance is a means to an end, not an end in itself. “With sufficient scale, we can do well by doing good.”
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