ANDREW W. LO: Hi, my figure is Andrew Lo. And I want to welcome you to1 5.482 Healthcare Finance. Now, you might be wondering, which is what i Healthcare Finance? So let me start by tellingyou a personal story. A couple of years ago, a numberof friends and my mother were dealing withvarious kinds of cancer. And in my mother’s case, thestandard medicines weren’t working. So a friend of a friend interposed meto a very successful biotech company that was developing anumber of brand-new cancer dopes, including one that might help her. I was privileged to meet with the chiefscientific officer of the company, who brought along his chieffinancial officer, because I suspect he was toldthat I was a finance professor.And he thought he mightneed a translator. During such courses of ourmeeting, I asked what I thought was an innocent question. I ask questions, whethertheir sources of financing had any influence ontheir technical agenda. As you can imagine, I was veryinterested in how they prioritize the agenda items since one of the projectswas related to the kind of cancer my mother was combating. I’ll never forget hisanswer to my question. The chief scientific officershook his head, looked at a CFO, ironically, and then turn itback to me and said, influence– our financing drivesour technical plan. Now, I’m an economist, so I do get it.You have to pay for stuff. But as the lad of adying cancer patient, I was absolutely sickened and outraged. What do interest rates, stockmarket volatility, and Fed policy have to do with whether you should treatcancer via angiogenesis inhibitors, immunotherapy, or radiation? Nothing. And yet, it drivestheir technical agenda. Now, I’m no biomedicalexpert by any means. But should the science be driving thefinancing instead of the other way around? Well, that’s what this course is about. That occurrence convincedme that finance actually dallies a huge role in health care, particularly, in the medicine development process. One of the things thatI learned early on is that this process suffers froma triple whammy of challenges. Number one, it that takes a long timeto develop a successful cancer drug. In some instances, 10 to 15 years. Two, it costs a huge amount of moneyon the order of hundreds of millions to billions of dollars per drug.And three, the chances of failureare extremely high, peculiarly, in oncology. This trifecta of challengesmeans that investors aren’t going to be as keen to investtheir capital in this process, specially, when there aremore attractive investment the chances for other industries. But here’s where HealthcareFinance comes in. What if we use the tools ofmodern financial engineering to mitigate risks and increase therewards of biomedical investing? We do this all the time inother manufactures and situations. For lesson, if you have any kindof savings or retirement savings account, you’re probably holdingsome of your resources in an indicator money, whichis a portfolio that are in literally hundreds ofstocks like those in the S& P 500. If you do invest in sucha fund, congratulations. You’ve taken advantage of one ofthe most basic and important ideas of modern finance, diversifying your investments across a large number of stocks insteadof trying to pick one or two winners.Well, the same approach can beapplied to drug development projects on a big scale. And the same types of financialbenefits should develop. And if we use all the othertricks of the financial trade– portfolio optimization, collateralizeddebt obligations, recognition default swaps, and derivative securities– we can attract muchlarger amounts of funding to develop the miracle drugs thatdesperate cases are waiting for. Now, you might be scratching yourhead right now and wondering, truly, is this really wise? After all, didn’t thesetools figure prominently in the financial crisis of 2008? Well, I have to tell you that it wasstudying the financial crisis that started my suppose along these lines. The financial crisis didn’t happenbecause these implements didn’t work.It happened, because thesetools laboured way too well, channeling massive extents of moneyin a relatively short period of time into US suburban real estate. In fact, Warren Buffettcalled some of these implements monetary weapons of mass destruction. And you are familiar with, he had a point. There’s awesome power lockedup in world fund markets. And when that power is unleashedcarelessly and irresponsibly, business engineering can causegreat devastation and disturbance with fallout that can linger for years. But the analogy cuts both modes. When powerful tools are usedcarefully and responsibly, monetary engineering can providevirtually unlimited resources to fuel, innovation, and economicgrowth for contemporaries to come. The more you know aboutfinance, the greater the occasions are that you’ll be able touse these techniques properly, responsibly, effectively, and ethically. That’s why all my fellow members and I at MITcreated 15.482 and this online course. Over the next few weeks, we’regoing to cover fiscal hypothesis like portfolio thought, cost of capital estimation, fund planning, real option analysis, securitization, and machine learning.All apply to specificchallenges and opportunities in the biotech andpharmaceutical industries. If you’re a business student lookingto make a career in the health care industry, or if you’rea scientist looking to commercialize some ofyour research, or if you’re just interested in how finance can makea real difference in people’s lives, this course is for you. Biomedicine is at aninflection point today. Thanks to the amazing dedicationand creativity of tens of thousands of scientists, engineers, clinicians, business professionals, investors, regulators, and cases, we are now curing diseases that were fatal simply a few years ago.But this inflection pointwon’t be sustainable unless biomedical expertscollaborate with financial experts to come up with similarly creativebusiness modelings and funding arrangements. Now, I is a well-known fact that talkingabout frequencies of return and profits and loss in the samebreath as life and death issues like cancer may seem reallyoffensive and obscene. My mother died of cancer, so I get it.But if we don’t deal withthese monetary challenges, we’re not going to getthe resources we need to deal with these terrible infections. Finance doesn’t have to be azero sum game if we don’t let it. And using the financialtools covered in this course, we can do well by doinggood, and we can do it now. Thank you for joiningme on this mission. And I look forward to workingwith you in the coming weeks.[ MUSIC PLAYING].
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