A sure way to end a conversation at a cocktail party is to mention that your job entails financial engineering. Securitization and the collateralized obligations it produced led to the financial crisis and the near-collapse of the financial markets. But financial engineering’s bad reputation could turn around: A highly respected academic has devised a way to apply the core principles of financial engineering to one of the most daunting challenges facing mankind.

Andrew Lo thinks financial engineering can cure cancer.

The biggest problems confronting cancer research are the enormous cost of developing drugs, the long research and development cycles and the high likelihood that a drug will fail. The rewards for a successful drug, however, are enormous – not just medically, but financially as well.

Lo has proposed a way that drug companies can use financial engineering to spread risks among investors and provide incentives to develop successful cancer treatments. He claims that a securitized-debt offering – a “cancer mega-fund” – would offer investors attractive risk-adjusted returns.

Lo is a professor at the MIT Sloan School of Management and director of its Laboratory for Financial Engineering. He spoke at the CFA Institute’s fixed-income conference in Boston on October 17.

“You can actually make money – good money – by curing cancer,” according to Lo.

Each year, 230,000 women get breast cancer and 30,000 die of the disease. The annual cost of breast-cancer treatment is $100,000. But a drug that cost $50,000 a year and transformed breast cancer into a chronic manageable disease would be a very compelling business proposition, according to Lo.

“There has got to be a way to make money for everybody if you can finance that kind of drug discovery,” he said. “We just need to find a better way to do it.”

I’ll look first at a conundrum that Lo identified – why pharmaceuticals have had poor returns, despite a “golden decade” of advances in cancer treatment – and then discuss how a cancer mega-fund would work.

See full article on Can Financial Engineering Cure Cancer? by Robert Huebscher, Advisor Perspectives