Can Financial Engineering Cure Cancer?: A New Approach to Funding Large-Scale Biomedical Innovation

Posted: 20 Dec 2015

See all articles by David Fagnan

David Fagnan

Massachusetts Institute of Technology (MIT)

Jose Maria Fernandez

MIT Laboratory for Financial Engineering

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Roger Stein

Sloan School of Management, MIT

Date Written: January 18, 2013

Abstract

For investment projects with low probabilities of success, long time horizons, and large capital requirements, traditional financing sources such as private and public equity may not be ideal. Nevertheless, such projects may yield attractive risk-adjusted returns when combined into a single portfolio if they are not too highly correlated. The scale of such "megafund" portfolios may be too large to finance through private or public equity alone, but with sufficient diversification and risk analytics, debt financing via securitization may also be feasible. Additional credit enhancements through derivatives markets and government policy can also increase both the size and attractiveness of megafunds. We provide an analytical framework and an empirical example involving cancer drug-development programs to illustrate the mechanics of megafund financing.

Keywords: Financial Innovation, Securitization, Financial Engineering, Healthcare

JEL Classification: G11, G24, G32

Suggested Citation

Fagnan, David and Fernandez, Jose Maria and Lo, Andrew W. and Stein, Roger, Can Financial Engineering Cure Cancer?: A New Approach to Funding Large-Scale Biomedical Innovation (January 18, 2013). Available at SSRN: https://ssrn.com/abstract=2203203

David Fagnan

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Jose Maria Fernandez

MIT Laboratory for Financial Engineering ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Roger Stein

Sloan School of Management, MIT ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.rogermstein.com

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