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E[R] = 11.9%
SD[R] = 423.5%
12
A CFA Institute Production
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What If We Invest In 150 Programs Simultaneously?:
Requires $30B of capital
Assume programs are IID (can be relaxed)
Diversification changes the economics of the business:
But can we raise $30B??
Investment Problem (3)
E[R] = 11.9%
SD[R] = 423.5% / 150 = 34.6%
____
13
A CFA Institute Production
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What If We Invest In 150 Programs Simultaneously?:
Given the reduction in risk, debt-financing is possible!
$17B of high-quality 10-year debt can be issued
With securitization (RBOs) and third-party guarantees (CDS), debt
capacity is even larger
Investment Problem (4)
Event Probability
Minimum
Year-10
NPV
Maximum Year-0
Proceeds at
3.75% (10-Yr Aa
as of 9/13/13)
Maximum Year-0
Proceeds at
4.06% (10-Yr A
as of 9/13/13)
At least 1 hit: 99.95% $12,289 $8,504 $8,254
At least 2 hits: 99.59% $24,578 $17,009 $16,509
At least 3 hits: 98.18% $36,867 $25,513 $24,763
At least 4 hits: 94.52% $49,157 $34,017 $33,017
At least 5 hits: 87.44% $61,446 $42,522 $41,272
14
A CFA Institute Production
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Simulating A Cancer Megafund
Fernandez, Stein, Lo (Nature Biotech, Oct 2012)
Tufts Medical School CSDD + Deloitte/RECAP cancer compounds database from
19902011
2,000+ compounds 733 after cleaning data
Cost and revenue assumptions from historical data and literature (e.g., Bloomberg,
DiMasi et al. 2003, etc.)
Estimate transition probability matrix and valuations
Fagnan, Fernandez, Lo, Stein (AER, May 2013)
Pricing and impact of third-party guarantees on debt capacity and investment
performance
15
A CFA Institute Production
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Simulating A Cancer Megafund (2)
Simulation Results: Matlab and R Software Available
16
A CFA Institute Production
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What About Personalized/Precision Medicine?
Fagnan, Gromatzky, Fernandez, Stein, and Lo (2013)
Orphan Diseases: smaller population, urgent need, higher prices,
lower development costs, higher success rates (20%), faster time
to approval (37 years)
Simulating A Cancer Megafund (3)
17
A CFA Institute Production
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What About Personalized/Precision Medicine?
Simulation results for funds of $135 million and $225 million are
even more attractive!
Simulating A Cancer Megafund (4)
18
A CFA Institute Production
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Is This Realistic?
Is There Capacity From Investors? In 2012:
U.S. bond market: $38.1T
Mutual funds: $13.1T
Money-market funds: $2.7T
Norwegian sovereign wealth fund: $683B
CalPERS: $237B (as of June 30, 2012)
Target return of 126 public funds (2012): 8%
In 2012, the Size of the Entire VC Industry Was:
$199B
7.5%
19
A CFA Institute Production
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Is This Realistic? (2)
With Some Imagination, Megafunds Are Viable!
Imagine creating a $30B Cure For Cancer megafund
Imagine creating an advisory board of experts:
Imagine corporate pension funds, foundations, endowments,
insurance companies investing as well
Imagine 10MM households investing $3,000 each
Imagine government tax incentives, credit enhancement, etc. (think
Fannie Mae, Freddie Mac!)
George Demetri, Eric Lander, Bob Langer, Mark Levin, Frank McCormick, Larry
Norton, Phil Sharp; Warren Buffett, Bill Gates, Jacob Goldfield, Bob Merton, Jim
Simons, George Soros, Bill Sharpe
20
A CFA Institute Production
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There Are Many Potential Challenges
Size and Business Model: managing large portfolios of complex R&D projects
may require new management and governance structures (e.g., Manhattan
Project)
Centralization: must preserve the benefits of diversity as scale increases
Capacity: is the talent pool large enough to match the scale of this venture?
Complexity: can investors understand the risks and rewards of RBOs?
Excesses: if successful, the potential for abuse will also increase
Ethics: how to balance profit motive vs. social objectives for cures?
Is This Realistic? (3)
21
A CFA Institute Production
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Next Steps
Expose each stakeholder group to the tools, challenges, and
opportunities of other groups in the biomedical ecosystem
Clinicians, researchers, biopharma professionals, VCs, insurance
companies, regulators, investors, financial engineers, patients
Identify major obstacles to private-sector funding of translational
medical R&D
Propose some potential solutions to these obstacles (see
http://cancerx.mit.edu)
22
A CFA Institute Production
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Conclusion
Dont Declare War On
CancerPut A Price Tag
On Its Head Instead!
With Sufficient Scale, We Can Do Well By Doing Good
Finance does not always have to be a zero-sum game