The MIT Laboratory for Financial Engineering Healthcare Finance Initiative

In this project, we combine structured finance and portfolio theory to design a new family of "megafunds" to support biomedical innovation. Over the last decade, financial markets have channeled trillions of dollars in investments to the real estate and lending markets. Structured finance facilitated this process by re-engineering loans and receivables into securities offering new profiles of risk and return to investors. We apply these principles to the areas of biomedical innovation and drug development, and propose a new type of megafund that will offer investors a set of attractive securities with unique risk/return profiles while multiplying the resources available for scientific research. The main objectives of the project are:

•To prove that it is possible to design a structured fund in which investing in science can generate statistically reliable and attractive returns.
•To detail how a megafund to support biomedical research would need to be structured in order to match researchers’ and investors’ interests.
•To define the roles that different stakeholders need to play in this market in order to achieve the objectives mentioned above.

Our ultimate goals are to offer a realistic solution to this challenge, to design a new mechanism to raise new pools of funds for science, and to prove that structured finance can play a role in finding answers to some of the problems facing humankind.

Research Publications

Fagnan, David, N. Nora Yang, John C. McKew, and Andrew W. Lo, 2015, Financing translation: Analysis of the NCATS rare-diseases portfolio, Science Translational Medicine 7 (276), 276ps3.

Lo, Andrew W., Carole Ho, Jayna Cummings, and Kenneth S. Kosik, 2014, Parallel Discovery of Alzheimer's Therapeutics, Science Translational Medicine 6 (241).

Fagnan, David, Austin Gromatzky, Roger M. Stein, Jose-Maria Fernandez, and Andrew W. Lo, 2014, Financing Drug Discovery for Orphan Diseases, Drug Discovery Today.
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Lo, Andrew W. and Sourya Naraharisetti, 2014, New Financing Methods in the Biopharma Industry: A Case Study of Royalty Pharma, Inc., Journal of Investment Management 12, 4-19.

Fagnan, David, Jose-Maria Fernandez, Andrew W. Lo, and Roger M. Stein, 2013, Can Financial Engineering Cure Cancer?, American Economic Review: Papers & Proceedings 103(3), 406-411.

Fernandez, Jose-Maria, Roger M. Stein, and Andrew W. Lo, 2012, Commercializing Biomedical Research through Securitization, Nature Biotechnology 30, 964-975.
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Ongoing Research

A Portfolio Approach to Translational Medicine: A Case Study of NCATS, Austin Gromatzky, Andrew W. Lo, Manita Singh, and Nora Yang

Optimal Capital Structure, Risk, and R&D Decisions: Theory and Evidence from the Pharmaceutical Industry, Richard Thakor and Andrew W. Lo