To Cure Cancer, Provide a Profit Motive2014
Translating scientific research into safe and effective drugs takes money—lots of money. Current estimates put the cost of developing a single successful drug at more than $2 billion by the time you include all the dead ends along the way; the out-of-pocket cost for just a single attempt is about $200 million. Drug development usually takes a decade or longer, and the probability of success is low (historically around 5 percent for oncology). As a result, investors are now shying away from the pharmaceutical industry, investing instead in less risky and more attractive opportunities like big data, social media and e-commerce. Financial engineering techniques can help change that, directing capital from those wishing to invest it to those who need it to develop new drugs.
Dealing with Femtorisks in International Relations2014
The contemporary global community is increasingly interdependent and confronted with systemic risks posed by the actions and interactions of actors existing beneath the level of formal institutions, often operating outside effective governance structures. Frequently, these actors are human agents, such as rogue traders or aggressive financial innovators, terrorists, groups of dissidents, or unauthorized sources of sensitive or secret information about government or private sector activities. In other instances, influential “actors” take the form of climate change, communications technologies, or socioeconomic globalization. Although these individual forces may be small relative to state governments or international institutions, or may operate on long time scales, the changes they catalyze can pose significant challenges to the analysis and practice of international relations through the operation of complex feedbacks and interactions of individual agents and interconnected systems. We call these challenges “femtorisks,” and emphasize their importance for two reasons. First, in isolation, they may be inconsequential and semiautonomous; but when embedded in complex adaptive systems, characterized by individual agents able to change, learn from experience, and pursue their own agendas, the strategic interaction between actors can propel systems down paths of increasing, even global, instability. Second, because their influence stems from complex interactions at interfaces of multiple systems (e.g., social, financial, political, technological, ecological, etc.), femtorisks challenge standard approaches to risk assessment, as higher-order consequences cascade across the boundaries of socially constructed complex systems. We argue that new approaches to assessing and managing systemic risk in international relations are required, inspired by principles of evolutionary theory and development of resilient ecological systems.
Hedge Fund Beta Replication: A Five-Year Retrospective2014
During the past few years, hedge fund beta replication strategies have become more common. At the same time, questions about the relevance, performance, and applicability of these strategies have been raised in response to the rapidly shifting landscape in the hedge fund industry. We present a review of the growing beta replication industry with particular emphasis on the ASG Global Alternatives Fund. We discuss the motivation for its existence and the logic of its absolute and relative performance over time and across different market environments. We also explain why these strategies are complements to, and not substitutes for, direct investments in hedge funds, and provide examples of their value-added in investors’ portfolios.
Financing Drug Discovery for Orphan Diseases2014
Recently proposed ‘megafund’ financing methods for funding translational medicine and drug development require billions of dollars in capital per megafund to de-risk the drug discovery process enough to issue long-term bonds. Here, we demonstrate that the same financing methods can be applied to orphan drug development but, because of the unique nature of orphan diseases and therapeutics (lower development costs, faster FDA approval times, lower failure rates and lower correlation of failures among disease targets) the amount of capital needed to de-risk such portfolios is much lower in this field. Numerical simulations suggest that an orphan disease megafund of only US $575 million can yield double-digit expected rates of return with only 10–20 projects in the portfolio. Open-source software available for download above.
Wall Street’s Next Bet: Cures for Rare Diseases2014
MIT Sloan Professor Andrew Lo authored this blog post about the development of a mega-fund to finance research and drug development for orphan diseases.
New Financing Methods in the Biopharma Industry: A Case Study of Royalty Pharma, Inc.2014
The biotechnology and pharmaceutical industries are facing significant challenges to their existing business models because of expiring drug patents, declining risk tolerance of venture capitalists and other investors, and increasing complexity in translational medicine. In response to these challenges, new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is the largest of these drug royalty investment companies, and in this case study, we profile its business model and show how its unique financing structure greatly enhances the impact it has had on the biopharma industry and biomedical innovation.
Financial Orphan Therapies Looking for Adoption2014
There exist scientifically promising treatments not being tested further because of insufficient financial incentives. Many of these therapies involve off-label uses of drugs approved by the Food and Drug Administration that are readily available and often inexpensive. Pharmaceutical companies—largely responsible for clinical drug development—cannot justify investing in such clinical trials because they cannot recoup the costs of these studies. However, without prospective data demonstrating efficacy, such treatments will never be adopted as standard of care.
In an era of increasing health care costs and the need for effective therapies in many diseases, it is essential that society finds ways to adopt these “financial orphans.” We propose several potential solutions for the non-profit sector, pharmaceutical companies, health insurers, patient driven research, and others to accomplish this goal.
Unintended Consequences of Expensive Cancer Therapeutics The Pursuit of Marginal Indications and a Me-Too Mentality That Stifles Innovation and Creativity2014
Cancer is expected to continue as a major health and economic problem worldwide. Several factors are contributing to the increasing economic burden imposed by cancer, with the cost of cancer drugs an undeniably important variable. The use of expensive therapies with marginal benefits for their approved indications and for unproven indications is contributing to the rising cost of cancer care.We believe that expensive therapies are stifling progress by (1) encouraging enormous expenditures of time, money, and resources on marginal therapeutic indications and (2) promoting a me-too mentality that is stifling innovation and creativity. The modest gains of Food and Drug Administration–approved therapies and the limited progress against major cancers is evidence of a lowering of the efficacy bar that, together with high drug prices, has inadvertently incentivized the pursuit of marginal outcomes and a me-too mentality evidenced by the duplication of effort and redundant pharmaceutical pipelines. We discuss the economic realities that are driving this process and provide suggestions for radical changes to reengineer our collective cancer ecosystem to achieve better outcomes for society.
The Origin of Risk Aversion2014
Risk aversion is one of the most basic assumptions of economic behavior, but few studies have addressed the question of where risk preferences come from and why they differ from one individual to the next. Here, we propose an evolutionary explanation for the origin of risk aversion. In the context of a simple binary-choice model, we show that risk aversion emerges by natural selection if reproductive risk is systematic (i.e., correlated across individuals in a given generation). In contrast, risk neutrality emerges if reproductive risk is idiosyncratic (i.e., uncorrelated across each given generation). More generally, our framework implies that the degree of risk aversion is determined by the stochastic nature of reproductive rates, and we show that different statistical properties lead to different utility functions. The simplicity and generality of our model suggest that these implications are primitive and cut across species, physiology, and genetic origins.
Dynamic Loss Probabilities and Implications for Financial Regulation2014
Much of financial regulation and supervision is devoted to ensuring the safety and soundness of financial institutions. Such micro- and macroprudential policies are almost always formulated as capital requirements, leverage constraints, and other statutory restrictions designed to limit the probability of extreme financial loss to some small but acceptable threshold. However, if the risks of a financial institution's assets vary over time and across circumstances, then the efficacy of financial regulations necessarily varies in lockstep unless the regulations are adaptive. We illustrate this principle with empirical examples drawn from the financial industry, and show how the interaction of certain regulations with dynamic loss probabilities can have the unintended consequence of amplifying financial losses. We propose an ambitious research agenda in which legal scholars and financial economists collaborate to develop optimally adaptive regulations that anticipate the endogeneity of risk-taking behavior.