Friday, June 24, 2011

Challenges in Combating Cancer

Summertime is full of walkathons for cancer.  There is absolutely nothing wrong with raising money to help cure disease.  But is this money well spent and have we made much progress toward cures?  Although many view cancer as an evil monolith, cancer is not a single disease.  A glioblastoma took my father’s life roughly 18 years ago this week and yet the prognosis for a patient with glioblastoma today is virtually as awful as it was 18 years ago.  Even now, most solid tumors are treated with a regimen of chemotherapeutic agents, surgery and radiation similar to what my father received.  Rates of remission move incrementally, if at all, over time.  Although we have made some strides, real progress in addressing cancer’s ravages for many indications has been frighteningly slow.  Why is this so with the billions and billions raised annually for cancer and deployed in research for cures by governments, universities and pharmaceutical, biotechnology and medical device companies?

There are several structural problems that have led to egregious wastes of time and money and relatively little progress against most cancers.  First, I believe the typical research approach to creating new anti-cancer drugs is simply ineffective.  Find a marker for a type or sub-type of disease and then find agents that attack cells with that marker.  For the most part, with a few exceptions, we haven’t made much progress using this approach and haven’t extended lives for years or decades by doing so.  Second, our US regulatory system (FDA) is ill equipped (perhaps also institutionally incapable) to reorganize itself to handle new approaches to curing cancer that have a much better chance of long term success.  It still takes forever and costs $180 to $231 million to bring a drug to market.  Ridiculous.  And third, many companies in the industry are organized and optimized for regulatory and marketing operations that do not correspond well with new approaches that may indeed work.  Such organizations are incentivized to create one size fits all solutions.  Moreover, they are motivated not to cure anything, but rather to treat diseases (including cancer) as chronic conditions.

Biological systems are very complex, very sneaky and redundant.  They are created by Darwinian trial and error and the fittest are the ones that can withstand a multitude of environmental blows that can be thrown at them.  So when something goes awry with a cell (such as cancer), it is not typically because one protein is present or missing.  Biological systems must compensate for the odd problem or else they do not survive ruthless Darwinism; it is usually attacks from multiple sources that beat their repair defenses.  It is the breakdown of the entire system (interplay of genetics and environment/nature and nurture) that enables cancerous growth.  It is the rare exception (such as Huntington’s Disease) where one can point to a single nucleotide polymorphism that is responsible for a particular disease state.  Because they are all interdependent, one cannot typically analyze individual components in a biological system in isolation.   Disease occurs because the system as a whole breaks down not usually because one individual part was the “cause.”

With the above statements, I do not mean to denigrate Roche’s Herceptin or Genentech’s Gleevec which are effective for the populations they serve.  See also Pfizer’s Crizotinib and Roche’s Vemurafenib.  But we will probably discover that these drugs will be most efficacious when used in combination therapies that address multiple attacks on entire systems. Most diseases, however, e.g. metabolic disorders, cardiovascular disease, and yes, most cancers have a plethora of pathways to march down to progress to disease.  The way to solve and knock out the various progression pathways simultaneously and arrest tumor formation is to use systems approaches.  Such methodologies require vast amounts of patient data over populations and tremendous amounts of computing power to capture the information in databases and then parse and analyze it 

I believe treatments of the future will usually require a series of diagnostic tests to determine which regimen combination of drugs will be necessary for the sub-type of cancer that the patient possesses.   Blood protein assays for these types of diagnostics will require the next generation of micro-fluidic chips from companies such as our portfolio company, Fluidigm.  The problem is that the markets for each of the individual tests and drugs will probably not be large enough to recover the costs necessary to invest in developing them under our current regulatory system.  Thus, to get where we need to go in the future to create more individualized and effective cancer therapies, FDA will need to undergo a dramatic transformation.  Nevertheless, even if the regulatory system were to adapt, the current research and development arms and marketing divisions within drug companies are not structured to be able to address micro-diagnostic markets with corresponding therapeutics.  And healthcare providers have little incentive to change methods of hacking out tumors through surgery.  Future treatments may involve more elegant solutions such as “signalling nanoparticles” that would function like notification proteins and mark locations where cancer cells exist and further action was required. “Receiving nanoparticles” might then be recruited to cancer sites like platelets, but instead of staunching a wound they would deliver anti-tumor drugs.  Without an economic incentive, however, it will be hard to change behavior and get providers to adopt new techniques.

With all of these factors stacked against real change, I guess I should not be surprised that so little progress has been made since my father passed away 18 years ago.  Scientists such as Dr. Leroy Hood, Dr. Sangeeta Bhatia and Dr. Geoffrey von Maltzahn have made great discoveries, but without more research dollars being directed appropriately, serious FDA regulatory reform and a complete rethinking of pharmaceutical and healthcare company business plans, I fear that we will be in much the same place in the war on cancers 18 years from now.  That is a lot of walkathons for little progress.

Wednesday, June 15, 2011

Whither real estate goest, the country will go. (apologies to Ruth 1:16)

I have had several friends discuss the following question with me recently.  Can the US economy undergo a sustained recovery without any participation from residential real estate?  Moreover, they have forwarded to me several blogs such as the Diary of a Mad Hedge Fund Trader  that point to a chart that prices US residential real estate in gold for the last 40 years.  Many of these chartists suggest that residential real estate prices have another 10 to 15% to fall relative to gold before they can grind sideways or head slowly upwards.  I imagine the gold bugs among them have concluded that if gold falls in price, the US financial system is doomed as all assets tumble in value and anyone who has a mortgage falls further underwater….

Real estate may fall another 10 to 15% relative to gold, but I don’t know how these traders can foresee this future from the chart.  These bloggers contend that gold is the only real store of value and is therefore the “real” benchmark to use in determining where real estate prices are headed.  If you look at the data since 1970, however, for median and average nominal sales prices of new homes sold in the US and real home prices as calculated by Robert Shiller, expecting a return to relative values of the early 1980s is not clear.  If we examine the data, we see that Pearson’s Correlation Coefficient is positive and fairly strong for nominal real estate sales prices and gold, but only slightly positive and weak for real home prices and gold. (r=0.67 and 0.34 respectively)

These relationships between real estate and gold make a lot of sense to me.  Generally, if the prices of hard assets are going up or down on a nominal basis, it makes sense that they will move in the same direction.  But the factors that are driving the long-term, positive, real, upward trend in the prices of real estate are not necessarily the same ones that are driving the more idiosyncratic values of gold.  Moreover, the price of gold in the US was an artificial one until the 1970s.  On the one hand, a house can be a pain to take care of, but you have to live somewhere; on the other hand, gold is cool and shiny and always worth something across history, but you have to make sure that no one steals it from you.

So back to the original question rephrased: are all US citizens going to rent property and hoard gold and watch the real estate market collapse?  If so, what does this mean for the US economy?  Well, I would not completely give up on the American dream just yet, but even a cursory review of jobs reports makes one conclude that it will be very difficult for the economy to recover without real estate making at least a partial comeback and it is probably going to be a while before it does.  According to the Bureau of Labor Statistics 7.4 million jobs, or 5.1 percent of total employees, counted on residential real estate for work at the peak of the real estate cycle in 2005. As the housing market crashed, residential-construction-related employment fell substantially; jobs in the industry fell to 4.5 million in 2008, accounting for only 3.0 percent of total U.S. jobs.   At its current pace, it will take quite some time for the private sector to create sufficient jobs to make up for the shortfall in the real estate and construction industries.   Sad, but true – no matter how rosy a spin you want to put on the data or the outlook….

The US real estate problem is demographics.  Demography is destiny.  I am certainly not the first person to note that relationship.  (That line is usually attributed to Auguste Comte).  But it certainly is one of the forces that will drive real estate sales and prices (and therefore construction and jobs) in the United States over the coming years.  I think it is far more important than the price of gold!  Demographics is also a major force behind my vision of the emerging market consumer  that is going to be one of the worldwide economic drivers of at least the next decade or two.

The aging of the Baby Boom generation (roughly 76 million individuals) here in the US is the demographic trend that is currently having and will have the greatest impact on the real estate market in the medium term until Generation Y or the Millennials can afford the Baby Boomers’ homes.  Generation X alone does not have sufficient numbers to buy the homes will come onto the market.  This is another compelling argument for greater H-1B visa and other legal immigration into the US.  Baby Boomers born just after WWII are currently entering the time of their lives (65+) when they downsize their homes and either move back into city centers to be closer to good medical facilities and entertainment options or into retirement/semi-retirement/vacation areas.  They are slowly unloading their homes and settling into condos and other properties that are easier to take care of.  Ebay, Craigslist and other companies benefit from this trend as Boomers find new homes for their old “stuff.”    

Although mortgage rates will most certainly increase at some point in the next year or two, I do not believe that any initial increase will have much of an impact at all upon prices or demand for residential real estate and it may even be a net positive for the market.  I realize this sounds like economic heresy.  When the cost of acquiring an item rises, demand for it decreases, right?  This is certainly the case for most items with a price that is elastic.  I’d make that bet 99% of the time.

There are certain items for which this relationship between price and demand does not always hold true, however.  For example, when stocks rise in price, momentum investors and many individual buyers want to climb aboard “winning stories.”  Similarly, people like to buy homes when they are increasing in value believing that they will continue to do so.  They don’t like to purchase when prices have been cut or when they are declining thinking that this too shall continue.  Therefore, demand often rises as prices rise and this demand comes not only from speculators.   Prices and interest/mortgage rates often need to rise quite substantially to choke off demand once demand begins to rise.  Indeed, historically, there has been no correlation (it is slightly negative) between the market yield on the 10 year treasury security (which drives mortgage rates) and median nominal sales prices of new homes sold in the United States and real home prices as calculated by Robert Shiller (r=-0.36 and -0.28 respectively).  There does appear to be a very long term and very high correlation between median nominal home prices and population growth, however.  (r=0.98)  Demographics matter.
   
Demographics matter over the long term, but can they guide us in the short and medium term?  Unfortunately, not quite so much.  But they explain a good deal more than interest rates or gold.  For example, a strategy of keeping interest rates low to keep mortgage rates low to encourage home buyers to buy because home prices are held lower is not one that appears to be based on a sound analysis of historical data.  Such a strategy will not work for the long term.  A more effective strategy would be to encourage legal immigration to the US and to promote and encourage population growth and new household formation.    I hope it is not a generation before we see any real return on residential real estate although this could be the case unless the US decides to adopt more open legal immigration policies.  As you can see from the chart above, unless building costs are rising, it can take a very long time to see any real return on one’s investment in housing! 
Without a sufficient ROI in residential real estate, it is hard to envision a revival of the construction industry which is important engine of job growth for the economy.  This is another reason why I believe Fed Chairman Ben Bernanke is pushing for a more explicit inflation target.  With an explicit target, there is no more guessing about objectives and it would help generate at least a nominal return on some residential real estate investment and put some Americans back to work.  Only then can we breathe a bit easier about a sustained economic recovery.