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Renting Health vs Buying Cures: How New Financing Tools Can Boost Cancer Therapy Development

Andrew Smith
Evidence-Based OncologyTM sat down with Andrew W. Lo, PhD, to discuss his proposals to increase investment in medical innovation and utilization by giving investors more ways to support both research organizations and individual patients.
Andrew W. Lo, PhD, the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management, has a wide variety of research interests. He's best known in the healthcare world for ideas that could greatly increase the development of new drugs and access to expensive cures. The director of the MIT Laboratory for Financial Engineering, Lo is a principal investigator at the MIT Computer Science and Artificial Intelligence Laboratory and an affiliated faculty member of the MIT Department of Electrical Engineering and Computer Science. He is a past winner of the Battermarch, Guggenheim, and Sloan fellowships and has been named one of the 100 most influential people in the world by TIME.1

His proposals seek to increase investment in medical innovation and utilization by giving investors many more ways to support both research organizations and individual patients. For example, Lo sees opportunities for attracting new investment via securitization, the practice of combining individually risky assets into large pools that provide more predictable returns. The resulting cash flows are then divided into tiers based on levels of risk and reward favored by different investors.

Lo’s proposals typically rely solely on investors, drug developers, and patients acting in their own self-interest to produce the desired outcomes. However, he does see some opportunities for relatively small investments by philanthropies or the public sector to produce outsized returns in areas like pediatric cancer, where traditional finance tools would not be enough to attract socially optimal levels of investment. Indeed, by simply protecting private investors against loss during the riskiest phases of pediatric drug development, charities or governments may secure far more investment than they could fund on their own.2 This concept was presented in June at the American Society of Clinical Oncology annual meeting,3 with full results published in September in JAMA Oncology.2

Evidence-Based OncologyTM (EBO) spoke with Lo about his ideas, including those in his recent paper.

EBO: How did you get interested in how we finance drug development and usage?

It was really for personal reasons. A few years ago, a number of friends and a family member were dealing with different types of cancer, and it was through the process of trying to understand what they were dealing with that I realized that finance actually plays a pretty significant role in drug development.

For example, even though we seem to be on the verge of a number of breakthroughs in how we deal with these diseases, funding for early-stage drug discovery is actually getting scarcer. Why do we see this so-called “Valley of Death” for preclinical [research and development] and phase 1 clinical trials? In trying to make sense of this conundrum, I began doing research on the economics of the biopharma industry and realized that we could actually make a difference for patients if we used better methods for financing drug development.

EBO: How does that work?

LO: My conjecture, which now has substantial supporting evidence, is risk. Drug development is really at its riskiest between the preclinical stage and phase 2 clinical trials. As financial pressures have increased on drug companies and venture capitalists [VCs] to improve performance, the response has been to focus on better bets, bets that are more of a sure thing. This means waiting until drug development projects reach certain milestones before investing.

Another risk that drug companies face is the risk that—thanks to all the recent biomedical innovation that’s been going on—a better drug gets developed, destroying the valuable franchise that these companies have invested billions in. We see this happening now with gene therapies that are on the verge of curing certain diseases that used to be chronic manageable conditions. It’s going to be a very interesting market dynamic as we see patients choosing between one kind of therapy and another and what kinds of pricing policies will emerge.

Despite those risks, overall returns on drug development are high enough to suggest we’re not investing nearly enough in it.

EBO: Why is that?

LO: Drug development has 3 unique characteristics that, taken together, make it very challenging for investors. First, it takes a long time: typically 3 to 5 years before you hit the first major milestone and 10 to 15 years until you get an approved therapy. Second, it takes a large amount of capital to bring a single product to market, typically 1 or 2 orders of magnitude more than you need for start-ups in other industries. Third, the success rate is very low, about 5% in oncology for example, based on historical data.

There’s a small group of traditional biotech investors that are very sophisticated and understand how to manage these risks, but the larger pools of capital from ordinary investors that have been rushing into other areas like technology, social media, or cryptocurrencies simply aren’t there for this market. This is where the opportunity lies for better financing. If you structure the investments differently, you can make biotech attractive to more people and draw more money into drug development.

EBO: How?

There are actually 2 ideas that have been used for decades in other industries and demonstrated the ability to reduce risk and improve average returns for investors. The first idea is “multiple shots on goal,” to use a hockey or soccer analogy. If you put together series of investments into a single financial vehicle, you are, in most cases, going to be able to reduce the risk and increase the likelihood that you have at least 1 or 2 successes. And in biomedicine, you only need 1 or 2 approved drugs to pay for all the other tries and still earn significant profits for investors.

But to create a large enough portfolio of multiple shots on goal, you need [a] much larger scale than the typical VC would have— on the order of billions of dollars in the case of cancer therapeutics, rather than a few hundred million dollars. This is counter to the traditional VC view that “small is beautiful.”

Which brings us to the second idea: using different kinds of financial instruments to fund these multiple shots on goal. Traditionally, biotech VCs use convertible preferred debt and then eventually equity to finance these start-ups. That’s certainly the tried-and-true approach. But to create a large enough portfolio of multiple shots on goal for drug development, you need to attract more capital, and the way to do that is to offer different kinds of securities. You can divide the underlying portfolio of assets—claims on future drug sales of multiple drug targets—in ways that let you sell low-risk, low-return bonds to investors who want safety, higher-risk equity to investors who want to gamble for big returns and every other type of security for investors who fall somewhere in between.

EBO: You also believe that finance can increase utilization of expensive short-term treatments that either cure diseases or provide lifelong benefits. The idea is to find pools of capital that would be used to lend patients money that could be paid back over time.

Yes, but that’s not the new idea. It’s being done right now for all sorts of elective surgeries. Dental reconstruction is a good example. The typical cost of full-mouth reconstruction can range from $20,000 to $50,000, and candidates for these kinds of procedures can get consumer loans to pay for them right now.

What’s new in our proposal is to do this on a much larger scale, greatly increasing patient access to costly therapies, and to be able to securitize and package these “healthcare loans” and sell them to investors who are perfectly happy to take on large pools of diversified kinds of risks. Again, the investors get multiple shots on goal, but in this case, you’re talking about multiple consumer loans or loans to health insurers.

The idea really came about because of the possibility of curative gene therapies as well as other shorter-duration treatments like Sovaldi and Harvoni, 12 weeks of pills that can cure hepatitis C. Taking traditional medications is like renting an apartment: You pay for your benefit a month at a time and keep on paying as long as you want to live in that apartment. New medications like gene therapies are more akin to buying a house. You pay the whole cost up front and the benefit lasts for many years. But most people can’t afford to pay for the entire house in cash, so they get a mortgage, and that’s what we’re talking about here: drug mortgages. It’s the difference between “renting health,” one pill at a time, versus “buying a cure” and paying for it in installments.

The reason that this is an interesting approach is not just because it makes expensive one-time therapies more affordable for patients and payers. It can also serve as a way of dealing with cures that don’t really cure. We don’t yet know how permanent the effects of gene therapies really are; they’re supposed to be permanent, but we don’t have any real experience to rely on. What if it turns out that, after 2 or 3 years, the “cure” stops working and the patient relapses? Well, if you’ve paid for the therapy through a drug mortgage, you can simply stop making payments. That aligns the interest of the drug companies with the patients and the payers.

Based upon some very simple simulations that we’ve run by paralleling this submarket with the student loan market, we think there are tremendous amounts of resources that could be devoted to increasing patient access to these kinds of therapies. And with the 300-plus gene therapies currently in clinical trials, this is only the beginning of a huge wave of cures coming to patients over the next few years.

EBO: You have also explored the idea that insurance companies, rather than patients, would take out these loans.

Yes, the idea of stretching out payments over a period of time is pretty straightforward, but the big question is who’s going to be paying that mortgage, and the natural response is insurers. That’s why we have health insurance.

The problem is that insurers expose themselves to potentially huge losses when they make large up-front payments for treatments that provide their policyholders with decades of benefits. This wouldn’t be true if policyholders always stayed with the same company. If you pay for a cure for one of your policyholders and that policyholder now lives for the next 30 years instead of dying in 1 or 2 years, you’ve got 28 more years of premiums that you can use to offset the cost of this cure.

But in practice, that policyholder can leave her health plan at any time. Suppose she moves to another state after only 5 years. So now, instead of having 28 years of premiums, you’ve only collected 5 years’ worth; the remaining 23 years of premiums go to an insurer in another state. That insurer will benefit from a healthy policyholder who’s now cured of this disease, thanks to the previous insurer. She may have other problems, but that’s one really serious disease that the new insurer doesn’t have to pay for.

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