Lo’s thesis rests on several key points:
- Applying portfolio theory to finding a cure for cancer helps increase expected returns and lower expected risks for the capital deployed.
- Applying financial engineering through securitization allows for financing a cure for cancer in a smarter way that ensures greater participation from prospective investors.
- 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.
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.
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.
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.
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:
- The mapping of the human genome.
- The ability to analyze an individual patient’s genes and compare these genes to known genetic defects that lead to unique cancers.
- Customized drugs that suppress the expression of “bad” genes.
While this may sound encouraging, as evidence, it strikes me as weak. First, the evidence is anecdotal and based on one person’s very unique circumstances. Yes, genome mapping is widely available and was able to identify an overexpressed gene in Wartman’s 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 the number of genes in the human genome of at least 21,000 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.
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 perception would hold for middle class families, in general.
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?
Fonte: aqui
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Traditional financing sources such as private and public equity may not be ideal for investment projects with low probabilities of success, long time horizons, and large capital requirements. Nevertheless, such projects, if not too highly correlated, may yield attractive risk-adjusted returns when combined into a single portfolio. Such "megafund" portfolios may be too large to finance through private or public equity alone. But with sufficient diversification and risk analytics, debt financing via securitization may be feasible. Credit enhancements (i.e., derivatives and government guarantees) can also improve megafund economics. We present an analytical framework and illustrative empirical examples involving cancer research.
Fagnan, David E., Jose Maria Fernandez, Andrew W. Lo, and Roger M. Stein. 2013. "Can Financial Engineering Cure Cancer?" American Economic Review,103(3): 406-11.
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