MIT Sloan Professors to Apply Financial Engineering to Search for Cancer Cure
Three professors at the MIT Sloan School of Management have proposed the creation of a $30 billion “megafund” that would invest in early-stage biomedical research and drug development in the search for a cure for cancer, the Financial Times reports.
Andrew Lo, an economist, hedge fund manager and finance professor at MIT Sloan, felt helpless after losing three people close to him to cancer in recent years. So he set out to think of a way to use financial engineering – his area of expertise – to do something.
Government funding for cancer research is being cut, and the private sector is reluctant to invest due to low rates of return. It costs roughly $200 million to develop a cancer compound, and chances of success are about 5 percent, Lo told the FT. So the industry calculation to develop a drug is more like $1 to 2 billion.
With MIT colleagues Jose-Maria Fernandez and Roger Stein, Lo has proposed establishing an oncology megafund that would help overcome these low rates of return and increase the chances of success by investing in 150 projects at a time. Several other industries have used similar techniques for funding, including real estate, consumer loans, student loans and even the movie industry, Lo told the FT.
Lo and colleagues propose using structured debt securities for the fund because bond markets are much larger than equity markets and can provide the large amounts of capital necessary to “de-risk” the drug development process. “If you look at biomedical projects, it takes five to 10 years before you see anything,” he told the FT.
This “more patient” capital could change the way science is conducted, Lo added, because it would lift some of the pressure to meet short-term performance milestones that have led biotech and pharmaceutical companies to go for “me too” drugs instead of innovative pathways.
According to Lo, the megafund – if launched with a large amount of debt in two tranches – could have a rate of return of between 7 and 11 percent. While perhaps not enough to excite venture capitalists, it would be of interest to institutional investors such as pension funds – and offer a good opportunity to diversify.
Read the full Financial Times article about MIT Sloan Professor Lo’s oncology megafund proposal.
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