Edición 48, Finance

Finding the finance to fight Cancer

Finding the finance to fight CancerPor: Guillermo Serrano
Sarum Capital

This paper will aim to shed some light on how finance plays a role in the fight against cancer and whether by shifting economic incentives, investors and industry can play a more effective role in expanding the resources available in the fight against cancer.

Cancer is the leading cause of death worldwide according to the Worth Health Organization with reported 8 million deaths per year (10% of the total) and according to the American Cancer Society it costs the world economy some $900 billion a year measured in lost years of life and productivity. This paper will aim to shed some light on how finance plays a role in the fight against cancer and whether by shifting economic incentives, investors and industry can play a more effective role in expanding the resources available in the fight against cancer.

The developed world currently channels some 10% of its annual spend into healthcare in general; representing in most cases a significant proportion of national government budgets. An army of some 4 million doctors in the OECD helps us in our daily quest for longer, fuller and healthier living. Much of the weaponry afforded to the medical profession stems from companies that deliver a set of technologies for diagnosing and curing disease. All companies’ products and services have gone first through a rigorous and often long processes of research, discovery, development, testing, approval and commercialization. This is often at an uncertain financial cost.

Finance plays an essential role in enabling companies to develop new products and we shall describe some of the investment dynamics related to companies in therapeutics and diagnostics with the differences between the two.

Companies in the therapeutic space deal with finding new products for cancer namely through the discovery of chemical or biological drugs; often used in combination with companies that manufacture the equipment used in radio, proton and heat therapies. The first subset is, perhaps, the most complex from a financing standpoint; namely for the time, cost and lack of certainty of success. Based on the scientific realities of drug discovery and their implicit high failure rate, they are without doubt one of the biggest challenges for they way biotechnology companies are financed. They stand out for the elevated level of investment associated with research and development, combined with expensive and lengthy trial periods before regulators approve them. Taking all these factors together, a new drug approval, today, costs the pharmaceutical industry around $1 billion.

Addressing those challenges we will comment on the article written by Fagnan, Ferna’ndez,
Lo and Stein of MIT1 that proposes an ingenious proposal to address the risks associated with biotechnology investing.

The main advantage for biotechnology companies of therapeutic drugs used in cancer, is that they benefit from unique economics compared to other industrial products. Price sensitivity is low and uptake is almost instantaneous, once regulatory approval has been granted. The public and private healthcare systems of most OECD countries are prepared to spend generously on cancer patients (see the chart below). Avastin alone, the best selling cancer drug, generates annual sales for Roche in excess of $6 billion.

By contrast, the financing of developing effective diagnostics technologies is comparatively simpler than novel drugs, but their economics are quantifiably more difficult. The key element in the diagnostics equation is related to the timing of the decision to spend on the diagnostic test.

The best line of defense against cancer, assuming prevention has failed, is early diagnosis leading to early medical intervention. In some cases, mass screening programs can make a difference. Despite that note of caution, the American Cancer Society predicts that in 2014, an estimated 1,7 million people in the US will be diagnosed with cancer and the number of premature deaths that could be avoided through screening vary from 3% to 35%. Although there is consensus about the positive impact there is still a wide divergence about its benefits, including the economic ones.

From an industry perspective, the race to detect and diagnose cancer as early as possible has moved into the field of molecular biology. The objective is to detect the presence of cancer cells in the body long before it manifest itself as overt lumps, lesions, spots, bleeding, etc. When cancer cells arise, they begin to leave a trace of their own DNA or by spreading unique “debris” around the body and hence provide an opportunity in the quest to find them using inexpensive and simple-as-possible, non-invasive tests.

When it comes to making convincing commercial logic for any type of cancer screening, the test must be capable of detecting cancer earlier than overt symptoms appear and, also, evidence must be available that an earlier initiation of treatment results in an improved patient outcome. Before health authorities approve any test, its performance is measured in terms of sensitivity, specificity, and positive-predictive values and negative-predictive values.

From a financial perspective, the challenges faced by technology companies are associated with the difficulties of discovery and, all too often, the difficulties in managing scientific teams along commercially viable paths. The commercial attraction of a successful screening test cannot be underestimated, because the statistics point towards 1 in 200 in the population will be diagnosed with cancer in any given year. In simplistic terms, a screening test has potentially 200 more customers than a therapeutic drug.

Sarum is currently invested in a company called Rhedyn that is developing a non-invasive test for primary and recurrent bladder cancer that hopes to replace the discomforts of cytoscopy. Within Europe, we have also come across success stories such as MDx Health that is now marketing a molecular diagnostic product for prostate cancer and Epigenomics, which intends to bring to market a non-invasive screening test for colon cancer.

For individuals with a personal history of cancer, or a strong family history of cancer, genetic testing could be a plausible way to deal with the probabilities of developing cancer. The costs of the test are dropping every year as new and more efficient gene amplification and sequencing equipment is delivered to the world’s laboratories. This is an area of medical technology that is truly disrupting the way cancer is diagnosed and it’s enabling the creation of personalized medicine.

The next stage in the diagnostic phase is generally represented by the use of biopsies, a procedure by which surgeons take a tissue sample to help grade the cancer and determine, in some cases, its extent and the use of imaging techniques (MRI, PET, ultrasound or CT) to determine the exact location and size of the tumour within the body and its association with other structures.

From a financial standpoint the risks and returns associated with investing in the medical imaging industry are probably very similar to other kinds of equipment manufacturers. The biggest challenge from a commercial standpoint, relative to drugs and diagnostic products, is their product differentiation and distribution. The Sarum SICAV has recently invested in a company called Endomagnetics that offers patients a non-invasive and far less toxic way to detect the presence of metastasis in the lymph nodes following conventional breast cancer interventions. It is just an example of medical imagery being an essential part of cancer treatment.

The timeline and cost profile vary from company to company, but in general technological development in medical equipment is an evolutionary process. Each year, equipment manufacturers identify new opportunities from in-house or external research sources, which may ultimately lead to new products in the marketplace. Every now and then there are disruptive new technologies that take aim to enter the market by displacing the established ones.

The scale of the investment required to introduce a product to market, making a very broad generalization for the purposes of this paper, it would not be unusual if it is at least 10x cheaper than a therapeutic. So, if a typical medical technology start-up works with 20 full time scientists to develop a particular piece of equipment, the “burn rate” of such a venture is likely to exceed $3 or $4 million per year. If we assume a 5-year timeline to market, we would then find ourselves with a $15 to $20 million-investment proposition.

Alternatively, the scientific work for a therapeutic may well face the same kind of costs, but once we add a $15,000 to $25,000 bill for each patient in a clinical trial, costs quickly escalate over the $100 million mark. If, on top of that, we add the risk of failure, the costs for Pharma escalate to the estimated $1 billion we mentioned earlier.

The financial system struggles to deal with the high level of uncertainty and risk inherent in the biotechnology area. A recent article titled “Can financial engineering cure cancer?” makes a brilliant and well-documented series of proposals for removing, or at least reducing uncertainty or failure in biotech, which probably represents the highest form of financial risk taking. The paper provides a portfolio approach by way of crating a multi-billion dollar mega-fund which is used to support a sufficiently large number of drug candidates to minimize the consequences of failure and spread the benefits of success, through adequate returns to all investors.

The creation of this proposed $135 billion cancer fund would undoubtedly unleash a flood of funding with the probable result of escalating, by hundreds, the number of new drug candidates; with the theoretical “comfort blanket” of it being a “safe” way of deploying capital.

A basic concern of ours would be that by lowering the cost of capital the chances of creating some kind of a financial bubble in biotech would be quite high. We would suspect this bubble would manifest itself in a drop in success rates, as significantly more drug candidates are brought forward and/or asset (IP) price inflation as the supply of capital could outstrip the supply of scientists and biotechnology companies. Examples in other markets such as property, the Internet and emerging markets have taught the financial markets a few hard lessons recently.

Risks in the biotech industry are born out of the very complexities involved in finding molecules or biologics that perform a therapeutic effect in the human body. The sheer uncertainty of introducing a novel therapeutic compound into the complex milieu that is the human body is so unpredictable that neither the best computer models, nor the finest research minds, can reliably predict whether a drug candidate will not be unduly toxic without testing it first on healthy individuals. The industry calls this first stage of the regulatory process Pahase I trials, and this is just the first stage of the regulatory process, there are two more, Phase II and Phase III, each with a higher cost to the preceding Phase and each with a significant probability of failure. In the case of new cancer drug candidates, less than 5% of them will eventually turn out to be approved drugs and reach the patient.

If failure is the norm, what can we do about it, finacially? In our view there is room for improvement, at least in Europe where we are writing this article, to treat innovation in a different light; from a purely fiscal standpoint. There are a number of initiatives that could have instantaneous positive effects, from making tax losses count double or triple if they stem from cancer related companies, to making capital gains free of tax, or, even allowing the tax- free credits from capital gains count more than their nominal amount.

Investing in biotech is risky business and, in our view, the scientific realities will make sure that it stays that way. Only by recognizing those risks and making governments more sensitive to that fact, will more resources be made available by the capital markets.

At the beginning of the paper we quantified the costs of cancer to the world economy at $900 billion per year and if we were to apply a standard VC return to eradicating cancer, the world should be prepared to invest at least $4 trillion to fix the problem profitably. If we take profits out of the equation it would mean the world should be prepared to invest at least $18 trillion. Will we?



  1. Fagnan, D. E., Fernandez, J. M. ; Lo, A. W. and Stein, R. M., 2013. Can Financial Engineering Cure Cancer? The American Economic Review, Volume 103, Number 3, May, pp. 406-411(6)

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