Fighting the Big C - Alumni News


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Could a ‘cancer megafund’ persuade investors to put serious money into researching the killer disease? Three alumni debate financial engineering in healthcare.

This was first published in AlumniNews, Issue 130, July 2013. Find out more about our alumni community at

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Fighting the Big C - Alumni News

  1. 1. ISSUE 130 JULY 2013 Could a ‘cancer megafund’ persuade investors to put serious money into researching the killer disease? Three alumni debate financial engineering in healthcare. Helen Power reports Fighting the big C: Three alumni debate innovation in healthcare funding
  2. 2. Healthy, wealthy and wise Duncan Higgons, MSc12(1979) is Chief Operating Officer of Agios Pharmaceuticals DURING THE CREDIT CARD CRISIS, FINANCIAL engineering became synonymous with toxic lending and the near collapse of the global banking system. But could financial engineering be used to facilitate research into a killer disease that takes 7.6 million human lives a year? In other words, could financial engineering cure cancer? London Business School alumnus Jose-Maria Fernandez MiFFT2009 argued for just this proposition at a Worldwide Alumni Celebration event in Boston last September, launching a template for a revolutionary US$30 billion cancer research fund that has taken the healthcare world by storm. The ‘cancer megafund’, which Jose-Maria designed with Professor Andrew Lo and Dr Roger Stein of MIT, would invest in early stage research and development, putting money into up to 150 experimental treatments at one time. Crucially – because in healthcare research the chances of any one treatment succeeding are very slim – the scale of the project would spread the risk for investors, theoretically generating enough profit to make up for ideas that fail. In the room with Jose-Maria in Boston last year were fellow alumni Duncan Higgons MSc12(1979), now COO of Agios Pharmaceuticals, a US biotechnology venture that is seeking to apply its expertise in the field of cellular metabolism to develop medicines to fight cancer, and Michael Davies MBA1991, who teaches the New Technology Ventures programme at the School. What follows is a debate between JoseMaria, Duncan, Michael and Alumni News on how financial innovation could revolutionise healthcare. ALUMNI NEWS: Jose-Maria, you’ve designed a radical method of raising cash for healthcare. Is this because it’s so hard to raise money through conventional channels? JOSE-MARIA: Unfortunately, I think it is more difficult to raise money for biotech ventures than it used to be. If you look at industry statistics, the number of active biotech venture capital funds has fallen by about a third since 2007 and of those still active the focus has shifted away from therapeutics into diagnostics or other technology fields. The IPO market is also softer than it used to be – there were only 13 IPOs in 2011 compared with 51 in 2007. You could argue that part of this is due to the inherent challenges of the healthcare industry but market conditions since the credit crisis have not made it any easier for bio entrepreneurs to raise funds. ALUMNI NEWS: Michael, how do you see the environment and what is it about healthcare in particular that makes fundraising so difficult? MICHAEL: It is challenging at the moment, but ironically the reasons for that are not directly related to the supply side or, in other words, the amount of available of money – they are more to do with factors specific to healthcare. The first problem is that the amount of money required for major healthcare projects tends to be large – these are relatively speaking expensive projects. A mobile app will cost tens of thousands of dollars to develop while a healthcare project costs typically many tens of millions, even for those that do not require [lengthy and costly] US Food and Drug Administration (FDA) approval.
  3. 3. Another problem is that often these are challenging investments. They tend to be all or nothing. This is very much an area where Jose-Maria’s ideas around financial creativity could help – you need to improve the likelihood of a pay-of within the overall investment so you don’t have huge one-of costs. My final concern is that when it comes to healthcare a lot of things are just not sexy, such as stemming diabetes and getting people to exercise more. The big payoffs in epidemiological terms only involve small-scale stuff, limited interventions and incremental innovation. Unfortunately, some of the amazing advances at the cutting edge actually help only a relatively small number of people. ALUMNI NEWS: Duncan, Agios Pharmaceuticals has made tremendous early-stage progress with some innovative ideas for treating cancer based on cellular metabolism research. How do you see the market? DUNCAN: From where we stand we see that there are a lot companies for whom fundraising is really hard, and it definitely depends which diseases you are talking about. But if your product proves to be a fundamentally transformative medicine, your chances are great. There has been a key change back to really good science in recent years and there are specialised investment funds run by highly sophisticated people. Unlike, say, 15-20 years ago those investors are very deeply immersed in science, so if you have good science and a good story to tell it’s much easier. Michael Davies MBA1991 is founder and Chairman of Endeavour Partners, Chief Technology Officer of EquuSys Inc, and teaches New Technology Ventures at London Business School Jose-Maria Fernandez MIFFT2009 is a researcher at MIT Sloan’s Laboratory for Financial Engineering
  4. 4. ALUMNI NEWS: Jose-Maria, do you think your cancer fund will actually take of? JOSE-MARIA: I believe so. Megafunds could be an attractive proposition for investors. Aside from institutional investors, sovereign wealth funds and high net worth individuals look for securities offering new sources of return and risk exposure. Currently available bio investment returns are dependent on the access to market funding and exit opportunities. In the megafund structure, return and risk depend more directly on scientific progress and less on financial market conditions. There are also different applications for these funds. We used the example of the case for cancer but it is possible to create rare disease, multidisease or global healthcare megafunds. Their financial viability and target size will depend on the characteristics of the scientific assets and patient market size, among others. ALUMNI NEWS: Michael, what are the challenges of establishing a fund such as this? MICHAEL: I think it is possible but I think it is unlikely to come out of a private system. A big issue for healthcare investment is that if you are in an insured environment like the US – the biggest market for new drugs – all the players have different incentives so it is hard to align the interests of hospitals, insurers and patients. I could see single provider governments such as those in the EU and Australia playing a part and NIH in the US might play a role with some classes of drug. Or an interesting route might be to turn to some of the very large foundations such as those run by Bill and Melinda Gates or Warren Bufet. But you would approach them not as private investors, but as a foundation with philanthropic goals. ALUMNI NEWS: Duncan, have Jose-Maria’s proposals made waves in the biotech community? DUNCAN: Jose-Maria’s idea is really interesting. We really need more ideas and to look at all sorts of ways of funding. His piece has created a lot of discussion amongst big pharmaceutical companies and biotechs, and I’m so glad these things are coming forward because they add to the general debate and hopefully that will help our industry. ALUMNI NEWS: Does that mean you think that London Business School and other academic institutions have a big role to play in this space, Duncan? DUNCAN: I actually think this is the first idea I’ve ever seen from a business school that has been very specific to biotech. People such as the School and others should be getting in and saying this is a really interesting space. ALUMNI NEWS: Michael, Jose-Maria, do you agree? And how important is the alumni network to this type of collaboration? MICHAEL: What the School brings to bear is the entrepreneurial element, combined with science coming out of somewhere like UCL. You can’t teach someone to be an entrepreneur, but you can teach them to be a much better entrepreneur. JOSE-MARIA: I’d say for me, my Masters in Finance at London Business School was very helpful in giving me the tools I needed to do this project and a great network to test my ideas. My hope is that our community will be interested in this and that fellow alumni may help carrying projects like this one to market. For more details, visit “You can’t teach someone to be an entrepreneur, but you can teach them to be a much better entrepreneur” “There has been a key change back to good science in recent years and there are specialised investment funds run by sophisticated people” “In the megafund structure, return and risk depend more directly on scientific progress and less on financial market conditions”
  5. 5. Can financial engineering help to cure cancer? Jose-Maria Fernandez puts forward his case We propose using technology that has been proven in financial markets, such as in asset-backed securities, and adapting it for life sciences. The high risk of each biotech project is a big problem with healthcare investing. But we can address it by creating diversification through large portfolios of uncorrelated assets. Based on our study that covers the last 20 years of cancer drug development, this fund could be economically viable and profitable for investors. We would raise the multibillion capital structure using different layers of debt and equity. We would invest across diversified types of molecules in different stages of development and we would monetise the value created by the scientific progress of these molecules as they were approved or by selling them once they had progressed to the point where pharma companies would have an interest in acquiring them. In our simulations, senior and junior bond investors make 5% and 8% annual return respectively while bearing low probabilities of default. Equity investors would make between 9% and 10.6% per year, less than they would expect from a successful venture capital investment but with a much lower risk too. Megafunds are not without risk. The risk of science failure exists and is significant but it can be diversified through megafunds. Also a government or a foundation could provide the megafund investor protection through credit enhancement mechanisms. Our work shows that this could be a powerful way to support private sector investment in science and to leverage the resources of foundations and governments more efficiently. This was first published in AlumniNews, Issue 130, July 2013. Visit our website: