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Amgen, Inc. (AMGN), Bristol Myers Squibb Co. (BMY): Can Financial Innovation Unlock a Cure for Cancer?

A few years ago, Andrew W. Lo from the MIT Sloan School of Management gave a lengthy talk at a meet-and-greet for prospective students of the Master of Finance program. His speech offered a glimpse into the future of financial engineering for the benefit of society. Greed, he argues, was at the heart of the recent financial crisis and unsustainable run-up in real estate prices. But if we can invent novel financial vehicles that align individual incentives (financial gain) with solving some of society’s biggest problems, everyone can get paid along the way to doing something truly transformative (and Foolish). Perhaps something as big as curing cancer.

Amgen, Inc. (NASDAQ:AMGN)

The status quo isn’t good enough
Lo believes that financial engineering could cure cancer in the next 20 years. It may sound unreasonable, but the probabilities actually support the bold claim. The status quo of cancer treatment development is accompanied by some pretty dismal statistics. The average cancer drug takes approximately 10 years and $500 million to develop, according to Lo. Additionally, each oncology drug screened by scientists may only have a 5% chance at success. While many companies have brought innovative drugs to the market in recent years, big pharma cannot possibly pursue each cancer-fighting mechanism drafted on a laboratory whiteboard.

Now, suppose the United States — or a consortium of countries — raised a $20 billion fund for the sole purpose of curing cancer that anyone could invest in. That could support 40 different $500 million projects over a 10-year period. While expediting cancer research, it would also allow companies to pursue riskier potential cancer drugs that could hold the key to curing cancer. Better yet, the fund could make you rich. Here is how the fund would stack-up against the current status quo:

Current R&D methods Cancer Fund
Amount invested $500 million $20,000 million
Duration 10 years 10 years
Drugs investigated 1 40
Success rate 5% 87.15%
Estimated annual rate of return ~0% 10%

Source: Andrew Lo speech.

Each drug would have an individual success rate of just 5%. However, the entire fund of 40 treatments would have a total success rate of 87% (for any Fools out there who would like to do the math, the probability is calculated from 1 minus 0.95^40). Lo says the compound annual rate of return over the 10 year maturity of the fund could exceed 10% — roughly matching the return of the broader market. Would you invest in Cancer Bonds for those returns?

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