ANDREW W. LO: Hi, my name is Andrew Lo.
And I want to welcome you to 15.482 Healthcare Finance.
Now, you might be wondering, exactly what is Healthcare Finance?
So let me start by telling you a personal story.
A few years ago, a number of friends and my mother
were dealing with various kinds of cancer.
And in my mother's case, the standard treatments weren't working.
So a friend of a friend introduced me to a very successful biotech company
that was developing a number of new cancer drugs,
including one that might help her.
I was privileged to meet with the chief scientific officer of the company, who
brought along his chief financial officer,
because I guess he was told that I was a finance professor.
And he thought he might need a translator.
During the course of our meeting, I asked what
I thought was an innocent question.
I asked them, whether their sources of financing
had any influence on their scientific agenda.
As you can imagine, I was very interested in how they prioritize
their agenda since one of the projects was related to the kind of cancer
my mother was battling.
I'll never forget his answer to my question.
The chief scientific officer shook his head, looked at a CFO,
ironically, and then turn it back to me and said, influence--
our financing drives our scientific agenda.
Now, I'm an economist, so I do get it.
You have to pay for stuff.
But as the son of a dying cancer patient,
I was absolutely shocked and outraged.
What do interest rates, stock market volatility, and Fed policy
have to do with whether you should treat cancer via angiogenesis inhibitors,
immunotherapy, or radiation?
Nothing.
And yet, it drives their scientific agenda.
Now, I'm no biomedical expert by any means.
But should the science be driving the financing instead of the other way
around?
Well, that's what this course is about.
That incident convinced me that finance actually
plays a huge role in health care, particularly, in the drug development
process.
One of the things that I learned early on
is that this process suffers from a triple whammy of challenges.
Number one, it that takes a long time to develop a successful cancer drug.
In some cases, 10 to 15 years.
Two, it costs a huge amount of money on the order of hundreds of millions
to billions of dollars per drug.
And three, the chances of failure are extremely high, especially,
in oncology.
This trifecta of challenges means that investors
aren't going to be as keen to invest their capital in this process,
especially, when there are more attractive investment
opportunities in other industries.
But here's where Healthcare Finance comes in.
What if we use the tools of modern financial engineering
to reduce the risk and increase the rewards of biomedical investing?
We do this all the time in other industries and contexts.
For example, if you have any kind of savings or retirement account,
you're probably holding some of your assets
in an index fund, which is a portfolio that
contains literally hundreds of stocks like those in the S&P 500.
If you do invest in such a fund, congratulations.
You've taken advantage of one of the most basic and important ideas
of modern finance, diversifying your investments
across a large number of stocks instead of trying to pick one or two winners.
Well, the same approach can be applied to drug development projects
on a massive scale.
And the same kind of financial benefits should emerge.
And if we use all the other tricks of the financial trade--
portfolio optimization, collateralized debt obligations, credit default swaps,
and derivative securities--
we can attract much larger amounts of funding
to develop the miracle drugs that desperate patients are waiting for.
Now, you might be scratching your head right now and wondering, really,
is this really wise?
After all, didn't these tools figure prominently
in the financial crisis of 2008?
Well, I have to tell you that it was studying the financial crisis that
started my thinking along these lines.
The financial crisis didn't happen because these tools didn't work.
It happened, because these tools worked way too well,
channeling tremendous amounts of money in a relatively short period of time
into US residential real estate.
In fact, Warren Buffett called some of these tools
financial weapons of mass destruction.
And you know, he had a point.
There's tremendous power locked up in global capital markets.
And when that power is unleashed carelessly and irresponsibly,
financial engineering can cause great devastation and disruption
with fallout that can linger for years.
But the analogy cuts both ways.
When powerful tools are used carefully and responsibly,
financial engineering can provide virtually unlimited resources
to fuel, innovation, and economic growth for generations to come.
The more you know about finance, the greater the chances
are that you'll be able to use these techniques properly,
responsibly, effectively, and ethically.
That's why my colleagues and I at MIT created 15.482 and this online course.
Over the next few weeks, we're going to cover financial concepts
like portfolio theory, cost of capital estimation,
capital budgeting, real option analysis, securitization, and machine learning.
All apply to specific challenges and opportunities
in the biotech and pharmaceutical industries.
If you're a business student looking to make a career in the health care
industry, or if you're a scientist looking
to commercialize some of your research, or if you're
just interested in how finance can make a real difference in people's lives,
this course is for you.
Biomedicine is at an inflection point today.
Thanks to the amazing dedication and creativity of tens of thousands
of scientists, engineers, clinicians, business professionals, investors,
regulators, and patients, we are now curing diseases
that were fatal just a few years ago.
But this inflection point won't be sustainable
unless biomedical experts collaborate with financial experts
to come up with equally creative business models and funding structures.
Now, I know that talking about rates of return
and profits and losses in the same breath as life and death issues
like cancer may seem really offensive and obscene.
My mother died of cancer, so I get it.
But if we don't deal with these financial challenges,
we're not going to get the resources we need
to deal with these terrible diseases.
Finance doesn't have to be a zero sum game if we don't let it.
And using the financial tools covered in this course,
we can do well by doing good, and we can do it now.
Thank you for joining me on this mission.
And I look forward to working with you in the coming weeks.
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