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.

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?

Cancer drugs gone wild
The speech was simply a thought experiment highlighting the potential of financial engineering in the 21st century. Give pharma companies the freedom to pursue the riskiest potential treatments risk-free and you could get some crazy proposals. Here are a few examples of the breakthroughs that can occur when companies dare to dream big.

Amgen has gone completely insane in developing T-VEC to compete with Yervoy from Bristol-Myers Squibb (NYSE:BMY)in late-stage melanoma. Bristol's drug, a human monoclonal antibody, rallies the immune system against cancer cells and was the first to prolong the lives of patients with the disease. That helped it generate sales of \$700 million last year -- its first full-year on the market.

Does herpes virus, or another viral foe, hold the key to curing cancer? Source: WikiCommons.

T-VEC is not your traditional biologic drug. It is actually a bioengineered form of the herpes virus that, once injected into cancerous tumors, replicates, and produces an immune-stimulating protein that puts a bulls eye on cancer cells throughout the body. Despite its promise and intriguing mechanism of action, T-VEC is not in further development at Amgen. However, Oncolytics has shown promising results for its bioengineered form of reovirus called Reolysin. Initial phase 3 results showed that 86% of patients taking the drug had reduced tumor mass or growth after six weeks of treatment.

Novel antibodies and viral treatments show promise in making significant progress against various types of cancer, but aren't the only way to approach a cure. Doxil from Johnson & Johnson (NYSE:JNJ) was developed decades ago and was the first cancer treatment to protect its active ingredient in a fatty envelope, or liposome. This Trojan Horse approach slowed the chemotherapy drug's release, reduced toxic side effects, and was a huge step forward in advancing treatments. . While Johnson & Johnson has been facing a supply shortage of Doxil, the company stated in its last quarterly report that it is planning on using a different manufacturing approach to continue marketing this drug.

What does the future hold?
Now imagine if we had 40 of these game-changers being developed in one 10-year period. Big Pharma could take deep dives into stem cells, gene therapy, and miRNA treatments that are often cast aside for their excessive risk until decades of research is completed. Do you see the potential of such a fund now? It may seem like a lot of money to raise -- be it \$20 billion, \$40 billion, or more -- but we spent much more on bailing companies out of the financial crisis. Heck, the central bank purchases \$85 billion in bonds and mortgage-backed securities each month. This fund would potentially cure cancer. I don't know how long it will take before individual investors are able to crowd-fund a cure for cancer, but I strongly believe that one day our portfolios will hold Cancer Bonds. Maybe Nuclear Fusion Bonds, too.

You can view Andrew W. Lo's speech in its entirety, or skip to 33:48 to listen to his pitch for engineering a financial solution to cancer.