15.

482 Healthcare Finance

Spring 2017
Andrew W. Lo, MIT
Unit 0, Part 2: Biomedical Megafund
FAQs
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FAQs:
Is There Enough Capital
Is There Enough Capital?
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October 14, 2016

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Is There Enough Capital?
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In 2015:
§ U.S. bond market: $39.9T ($6.4T issued)
– Corporate bonds: $8.2T ($1.5T issued)
– Mortgage-related: $8.7T ($1.7T issued)
– Asset-backed securities: $1.3T ($193B issued)
– Money-market funds: $2.8T
§ Norwegian sovereign wealth fund: $873B
§ CalPERS: $304B
§ Target return of 126 public funds (2012): 8% 7.5%
In 2015, Total U.S. VC AUM Was? $165B
($7.6B invested in biotech)
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Can Massachusetts Cure Cancer?
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With Some Imagination, Megafunds Are Viable!

§ Imagine creating an advisory board of experts:
– Ed Benz, Bruce Chabner, George Demetri, Jeff Flier, Bob
Langer, Eric Lander, Phil Reilly, Phil Sharp, Henri Termeer
– Phill Gross, Abby Johnson, Seth Klarman, Mark Levin, Terry
McGuire, Bob Merton, Phil Ragon, Ray Stata
§ Imagine a large reputable fund family offering the fund

Would You Be Willing To Invest $3,000 of Your 401(k)?

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 FAQs:
Do We Really Need
$30 Billion?
Do We Really Need $30 Billion?
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The Amount of Capital Needed Depends On:

§ Cost per shot Fernandez, Stein, Lo,
§ Probability of success
(NBT 2012)
§ Duration of trials
§ Correlation of shots § Sourcecode available
§ Profits per success in R and Matlab
Finance and Biomedical Experts Must Collaborate
§ Cultures are very different (scientific precision vs. risk appetite)
§ Value created in being able to bridge this gap
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Orphan Diseases
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§ Diseases that affect less than 200,000 people (Orphan Drug Act
of 1983)
§ Often due to mutation in a single gene (e.g. Huntington’s, cystic
fibrosis, Gaucher, paroxysmal nocturnal hemoglobinuria)
§ 25 million Americans suffer from rare diseases
§ Smaller population, urgent need, higher prices, lower
development costs, higher success rates (20%), faster time to
approval (3–7 years)
§ $400–$500 million of capital and 10–20 projects sufficient
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And Now The Bad News…
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For Alzheimer’s, $30 Billion May Not Be Enough!

§ Lo, Ho, Cummings, Kosik (STM, 2014)
§ 13-year development time, not 10; $500M to $600M in out-of-
pocket costs; probability of success £ 5%
§ But not enough “shots on goal” (beta amyloid, tau)
– Correlated shots provide less risk reduction
§ Basic science is not as developed as in oncology
§ We have to “invest” in basic science of AD biology
§ The private sector will not do this
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And Now The Bad News…
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How Many New Cancer Drugs Were Approved In 2015-2016? 32

How Many New AD Drugs Were Approved In 2015-2016? 0
How Many New AD Drugs Were Approved In 2014? 0
How Many New AD Drugs Were Approved In 2013? 0
How Many New AD Drugs Were Approved In 2012? 0

…
How Many New AD Drugs Were Approved In 2004? 0
How Many New AD Drugs Were Approved In 2003? 1

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Role of Public/Private Partnerships
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National Cancer Act Orphan Drug Act of National Alzheimer’s

of 1971 1983 Project Act of 2011
+ + +
Human Genome Human Genome BRAIN Initiative
Project Project +
+ + Philanthropy
Biopharma R&D Philanthropy +
+ + Biopharma R&D

Philanthropy Biopharma R&D

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Role of Public/Private Partnerships
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Government Funding Is Essential When:

§ There is no quantifiable economic return
§ The horizon is too long
§ The costs are too large
§ The probability of success is too low (or completely unknown)
§ But societal impact is large (in some cases exponential)
The Market Failure Is High Risk and Low Reward

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FAQs:
Isn’t Pharma Already
Doing This?
Isn’t Pharma Already Doing This?
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Amgen Balance Sheet 2016Q3

ü Cash + Mkt. Sec.: $37.9B
ü LT Debt: $30.5B
What does pharma do
with so much cash on
its balance sheet??

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Isn’t Pharma Already Doing This?
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Amgen Acquisitions Timeline (source: wikipedia)

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Isn’t Pharma Already Doing This?
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Isn’t Pharma Already Doing This?
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Pharma Job Cuts, 2008–2013 Feb 3, 2017

Company Job Cuts

Abbott 5,900
AstraZeneca 25,733
Bristol-Myers Squibb 5,285
Eli Lilly 6,250
GlaxoSmithKline 8,687
Johnson & Johnson 9,200
Merck & Co. 46,140
Novartis 5,390
Pfizer 16,517
Roche 6,750
Sanofi 7,684
Total 143,536
Source: Bloomberg
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Isn’t Pharma Already Doing This?
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Pharma vs. Biotech

5 Dec 1994 to 12 Dec 2016
100
NYSE/ARCA Pharma Index
NYSE/ARCA Biotech Index
10

0.1

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Lessons From Hollywood
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Hollywood Studios and the Film Industry

§ Two different businesses
– film production
– film licensing and distribution
§ Probability of blockbuster??

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Lessons From Hollywood
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Distribution of Independent Film Returns

Sample of 900 films from 2000 to 2009

Source: Lucini (2010)

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Lessons From Hollywood
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§ Dreamworks SKG founded in 1994; $1.5B debt financing in 2002

§ 2005: Gun Hill Road (Sony and Universal), $600M for 17
pictures, from hedge funds
§ 2005: Legendary Pictures (Warner Bros.), $500M for 25
pictures (Batman Begins,…)

§ 2005–2008, $12 billion financed, $4 billion from hedge funds,

$8 billion from private equity
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Lessons From Hollywood
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Lessons From Hollywood
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The Role of Big Data Analytics
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Analytics Analytics
Uncertainty Risk Certainty

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Anesthesia & Analgesia 2010

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The Role of Big Data Analytics
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But this is based on

retrospective studies of
319 patients, not a
randomized clinical trial
§ No incentive to run
the trial (drug is
generic)
§ What if we had data
from 1,000,000
people?!
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The Role of Big Data Analytics
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March 12, 2015

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New Business Models Are Emerging
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§ One size does not fit all—ideal business structures need

not be pharma companies, CROs, biotech VCs, or
mutual funds
Government,
Non-profits
Non-profits,
impact investors
Biotech VC
Megafund
Pharma, drug
royalty investment
companies
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New Business Models Are Emerging
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“…its plan is to acquire majority or significant minority equity

positions in private, pre IPO, pre trade sale operating businesses
in the life sciences industry.”

“The Ireland Strategic Investment Fund (ISIF), a government fund

aimed at supporting economic activity and employment in
Ireland, is a 15 per cent shareholder in the company, having
invested € 50m in Malin’s IPO.”
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New Business Models Are Emerging
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New Business Models Are Emerging
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New Business Models Are Emerging
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California Institute of Regenerative Medicine

(2004)

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New Business Models Are Emerging
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California Institute of Regenerative Medicine

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New Business Models Are Emerging
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New Business Models Are Emerging
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Next Steps
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§ Engaging various stakeholders and exploring business models

and pilot program structures
§ Getting more data, running more refined simulations,
conducting case studies
§ Organizing small workshops to focus on specific challenges with
specific stakeholders to accelerate innovation (e.g., LFE/DFCI
workshop on financing for curative therapies on Oct 14, 2016)
§ CanceRx 2016 on Oct 26–28 (cancerx.mit.edu)
§ Education and outreach “Permissioning”
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 © 2017 by Andrew W. Lo Slide 42
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 © 2017 by Andrew W. Lo Slide 43
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Thank You!