1) Jose-Maria Fernandez proposes a "cancer megafund" that would invest in early-stage cancer research and development, spreading risk across 150 experimental treatments to attract serious investment and potentially generate profits to fund treatments that fail. 2) Duncan Higgons and Michael Davies debate the challenges of fundraising for healthcare ventures, noting the large costs involved, risk of failure, and lack of sexiness of some areas. 3) Jose-Maria argues that the megafund structure could make returns and risks depend more on scientific progress than financial markets, and that it has potential to be economically viable and profitable for investors based on simulations of cancer drug development over 20 years.

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. 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. 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. 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 fernandez.mit.edu/financialengineering-for-good
“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. 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.
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