{"id":5353,"date":"2013-12-03T07:12:37","date_gmt":"2013-12-03T12:12:37","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5353"},"modified":"2018-09-21T02:03:59","modified_gmt":"2018-09-21T06:03:59","slug":"can-financial-engineering-cure-cancer","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2013\/12\/03\/can-financial-engineering-cure-cancer\/","title":{"rendered":"Can Financial Engineering Cure Cancer?"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">This may seem an odd question, but can financial engineering cure cancer? No less of an intellectual light than <a title=\"Andrew Lo's bio\" href=\"http:\/\/mitsloan.mit.edu\/faculty\/detail.php?in_spseqno=41207\">Andrew W. Lo of the Massachusetts Institute of Technology<\/a> and member of the <a title=\"CFA Institute's Future of Finance Advisory Council\" href=\"http:\/\/www.cfainstitute.org\/learning\/future\/about\/Pages\/advisory_council.aspx\">Future of Finance Advisory Council<\/a> believes financial engineering may be a potent weapon in the quest to find a cure. In fact, this was the topic of Lo&#8217;s presentation at the recent <a title=\"2013 Fixed-Income Management Conference | Storify\" href=\"http:\/\/storify.com\/CFAinstitute\/2013-fixed-income-management-conference\">Fixed-Income Management Conference<\/a> in Boston.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Lo\u2019s thesis rests on several key points:<\/span><\/p>\n<ul style=\"margin-left: 5%;\">\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">Applying portfolio theory to finding a cure for cancer helps increase expected returns and lower expected risks for the capital deployed.<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">Applying financial engineering through securitization allows for financing a cure for cancer in a smarter way that ensures greater participation from prospective investors.<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">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.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">Notorious capital destroyers, <a title=\"BioCentury's Biotechnology Fact Sheet (PDF)\" href=\"http:\/\/www.biocentury.com\/Data\/StaticContent\/ContentFiles\/Factsheet_Investors.pdf\">biotech investments of more than $400 billion have never generated returns in the aggregate covering their costs of capital<\/a>. In fact, venture capital firms are so discouraged by their returns that <a title=\"BIOtechNOW reports on venture capital investing\" href=\"http:\/\/www.biotech-now.org\/business-and-investments\/inside-bio-ia\/2012\/01\/vc2011\">the number and size of biotech investments has steadily declined<\/a> from their peaks in 2007\u20132008.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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:<\/span><\/p>\n<ul style=\"margin-left: 5%;\">\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">The mapping of the human genome.<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">The ability to analyze an individual patient\u2019s genes and compare these genes to known genetic defects that lead to unique cancers.<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">Customized drugs that suppress the expression of \u201cbad\u201d genes.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">Specifically, Lo offered up the story of <a title=\"Doctor Survives Cancer He Studies | The Genome Institute\" href=\"http:\/\/genome.wustl.edu\/articles\/detail\/doctor-survives-cancer-he-studies\/\">Lukas Wartman<\/a>, a cancer researcher who himself developed a very rare form of cancer with only a 5% survival rate. Wartman\u2019s 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, <a title=\"Wikipedia: sunitinib (sutent)\" href=\"http:\/\/en.wikipedia.org\/wiki\/Sunitinib\">Sutent<\/a>, designed specifically to suppress that gene. Though Sutent was originally designed for a different disease, Wartman was almost immediately cured of his cancer.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">While this may sound encouraging, as evidence, it strikes me as weak. First, the evidence is anecdotal and based on one person\u2019s very unique circumstances. Yes, genome mapping is widely available and was able to identify an overexpressed gene in Wartman\u2019s 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 <a title=\"National Human Genome Research Institute Q&amp;A\" href=\"http:\/\/www.genome.gov\/DNADay\/q.cfm?aid=2&amp;year=2012\">the number of genes in the human genome of at least 21,000<\/a> 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.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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\u00a0perception would hold for middle class families, in general.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">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?<\/span><\/p>\n<hr \/>\n<p style=\"font-size: smaller;\"><span style=\"font-size: 16px;\">Photo credit: iStockphoto.com\/enot-poloskun<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: 16px;\"><em>Originally published on CFA Institute\u2019s \u00a0<a href=\"https:\/\/blogs.cfainstitute.org\/investor\/\">Enterprising Investor<\/a>.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":5354,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[215,140],"class_list":["post-5353","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-the-blog","tag-andrew-lo","tag-financial-engineering"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5353","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5353"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5353\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5354"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5353"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5353"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5353"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}