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. [MUSIC PLAYING]
