Can Financial Engineering Cure Cancer? | Andrew Lo | TEDxCambridge


Translator: Eriko T
Reviewer: Hélène Vernet If you are under 30, you probably
use Facebook all the time. I’m not part of that demographic, so I don’t. But if I did, these are some of the photos
that would be on my Facebook page: pictures of my friends,
colleagues, and my mom. These people have one other thing
in common besides me, they all died of cancer
within the last few years. Cancer is personal for me,
as I am sure it is for many of you. So, by a show of hands, how many people here
have dealt with cancer directly or have friends or family
that are dealing with cancer? Yeah. Cancer touches all of us. So, I know that grieving
is supposed to have five stages: denial, anger, bargaining, depression and acceptance. I probably won’t make it to acceptance, because I am still stuck on anger. I’m sick and tired of losing friends
and family to cancer, and I don’t accept it
and neither should you. But what can I do?
I’m just a financial economist. And cancer patients need
a financial economist like a fish needs a 401(k) plan. (Laughter) But as I learned more about cancer and the business
of cancer drug development, I now believe that financial engineering
can play a major role in curing cancer. Now before I tell you how I came
to that strange conclusion, I need to make a disclaimer. You know, like the warning on
drug commercials? I may cause disorientation,
confusion or drowsiness, (Laughter) but they should all pass
within 18 minutes. The real disclaimer is that I have
no background in biomedicine. I’m not part of the biomedical industry, but like all of you who have friends
or family with cancer, I want to help. And four observations have convinced me that the financial industry
and all of us can do a lot to bring cures to cancer patients faster. The first observation
is that drug development is getting harder and harder
all the time, not easier. What’s the evidence? Here’s a graph titled “Eroom’s law” from an article on the efficiency
of the pharmaceutical industry. The horizontal axis is time, and the vertical axis
is this measure of efficiency, the number of new drugs approved
by the FDA each year per billion dollars of R&D spending. And it’s been declining for decades. In case you are wondering, “Eroom’s law”
stands for the opposite of “Moore’s law.” (Laughter) This is the exact opposite of what we’re experiencing
in semiconductors, where we’re getting more and more
efficient all the time. Why is this happening? Especially when we’re getting smarter,
year after year, thanks to all the breakthroughs made by scientists, clinicians
and drug developers just in the last ten years. Well, it’s partly
because we’re getting smarter that drug development is getting
harder and financially riskier. I know that sounds counter-intuitive. Usually when we get smarter,
things get easier and less risky, but it’s just the opposite in biomedicine. As we learned more about the complexity
of human biology and disease, we realized that there are many
many things that can go wrong and a lot of possibilities for either fixing or preventing
them from happening. And because of scientific
and ethical reasons, we have to test
each of those possibilities with a separate
and independent clinical trial. And each clinical trial takes years
and thousands of patients and hundreds of millions of dollars,
which somebody has to pay for. And that brings me
to my second observation, which is that funding is declining
because financial risk is increasing. So let’s talk about financial risk. It turns out, that most clinical trials
are done by big drug companies. But ultimately, it’s the investors
in those companies that have to pay for those trials,
including you and me. And here’s a fact about those costs. We like return, but we don’t like risk. And I’m going to give you
an illustration of that. I’m going to show you
an investment of a dollar in four different financial assets. I’m not going to tell you what they are,
or even over what time span they last. I want you to take a look
at these four assets, and tell me which one you would prefer
if you could only have one. Try to balance the risk-reward trade-off
for your own preferences. Okay, by a show of hands,
how many people want the green asset? Okay, how about the red asset? All right.
How about the blue one? A few hands. And how about the yellow one? Yeah. Let the record show
that most of you want the yellow asset. Well, let me tell you what you all chose. First, the time span is from 1990 to 2008, and the first asset, the green one,
is US Treasury bills, the safest asset in the world but not
very attractive in terms of return. The second asset is the S&P 500,
the US stock market: more return but more risk. The third asset, the blue asset,
is Pfizer, the drug company, and it’s got an even better return
but a lot more risk. Now what about the yellow asset?
The one that most of you picked. The yellow asset is the feeder fund
for the Bernie Madoff Ponzi scheme. (Laughter) And that’s why it ends in 2008. (Laughter) (Applause) We all want more return and less risk; it’s human nature. (Laughter) Now let me ask you
about a second investment opportunity. This investment requires
an upfront payment of 200 million dollars. It takes 10 years, where you get
nothing in between, and in year 10, your payoff depends
on drawing a ball from this urn. (Laughter) The urn has 20 balls,
19 of them are yellow, one of them red. And if you draw a yellow ball,
you get nothing. But if you draw the red ball,
you get 12.3 billion dollars! A fantastic payday, but remember, you only have a one out of 20 chance
of picking that ball. 19 out of 20 times you get nothing. So by a show of hands, how many people
want this investment? Yeah. Not too many takers. Well, these are the back-of-the-envelope,
typical numbers for investment in a single anti-cancer drug candidate. And it’s just not that compelling. In the history of Major League Baseball, the player with the lowest
batting average of all time was a catcher from the Cincinnati Reds
named Bill Bergen, who in 1909 batted 139. 139 is the lowest batting average
in baseball history. And it’s almost three times
the number of hits you can expect from cancer drug development. It’s just too risky. And these statistics, they have an impact
on biomedical funding and on patients. 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 a CFO, shook his head sadly,
turned back at 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. Now, I’m no scientist, but shouldn’t
the science drive the financing? The problem is, investors don’t like risk. But sometimes, the most innovative
therapies are the riskiest. When you are swinging
for the fences and going for home runs, you’re going to strike out a lot more
than when you go for singles and doubles. David Ortiz is a good example. So, drug development is getting harder, financial risk is getting bigger
and funding is getting lower. What do we do about this? Well, what if we used
financial engineering to improve the odds
of cancer drug development? That brings me to my third point, which is that finance can help lower risk. We do it all the time.
Here’s how. Instead of investing
in one project at a time, let’s invest in a portfolio
of a hundred and fifty projects all at the same time. I know this sounds crazy. First, you need 150 times 200 million
or 30 billion dollars. Where are you going to get
that kind of money? As an economist, I have a simple answer. Assume we have 30 billion dollars. (Laughter) I’ll come back to that. But second, if you don’t want
one of these projects, why on earth would you want 150 of them? Well, you’ve heard the old saying, “If at first you don’t succeed,
try, try again.” What if we could try, try again
all at the same time, 150 times. If we did that, the chances
of getting at least three hits out of 150 independent trials is a stunning 98%. A 98% chance of getting
at least three hits in 150 times at bat. By the way, 98% is more than double
Ted Williams’ batting average of 406. And if you got at least three hits,
what would your portfolio be worth? Well, three times 12.3 billion
or 37 billion dollars in year 10. This is Moneyball
for cancer drug development. Now what about the first issue,
where do we get the 30 billion? Well, if you have a 98% chance of producing 37 billion
dollars in year 10, it turns out that you can finance
the vast majority of that 30 billion by issuing long-term bonds. And if we use all the other tricks
of the financial trade, things like collateralized
debt obligations, credit default swaps and derivatives securities,
we can do even better. Now, I know what you’re thinking,
“Really? We really want to do this?” “Didn’t these techniques figure
prominently in the financial crisis?” And I have to tell you that 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. In fact, these techniques are called
”financial weapons of mass destruction” for a reason. There’s tremendous power locked up
in financial markets around the world. And if that power is unleashed
in an uncontrolled and irresponsible way – (Blast!) I’ve always wanted to do that – (Laughter) you get devastation
and years of nuclear fallout. But the analogy also applies
at the other extreme. If we use these tools
carefully and responsibly, we get virtually unlimited power for fueling innovation
and economic growth. It works both ways. So let me give you the positive extreme. Imagine creating a multi-billion-dollar
cancer mega-fund managed by the world’s experts
in biomedicine and health care investing. Imagine this fund invests
in a large number of really risky, but potentially life-saving
cancer therapies. I’m talking cures, not just two or three extra months
of suffering for cancer patients. And imagine if this fund
were financed by cancer bonds that we could all invest in, like the war bonds that the US government
issued to finance World War II. 85 million Americans
invested in war bonds, and by 1946 we had raised
a 185 billion dollars for the war effort. That translates
into 2.3 trillion dollars today. It’s a crazy amount of money. And we can finance the war on cancer
in exactly the same way. The research that my collaborators
and I have been doing – and I have to give a lot of credit
to my collaborators. I couldn’t have done this by myself,
fantastic team we have – we found that investments
in these kind of securities can actually earn reasonable
rates of return for investors if they’re structured in the right way. This brings me to my fourth
and most important observation. The importance of expectations and vision. So, just throwing money
at this problem is not enough. We need to know how to use the money well. And as an outsider
to the biomedical industry, I’m not qualified to manage
a cancer mega-fund, nor am I trying to start one,
so please don’t send me your money. That’s the first time
a finance professor has ever said those words in public. But I’ve had the great good fortune
of meeting a number of people who are supremely qualified
to manage this mega-fund as well as a large number of investors
who would be delighted to invest if it were structured properly. The work that we’re doing at MIT is to develop the financial models
that bring these two groups together. Financial markets
are all about expectation and vision. If investors expect that you can
cure cancer, if they share your vision, believe me, they’ll be more
than happy to finance all of it. With the right expectations,
the right financing and the right vision, we can accomplish amazing things. I want to leave you with a really
powerful example of that vision, which has to do with Harvey Lodish,
an MIT colleague of mine who is a cell biologist
at the Whitehead Institute. When I first heard the story, I decided
I want to be Harvey Lodish. And let me tell you why. In 1983, Harvey co-founded
a small biotech company focused on developing therapies
for Gaucher’s disease, a rare genetic disorder that affects
maybe one in 20,000 births here in the US. This condition is caused
by a mutation, a typo in your DNA, that prevents your body from producing an important housekeeping enzyme
that breaks down fatty substances. Without this enzyme, these fatty substances
accumulate in your organs, causing all sorts of trouble
for your liver, your spleen and bone development. For many Gaucher’s patients in 1983
this was a terminal illness. Not anymore. Harvey helped to develop a method
to replace this missing enzyme in Gaucher patients. And in 1991, the drug
Ceredase was approved. That drug and his newer versions
have saved many thousands of lives over the course of the last several years. That startup, it’s called Genzyme. In 2011, Sanofi acquired them
for 20 billion dollars. Now, that’s not why
I want to be Harvey Lodish. I want to be Harvey Lodish
because of what happened in 2002. That year, Harvey’s daughter
gave birth to her first child, Harvey and his wife’s first grandchild. A boy named Andrew –
great name by the way. (Laughter) Andrew was born with the mutation
for Gaucher’s disease. What are the chances? Just because you have the mutation, it doesn’t mean you get
the disease right away, but when Andrew turned 10 in 2012, he started developing the symptoms. But he’s just fine, leading
a perfectly normal and healthy life thanks to the drug
that his grandpa developed over a decade before he was born. When Harvey was doing
his work in the 1980s, he never imagined that his work would
one day save the life of his grandson. Pretty cool, huh? This is why I want to be Harvey Lodish. I’ve never had the privilege
of saving another life, never mind the lives of my two boys
or my future grandchildren or my mom. I can’t. I’m not an MD.
My PhD is not in cell biology. I’m just a financial economist. But you and I,
we can both be Harvey Lodish if there were a mega-fund
that we invested in and which could someday finance
cures for our grandchildren’s illnesses whether they be cancer, Alzheimer’s
or rare genetic conditions like Gaucher’s. I know that talking about investment
rates of return in the same breath as life-and-death issues like cancer
may seem incredibly callous and offensive. My mother died of cancer,
so believe me, I get it. But if we don’t talk
about investment rates of return, we’re not going to get
the amount of funding we need to deal with these terrible afflictions. With the right kinds of financing, we can cure cancer
and many other diseases. Finance does not have to be
a zero-sum game, if we don’t let it. We can do well, by doing good. And if we work together,
we can do it now. Thank you. (Applause)

27 thoughts on “Can Financial Engineering Cure Cancer? | Andrew Lo | TEDxCambridge

  • Fabulous presentation…the world needs the solutions to disease that this bold financing approach could help bring to reality!

  • He might have made a small mistake. He assumes that if you do more research projects, the succeed rate would stay the same. He also assumes that there is enough money available to buy more medicine. I think that the return on investment would actually go down due to the increase in R&D. So not quite 1 hit in 10.

  • This is an amazing idea. I think that when most people say that America has a "mature" financial market, it also deters its innovations. Finance has unlimited power, and it is not a evil if we could use it in a responsible way. When more people get involved into the financial market with showing their real risk preference, the money will be used in a more effective way.

  • Most of the time the solution is not that direct.I was moved by this idea when I watched his MIT class video.Andrew lo is really a great person.I wish to meet him soon.

  • Excellent! I'm so impressed. Having being in the asset management industry for more than 10 years, I could never made a linkage between the finance to the moral practice in real life. Shame on  me. Transforming speech. Thank you. I would like to take your class in the near future.

  • Professor Andrew is one of my favorite finance professor. He gave very thought provoking idea. I hope some portfolio managers will think about it.

  • Mr Lo . you are a brilliant man with a heavenly heart that in this case will not work . They – the system doesn't want to a cure . There's no money in the log run for the system . There is more money in research and dramatic expensive therapies .
    There are already cures and methods out there – they are suppressed – B17 – Colloidal Silver IV's – DR Brezenski – Texas , marijuana .
    You're a nice guy .. but your mom and friends .. they died because the system want's them to and there's not a damn thing you or anyone else at this time can do about it .

  • Great idea. Devil in the details.

    Who decides and how to decide which company(s) to fund and which not to fund?
    Which cancer(s)?
    One cancer or many types of cancers? Focus on one cancer and many possible solutions increase the probability of success. Focus on many types reduces the probability of success for each.
    Or, only fund possible solutions that might work on many types of cancers.

    These questions carry their own level of risk. I would be willing to risk some money on it.

  • I'm an Engineer and this guy is the reason I'm currently doing my CFA. His MIT Sloan OCW lectures have really been helpful. A grate man indeed.

  • I cannot believe the comments section. This professor is manipulative. His premise is based on statistical assumptions that can way too easily be wrong. First, What if more than three drugs worked? This means the profits will be well over 2/3 the original amount.
    Who is paying that profit? The actual patients and the public! The more profit financiers make, the higher the cost incurred by people! Money in this way is a zero sum game. Second, using touching stories in such way is really low class mate! Again, his whole premise is fictional and also overlooks the fact that investors want shorter term commitments and you can make more money that way. The opportunity cost might be too high. Cannot believe this is actually for real!!! A public choice will always be cheaper and reasonable. Allowing finance grip to extend to such critical matters will mean that people will have to pay such high amount for patents cost not the actual medicine or the research!

  • How does this video still have a relatively small amount of views? Hands down one of the most insightful I have ever watched

  • Thank You Mr. Andrew,

    …For being such a philanthropist that is going to impact generations and generations to come.

    It's very strange that War Bonds have been invented about 3/4th of a century ago and we are still finding the ways to fund war against Cancer…..

    In-fact why only cancer, this type of Risk/Reward diversification and Financial engineering can be a answer to many many kind of problems.
    War against global warming, let's Earn Carbon Credits …… Finances ? no more a problem….we have Financial Engineering
    War against poverty, let's Earn by Economy of Scale…… Finances ? no more a problem……..we have financial engineering

    Hence you have proved, the world does not need Philanthropists any more after this wonderful form of Financial Engineering…. But it's the Committed and Honest Generals of these rescue wars…..

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