 Welcome to the latest edition of the MIT Sloan Expert Series, which gives you an inside look at some of the most exciting research and ideas coming out of MIT Sloan. Today, we'll be talking to Andrew Lowe, the hedge fund manager, economist, and finance professor here at MIT Sloan, who wants to bring Wall Street-style financial engineering to solve some of the biggest problems of medical history, curing cancer and other diseases. His proposal, the creation of a $30 billion mega fund that invests in early stage research and development. Welcome, Professor Lowe. Pleasure to be here. Before we begin, I want to remind our viewers that Professor Lowe will be taking your questions live on social media. Please go to crowdchat.net slash MIT expert to pose your questions to Andrew Lowe. Let's get started. Andrew, talk about your personal experience with cancer that inspired you to start this fund. Well, a few years ago, a number of friends and a family member were stricken with various kinds of cancer. And so in talking with them and trying to understand what they were going through, I started learning more about not just cancer, but various kinds of cancer drug development programs and ultimately the business of cancer therapeutics. And it inspired you to want to do something. Yeah, as a financial economist, you feel pretty useless when you're sitting with your friend in the oncologist's waiting room. And so as I was sitting there thinking about it, I started reading some of the journals that were in the waiting offices and trying to understand a little bit more about how cancer researchers get their incredible jobs done. And it became clear to me at that time that one of the real challenges was getting funding to be able to do the research that they were doing. Can you describe the current climate for funding? Well, it's a very strange situation. Almost every week, cancer researchers are making incredible breakthroughs in the understanding of the molecular basis of this terrible disease. And yet at the same time, money is actually leaving the space, which is really hard to understand. I mean, we have government funding issues, of course. NIH has been declining in their funding for these kinds of things. But on top of that, the private sector funding for early stage research is becoming more and more challenged, partly because the risks have increased. And so investors are fleeing to lower hanging fruit, things like app companies and software and social media. And yet we're living in an age of scientific discovery. Well, that's the frustrating thing. We seem to be at an inflection point where we're going to be making some incredible breakthroughs in treating all sorts of diseases, including cancer. So this is the worst possible time to be taking funding away. We ought to be increasing the amount of funding that goes into these kinds of activities. So what we're hearing from you is that drug development is time consuming, it's risky, and it requires a lot of capital. So talk about your proposal, your proposed mega fund and how it brings a solution to this problem. Well, you put your finger on the issues regarding these kinds of research activities. They have these unusual characteristics. They're very risky. They take a lot of money, and they actually take a long time to develop. A typical clinical trial for a cancer drug may take about 10 to 15 years. And so all of those three characteristics are sort of three strikes against investors who want to be able to put money to work in this area. And that's an area where finance can help. We can't do much in the way of dealing with cancer directly, but we can actually help using financial structures to reduce the risk to investors. So talk about these financial structures. Can you give us a good idea of what it is we're dealing with here? It's pretty simple. The idea is, and actually an old one that comes from the 1950s and 60s is portfolio theory, taking multiple shots on goal to use a hockey analogy. By taking lots of different projects and putting them into a single financial vehicle, you're actually increasing the chances you'll get one or two hits. And all you need are one or two hits in order to pay back for all of the trials that you're taking on. And so if you put together a portfolio of a large number of these, and it's going to take a lot of money to do that on the order of tens of billions of dollars, if you can do that, then actually investors can earn a really decent rate of return and everybody wins. So it's diversification is what you're talking about here and that's the first lesson in any investment class that an MBA student says. Exactly, don't put all your eggs in one basket. Is your fund a mutual fund then? Is that how you describe it? Well, eventually it might become a mutual fund, but the problem is that retail investors may not fully understand the risks of these kinds of investments. So I would suggest that initially you'd want to make it more of a limited partnership where institutional investors like pension funds, sovereign wealth funds, foundations, insurance companies, the investors that are best suited to take these kinds of risks and particularly for long periods of time. But eventually I think that individual investors will want to take part in this. Everybody knows somebody who's dealing with cancer and donations are great, but donations are not enough. Foundations provide a lot of support, philanthropists provide a lot of support, but eventually we're going to need much larger sets of resources. So if you can invest in curing cancer and earn a decent rate of return on your investments, that's a win-win. I want to ask you about the rates of return, but before I do, I want to go get into the nuts and bolts, the actual tools that you're using to create this fund. They sound alarmingly similar to the very same tools that figured so prominently in the global financial crisis. In fact, they are. So I'm talking about tools, not only like portfolio theory, but securitization, CDOs, CDSs, all of the things that did figure prominently in the financial crisis. And I have to say it's really the financial crisis that got my co-authors and I to start thinking down this path. It's not that these tools didn't work that caused the financial crisis, it's that they worked way too well. These tools were incredibly powerful instruments that took tremendous amounts of assets and diverted them focusing on U.S. residential real estate, causing the big real estate run-up and crash. If we could take those same tools and apply them to cancer research, the impact could be huge. So the devastation that the financial crisis wreaked on investors worldwide remains seared into the memory of many people. As it should. But for the people who may be a little hazy, can you just talk about how these tools that are so powerful, as you say, can be used to cause so much destruction? Well, so somebody characterized these kinds of tools as financial weapons of mass destruction. And I think that that analogy is accurate in certain respects. When you have an uncontrolled application of these tools, you can release enormous amounts of devastation and nuclear fallout for years. But using that same analogy, if you have a controlled application of these tools, it can provide nearly limitless resources for economic growth. And so the problem is being able to manage that process. When you have tremendous amounts of assets being deployed over a relatively short period of time in a particularly focused market, you can get bubbles that ultimately will burst. If you're able to control that flow and be able to manage the process by which those investments are made, you're much less likely to see these kinds of blow-ups. But I would argue that in any kind of innovation, it's very hard for us to get it exactly right. For example, we have wonderful companies today like Amazon, Google, eBay, Twitter, Facebook. We have to remember that the internet bubble created a lot of companies that no longer exist. There was a blow-up there as well. Part of the cost of innovation is maybe over-investing. Right, right. There's a winnowing, and that's a natural and normal part of business. So you've talked about how what happens when these tools are used irresponsibly. And it's clear that your tools would be used for good. Can you talk a little bit about the returns? Are the returns attractive enough for investors? So I wasn't sure when I first started out on this, but my co-authors, Jose Maria Fernandez and Roger Stein and I, we published a paper in 2012 where we actually simulated these returns. We looked at the data for cancer compounds from the Tufts Center for the Study of Drug Development and we looked at the probability of transitioning from phase one to phase two to phase three for all the cancer compounds and the databases that they use. And what we found really surprised us. We found that for a multi-billion dollar cancer mega fund, you're looking at rates of return on the debt pieces of between five to 8% for the bondholders and on the equity side, something on the order of eight to 12%. Now those numbers seem pretty reasonable to me. Sure. And to pension funds and insurance companies, exactly. But traditional biotech venture capitalists have done quite a bit better in their heyday. And so for a VC, this might not be as attractive. Right. So as you said, maybe more pension funds that those kinds of investors. We want to bring in a different pool of investors. Investors that have traditionally not invested in biotechnology in the same way that all of these instruments during the 90s brought more money into the mortgage space for people that never lent to homeowners. It's that kind of financial engineering that applied in this context could actually really transform the industry. You've done a lot of similar research on orphan diseases. And these are very rare diseases that affect small populations. Diseases like cystic fibrosis, Duchenne muscular dystrophy and ALS, more commonly known as Lou Gehrig's disease. Can you talk a little bit about your work in this space and whether or not these drugs are particularly well suited for portfolio financing? Sure. Well, that was a really interesting set of results that we had gotten, mainly because we were wondering what the limits were of this particular set of tools. Do you really need $30 billion in order to make a difference? And we started looking at orphan diseases, because as you pointed out, these are diseases that affect a relatively small population. According to the 1983 Orphan Drug Act, an orphan disease is defined as a disease that affects 200,000 patients or less. And so by definition, you're talking about smaller patient populations, which means when you conduct a clinical trial, it's less costly, there are fewer patients. But also the nature of orphan diseases, many of which are rare genetic disorders, scientists and clinicians can actually identify their sources and particular therapies much more quickly than for something as large as cancer. And so the probability of success is higher and the Orphan Drug Act provides other benefits for drug companies that are dealing with orphan diseases. And so it turns out that for an orphan disease mega fund, you don't need tens of billions. You need maybe a few hundred million in order to make a difference. And you don't need large numbers of projects, 10 or 20 could actually provide you with good diversification. And the rates of return based upon some research that we had done looked like around 15 to 25%, which is even higher than what we were getting for the cancer mega fund. And so could that interest the VCs? I think that not only will it interest the VCs, a 20% rate of return will put a lot of hedge fund managers to shame. So it's very attractive. And it's a very unique source of return because the ups and downs in that particular endeavor have very little to do with the ups and downs of the S&P 500. So it's a natural source of diversification, exactly. Right, right. So would you characterize both your cancer mega fund and then these orphan disease funds as impact investments? Well, impact investing is a bit of a loaded term. It means different things to different people. The reason that I hesitate is because when people think about impact, they think that they're giving up something. So in order to get social impact or to be environmentally sound, you have to give up something on the return front. My perspective is really from the private sector's investors view, we want to maximize return and minimize risk for the typical investor. It turns out that for certain investments, that kind of a process can actually be done with impact. So you're not giving it up. In fact, in certain cases, you can actually have even greater return if you have that kind of impact. For an area like cancer, for orphan diseases, for many of the kinds of biomedical innovations that are being developed today, impact and return go actually hand in hand. So yeah, I think that there's a tremendous amount of impact with these kinds of investments. So we've now laid the groundwork for how these work and why there is a need for them now. So let's talk about action. And we've seen a lot of it across the pond. In June of this year, PureTech, the Boston-based venture capital group held an IPO on the London Stock Exchange and raised $171 million. Boris Johnson, the London mayor, has also proposed a 10 billion pound or 15 billion dollar mega fund intended to support drug development in his city. You advised the London mayor on this. Can you talk a little bit about that? Sure, I mean, they are really doing some innovative things in London. As you know, London is one of the capital market centers of the world. And Mayor Johnson and his staff were really interested in thinking about how to change the ecosystem and accelerate biomedical innovation while at the same time being able to make use of one of London's greatest strengths, their financial industry. And so it was sort of a natural pairing. They held a conference during the summer to bring together all of the various stakeholders. And there was an extraordinary amount of optimism and excitement about this. Who knows where it'll end up, but so far it looks like there's a real possibility that they may ultimately end up launching something like this. I mean, it seems like such an obvious win-win. Why has progress been so slow? Well, you know, someone once said that necessity is the mother of all invention. And up until a few years ago, there wasn't as much of a necessity. But within the last decade, I would say, because of all of the complexities that scientists and clinicians have created as part of the discoveries that they've made, it's become a lot more challenging to do drug development. Pharma companies have been facing the so-called patent cliff. So financially, they've become more challenged. Investors, shareholders have become much more vociferous in their desire to reduce volatility and ask these pharma companies to cut their R&D expenses in order to improve share prices. So a confluence of things have really made biotech investing much more challenging. The venture capital is where a lot of the insights and knowledge really reside. They've been very frustrated as well. Some of the biggest VCs have done well, but many of the biotech VCs have actually gone out of business because their shareholders, their limited partners, don't have the wherewithal to be able to withstand the kind of 10 or 20 year horizons for these investments. So the biotech VCs are embracing these new forms of financing and I think this is going to be a tremendous boon to the industry and to society. And we're starting to see government also wanting to get in on it. I know that California congressman Juan Vargas, a Democrat, is also proposing a bill that would allow the NIH to do something similar. Can you talk a little bit about his bill? Sure, well, a few years ago, we started looking into whether or not orphan diseases could really offer the kind of rate of return that the industry statistics suggested. When we ran our simulations initially, we were really just using these kinds of numbers and coming up with relatively straightforward kinds of models, but really they hadn't been tested with data. And so we were very fortunate to be able to get access to data from the National Center for Advancing Translational Sciences, NCATS. NCATS has a program focused on rare diseases and so they shared with us their historical data, just the last four or five years, on 28 projects that they'd been developing and funding through the budget that they'd been provided. What we found was that when you simulate an orphan disease fund with their data, you're getting a rate of return if it were a private sector initiative of something on the order of 21%, which seems like a phenomenal return. And if you had that kind of a return, you could attract a lot of private sector money. In fact, some of the investors that we talked to about our results said they would be delighted to invest in NCATS if they could. The problem is that they're not authorized to take private sector money. Sure, of course. And so Congressman Vargas, who's been very supportive of this effort, has drafted legislation to allow the NIH to engage in these kinds of public-private partnerships. And he is based in San Diego. That's right. San Diego is a hotbed of biomedical innovation. They've got a very active biotech community and so he's very well-versed in these kinds of issues. Speaking of a hotbed of biotech innovation in a community, we have one here in Boston and we have a tape, Robert Langer, the noted biotech entrepreneur and expert, spoke to MIT expert series earlier today and here's what he said. I think the key to innovation in the biomedical area is first it's basic research. It's doing really fundamental research that teaches you things that you might not normally find and that's curiosity-driven. And it also is the ability to translate those discoveries if they're made into real-life things. The important thing about what Andrew Lowe's trying to do is that these things take in the biomedical area a lot of money. Now there's an estimate that it costs about $2 billion to create a new drug. So to try to do this research, it's incredibly expensive and to try to develop pharmaceutical products, it's very, very expensive and so, and I think we're at a time in the world's history and the nation's history when these things can be done but where it's been increasingly difficult, say, to get funding through the normal sources like federal sources, particularly for young people. Well, I think if investors are gonna come to the table to try to create a mega fund to cure cancer, one of the challenges is that a lot of investors want a reasonably quick return on their investment. If you're doing long-term research, you're not gonna get a quick return on your investment. I believe if people take a longer range for you, they probably will be rewarded. Well, Boston is a city where biotech and technology has been developing for many years and it's got MIT and Harvard and other places. So there's like a whole ecosystem where scientists, entrepreneurs, companies, investors all, I think, work together. A lot of people know each other and I think that that lowers the bar in terms of enabling companies to get started and enabling ideas to come together. I mean, so I think Boston has been a great place to do that and I think it's a good role model for London, for the whole world. I think the mega fund offers a whole new pathway, a whole new avenue for trying to foster innovation. I just hope it happens. I'm a believer. I think Andrew Lowe is, I think he's a visionary guy. All of us at MIT, in the science and engineering departments, we do research because we wanna see things happen, good things happen for the world but it's costly and I think he has a visionary idea and I wanna certainly do what I can to help him. Langer sounds pretty confident, Andrew. Are you as sanguine? How close are we in your estimation to making both the rare disease fund and the cancer mega fund a reality? Well, first of all, I have to mention that, Bob is one of the reasons that we went down this path. It was amazing people like him that convinced us that actually this is feasible. There are just tremendous amounts of talent and ideas in the Boston, Cambridge area. Unfortunately, I don't have an MD, PhD in biology so I can't start with myself. You're doing already. But there are many people who do and who have the ability to create this. So what my co-authors and I have been doing is talking to a number of investors, clinicians, scientists, venture capitalists, people who have the expertise to be able to do it and we're trying to bring them together to structure the kind of vehicle that would be needed in order to be able to generate these kinds of investments. So thank you very much, Andrew. We're now going to turn to you, our viewers on social media. If you have a question for Professor Lowe, please go to crowdchat.net slash MIT expert and we're already getting in a lot of great questions here. The first one I want to pose to you, this week there's been a lot of political discussion about imposing constraints on the pricing of new drugs, particularly orphan drugs, article in the New York Times. Artificial price constraints could disrupt your model. Could the model sustain such restraints? Well, so we've done a lot of sensitivity analysis to look at what happens to pricing because obviously everybody's concerned about what might happen, particularly what's been going on this past few days with touring pharmaceuticals. As an economist, I can get my arms around the idea of charging what the market will bear, but as a member of the human race, it's pretty hard to swallow when companies raise prices by 5,000%. I think this highlights a much broader issue, which is that economics is not the only issue that we have to deal with. There are issues about ethics, morality, societal implications, and until and unless we get all of the stakeholders together to resolve these issues, we're going to see more and more of these conflicts. But along the way, my sense is that there's a lot of room, a lot of economic opportunity to be gotten by developing really innovative therapeutics. No doubt some of these therapeutics are going to be very expensive, but if you can cure somebody's disease as we now have done with hepatitis C and other kinds of therapies, I think that investors and patients and payers will be happy to pay for those really effective therapies. Another good question coming in here, which I think is a good piggyback off of that one. Do you think these funds could change the way science is conducted, and if so, how? I think it absolutely can and should. Part of the challenge is that, I think scientists tend to be a little bit less involved on the financing side, and I'm hoping they'll change that perspective. You know, a few years ago, when my mother was struggling with lung cancer, I was introduced by a colleague to a biotech company here in Cambridge, focused on developing new therapies for dealing with cancer. And I was privileged to meet with the chief financial officer and the chief scientific officer of this successful company together. And I asked them what I thought was a relatively straightforward question, which is, does your source of financing have any influence on your scientific agenda? Does it determine which projects you pick first or second? And they turned to each other and sort of laughed ironically and turned back to me and shook their heads and said, influence, our source of financing drives our scientific agenda. And as an economist, I understand, but as a son of a patient, I have to tell you that I was outraged. I mean, what does stock market volatility, interest rates, and Fed policy have to do with whether you can cure cancer by angiogenesis inhibition or immunotherapy? Nothing, but it drives the agenda. I think that the science should be driving the finance, not the other way around. This another, another question. You're moving from a blockbuster to an orphan drug model. You noted that fewer patients will be eligible for treatment, which may not be good for drug developers. But why would drug prices not increase a lot to account for the better matching of drugs to patients? So there's a lot of concern about the price of these drugs and how this fund rationalized that. You know, I think that that's a very important set of issues. And as I mentioned, it really requires us to sit down and talk about the ethics as well as the economics of the situation. I'm not an expert on ethics, so I'm not qualified to speak to those issues, but I know that they're important and they need to be dealt with. On the economics side, though, there's a lot that we can do to make drugs more affordable. Part of it is being able to have scale. So with orphan drugs, you may not think you have scale, but it turns out that there may be some common infrastructure that can be used to develop cures for rare genetic disorders. We don't yet have an approval in this country for genetic therapies, but there are cases, particularly in Europe, where gene therapy has been successful. That's a situation where we can literally cure disease. And if we can do that, I think that both patients and payers not only will be able to pay, but can afford to pay, particularly if we think about using financing. So I'm thinking about buying cures versus renting health. If you think about buying a home versus renting an apartment, you can actually amortize the cost over a period of time. So some co-authors of mine and I, we're working on a paper right now that tries to address these issues in a somewhat more systematic fashion, showing what it would look like to have a drug mortgage and whether or not that's affordable. A drug mortgage. Another question in that is, here we go. Your approach to relaxing the current financial constraint will only succeed if there exists an unending stream of good ideas to cure cancer that now remain unfunded. Do you believe that to be the case? Well, so again, this is really where my conversations with Bob Langer and other colleagues here at MIT have really changed my perspective. I was concerned about that as well. Can you really get 100 or 200 projects? I've been shown some remarkable results by researchers just here in the Boston Cambridge area that tells me we could probably get 500 really interesting and innovative projects right now. Many scientists will actually hesitate to talk about some of their ideas because they realize that they can't get funding for five or six of them. So they'll talk about one of them. But the most risky, the most promising, the most far out there, the most transformational projects, those are the ones they don't talk about in polite company because they are so far out there. Those are the ones that we wanna be funding as well as the singles and the doubles in this portfolio. And based upon what I've learned from my colleagues here in Boston and Cambridge, I think that we have more than enough projects. We have way too many projects and not nearly enough funding to deal with that. And can you share with us some early success stories? This is another question. Your vision is exciting. What are some early success stories? Well, we've actually been seeing it over the course of the last year. Probably the biggest success story that's been going on for years before my co-authors and I even got to working on the project is drug royalty investment companies, the biggest of which is royalty pharma. They're managing $10 billion and have a very well diversified portfolio of royalty interests in approved drugs and now earlier stage assets. They diversify across lots of investors and part of their financing comes from debt, rated debt. So they're very responsible, very careful in how they manage their portfolio and that's clear example of how this kind of diversification can add value. The mega fun idea, of course, is to go earlier stage. As you go earlier in the clinical trials process though, it gets riskier so you need a larger pool of capital. The company that you mentioned, PureTech Ventures, that's an early stage venture capital fund and they just did an IPO and raised $171 million of permanent capital. That tells you that investors have a real appetite to fund these kinds of risky projects because we know that eventually they're gonna pay off. It just takes time and it takes the kind of financial resources that you can stick with over the course of that time to be able to make these assets pay. We have time for one more question and that is if you could give one piece of advice to an MBA student who wants to change the world as you have, what would it be? Well, I'm not sure I can claim to change the world but we're hoping that we will be able to work on this together. I would say that the piece of advice that I'd give to an MBA student is to be a little bit brash and not necessarily listen to advice when they're told it can't be done. Don't listen to your professors, is that what you're? Particularly not your professors. Take all of that kind of advice with a grain of salt because a lot of the ideas that may have been tried and failed, it may have been because of poor execution, it may because the time isn't right. There may be a host of reasons but market conditions change and the other piece of advice I would give is for MBA students to think broadly about how their tools can work and what the consequences are. We've got a lot of really powerful ideas that can create tremendous wealth for those who can use them but sometimes you have to think about what that wealth can do and what it means for society and thinking more broadly, I think we can actually do well by doing good and that's something that I think all of us should strive for. Using these financial weapons of mass destruction for good. Exactly, finance doesn't have to be a zero-sum game. Thank you so much for joining us, Professor Lo. This was really great and you've given us a lot to think about. Thank you, it was a pleasure. Thank you very much. And thank you for joining us on the MIT Sloan Expert Series.