Andrew W. Lo, a finance professor and healthcare industry expert at MIT, didn’t begin his career with a focus on healthcare.
“A number of friends and family were dealing with various kinds of cancer. Through their experiences, I started to learn more about the industry as well as the state of the science and medicine,” Lo said in a recent interview. “I realized that finance plays a pretty big role in drug development; in many cases, too big a role, and in those instances it’s being used in ways that I think are counterproductive to the ultimate goal of getting more and better drugs to patients faster.”
“That’s when I started thinking about how we could use finance pro-actively to lower the cost of drug development, increase success rates, and make it more attractive for investors. Because that’s really what the issue is: you need investors to come into the space to spend their billions of dollars in order to get these drugs developed.”
Since that awakening, Lo has gone on to write dozens of articles, give hundreds of lectures and even co-found a business–QLS Advisors, in Cambridge, Massachusetts—about how to make that happen. One lasting observation slow in coming, he said, “is that cancer is not just a medical problem. It’s not just a scientific problem. It’s not just a funding problem. It’s all of these problems rolled into one.”
“It took me a while to appreciate that. I would go from expert to expert asking them, ‘Why hasn’t this idea—which could have helped my mother with her lung cancer—why hasn’t it been moved forward? I would talk to a scientist who blamed the venture capitalist. The venture capitalist blamed the regulators. And so on. Pretty soon I realized that everybody was pointing fingers at each other, and they weren’t entirely wrong. It really is a systemic problem.”
He then decided to focus on the piece that he felt he could do something about — funding. “I realized pretty quickly that part of the challenge with cancer drug development is that it’s often pushed forward by scientists and clinicians without sufficient business training or background,” Lo said. “And that’s where problems can arise. One simple illustration is the way scientists often deal with funding issues. If you’re an academic applying for an NIH (National Institutes of Health) grant, say, you need $3 million to run some critical experiments for developing a new cancer treatment. The response you might get is this: ‘This is a really interesting proposal, but we don’t have enough money to fund all of it. Instead of $3 million, how about if we give you $1 million?’ And the typical response of the scientist is, ‘Thank you very much. I’ll take it.’ This makes sense because they’ll do what they can with that $1 million, and then apply for another grant after it’s spent.”
“The problem is that in venture capital, that strategy can backfire. If you need $3 million to reach a critical milestone, and they offer you $1 million, you’ll take it. But by the time you’ve spent the $1 million and need the other $2 million, what happens if the economy happens to be in a recession and no one is willing to invest? Without that funding, the people you’ve hired will have to leave for other jobs because they’ve got families to feed. Now you’re stuck with a company that has no people and not enough money to reach that critical milestone. As a result, your intellectual property can only be sold for pennies on the dollar because in biotech, it’s really all about the people,” he said.
“What that told me was the right kind of financing is actually a key component of successful drug development. You’ve got to pick not just the right science and the right medicine, but also the right business model and financing partners to get you over the finish line,” Lo said. “It’s like building a bridge. If it costs $100 million to build a bridge and you only have $50 million, you don’t go out and build half a bridge, because half a bridge is not half as good as a completed bridge. And that’s why I’m convinced that business strategy and financial innovation should be part of the Cancer Moonshot. In addition to all of the scientists on that blue ribbon panel, I would like to see some financial experts who could speak to the issue of: ‘How are we going to fund this?”
“Although the government provides funding that gets us started, it’s not nearly enough to get us over the finish line. We need the private sector to put in billions to match the hundreds of millions that the government has dedicated to this effort,” he said.
Lo also believes that the Cancer Moonshot program can be used to encourage more donations to venture philanthropy. “Philanthropy has historically played a very important role in funding the fundamental science underlying cancer therapeutics,” he said. “But there’s been a very important change in how philanthropies participate over the last 15 or 20 years. What philanthropies are focusing on now is not just giving grants, but rather using their resources to invest in drug development. I use the word ‘invest’ very deliberately.”
“The idea behind a grant,” Lo explained, “is that you expect nothing in return other than perhaps a final report describing what you’ve done with the money. There is no quid pro quo. It is literally: ‘Here’s some money, do some good research,’” Lo said. “But we’re seeing a different tack with some of today’s philanthropists, who say instead, ‘I want you to succeed in developing a drug and I’m willing to invest with you by paying for the clinical trials, but in exchange, I want what a typical VC might get from you—for example, royalties—if you’re successful.’”
“The quintessential example of this venture philanthropy model is the Cystic Fibrosis Foundation,” Lo continued. “When they first started their efforts in venture philanthropy in 1994—when Dr. Bob Beall became CEO—they invested in a number of biotech and pharma companies who were willing a partner with them to develop a drug for cystic fibrosis. Up until then, all of the treatments for CF were focused on symptoms, not on the underlying causes of the disease. And over the course of a decade they invested in a number of companies. The foundation provided not just money, but also a lot of expertise, patient registries, natural histories, and other support that lowered the threshold for the private sector to invest in this endeavor. Ultimately, they were enormously successful in getting several new drugs approved which really treat the disease at its biological root causes. As a result, the life expectancy of CF patients has actually doubled since the 1980s.”
“They didn’t expect any financial return—they wanted impact for CF patients. But they achieved impact not only in the form of new drugs, but also a financial return of around $4 billion from a $150 million investment. And what they’re doing with this money is now recycling it and putting it back into developing a total cure for CF using gene therapy. This is a wonderful example of how venture philanthropists can play a very important role in the biomedical ecosystem,” Lo said.
“In many cases, they are willing to invest where traditional VCs are not. They’re willing to take on such risk because their horizon is much longer and their goal is to develop a drug, irrespective of the financial return. And the Cancer Moonshot has the ability to bring all of these relevant species in the ecosystem together with the ultimate goal of changing the way we deal with cancer.”
“I think the additional resources of the federal government should also get behind it,” Lo said. “For example, there are things that ARPA-H (Advanced Research Projects Agency for Health) can do that venture philanthropy cannot. They can offer government programs to guarantee certain kinds of debt, like, ‘cancer bonds.’”
“Imagine if the government issued cancer bonds where the proceeds would be used to support cancer research, and pay the lenders a certain interest rate but with an equity kicker that would go up as these discoveries ended up generating value for investors? That would provide a really nice complement to venture philanthropy,” Lo said. “This whole system really is an ecosystem. Each of these different species has its own role to play in the ultimate goal of being able to treat cancer effectively.”
Even more broadly, Lo said, “tapping into the power of global capital markets should also be a priority for the Cancer Moonshot. If you think about the financial crisis, it was a very, very unfortunate and devastating event. But if you ask how it happened, financial innovation encouraged investors from around the world to put their money into U.S. residential real estate. And for about a decade, that was an extremely profitable investment, drawing resources from literally around the world into a very specific market. Everybody benefited until, of course, we went too far and ultimately ended up with the financial crisis of 2008,”he noted.
“Imagine if we could use the exact same tools,” Lo posited, “but with the goal of curing cancer, and without the excesses. If we’ve learned from the financial crisis and use financial engineering responsibly, carefully, then there’s an enormous amount that we could accomplish, especially with the U.S. government involved in the same way that it did with residential real estate.”
Though the crisis itself was “a terrible tragedy, there’s a silver lining to the financial crisis, which is that there are millions of homeowners today who didn’t default on their mortgages, and were only able to afford their homes because of Fanny Mae and Freddie Mac,” Lo said. “And because of those government policies and financial innovations, they’re leading lives that they otherwise couldn’t have This is exactly what policy makers intended, that more people should have a piece of the American Dream and be able to own their own homes.”
“If we can use that same approach to fight cancer—using financial engineering to channel global capital markets into this particular sector—I believe that we’ll have tremendous impact and be able to get over that finish line. The Cancer Moonshot should focus its attention not just on the science and medicine, but also on the financing and business of drug development. And I believe they have the resources to do that,” he said.
“There’s an army of investment bankers that have the right expertise and would very much appreciate the opportunity to do something with it other than making rich people richer,” Lo said. “There’s a real interest on Wall Street to have direct impact on human lives using the tools they’ve developed. It’s possible, if you structure the business model correctly, to have your cake and eat it too and lose weight all at the same time. Doing well by doing good is definitely possible, but you have to work at it.”
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