his may seem an odd question, but can financial engineering cure cancer? No less of an intellectual light than Andrew W. Lo of the Massachusetts Institute of Technology and member of the Future of Finance Advisory Council believes financial engineering may be a potent weapon in the quest to find a cure. In fact, this was the topic of Lo’s presentation at the recent Fixed-Income Management Conferencein Boston.
Lo’s thesis rests on several key points:Applying portfolio theory to finding a cure for cancer helps increase expected returns and lower expected risks for the capital deployed.Applying financial engineering through securitization allows for financing a cure for cancer in a smarter way that ensures greater participation from prospective investors.Recent anecdotal evidence suggests that human genome mapping allows for the identification of problematic genes that may be targeted by customized medicines to fight specific cancers.
Notorious capital destroyers, biotech investments of more than $400 billion have never generated returns in the aggregate covering their costs of capital. In fact, venture capital firms are so discouraged by their returns that the number and size of biotech investments has steadily declined from their peaks in 2007–2008.