A Toe in the Water

As noted in my post three weeks ago (“BIO Bits” 6/21/12), at BIO 2012, the big biotech meeting, I attended a session on “Innovative Financing for Global Heath R and D.”  It was mostly about the program-related investments (PRI) program of the Bill and Melinda Gates Foundation (BMGF) and its investment via an equity purchase in the Liquidia, a growth stage biotech company in North Carolina but I thought it light on specifics.  I learned that $400 million PRI fund had been judged a success and the BMGF is assigning $1 billion to PRIs, and that some portion of the fund (unspecified) is being used to invest in biotech companies with products for global health (not named) and put into other investment funds (also not named) that somehow, somewhere that are doing something in global health.  Further, the program has no application or submission process (apparently it’s insiders only), no detailed investment criteria (general criteria are at Gates PRI FAQ), and no specifics on its expectations for the company’s performance toward the intended objective- affordable and transformative global health products.  Recently, Trevor Mundel, president of the BMGF’s global health program, provided some insight and a lot of wiggle room on the last point.  In a Financial Times interview, he noted the foundation will have an “option to negotiate affordable access to technologies relevant to the diseases and low income countries which are its priorities,” apparently it will require (request?) the company grant low-cost licenses to other entities which will then do the hard part of developing and deploying the product in the countries of need (FT article).

From my (naïve) viewpoint, I don’t understand the lack of specifics on how the BMGF will select the companies for equity investment, under what terms, and with what objectives.   Clearly, there are challenges and some ground-breaking is needed.  For example, the BMGF will need to:

  • do thorough technical, competitive, and risk assessments (to be sure it is not being scammed);
  • figure out how to work with the other investors with whom it will not be in complete alignment (the BMGF measures its return on investment in both monetary and non-monetary terms);
  • learn how to influence the company as a later-round (less leverage) and physically distant (less communication) investor;
  • have its board of directors representative understand start-up companies and the biotech/pharma industry (even if she/he is only an observer as is the case with Liquidia);
  • have a clear understanding of how the product will be commercialized and made accessible in both major and rest-of-world markets;
  • have an exit plan if the company or product is acquired;
  • figure out how to track and respond to the progress (or lack of) by the company toward its global health-related objectives; and
  • assure the IRS that its investment is aligned with its charitable mission.

I have experience with some of these challenges as a mentor/adviser to startups, so know they are addressable with the right expertise.  For example, William Carleton, a corporate attorney, wrote a blog post last March about ways for the BMGF to “disengage” from its investment through a put (sell) option (Carleton blog).  He also estimates the BMGF’s investment is worth about an 18% ownership share, enough in my mind, to call some shots.  As for encouraging companies toward global health and access objectives, a group of tech transfer professionals at research universities worked on this problem and back in 2007 published a “Statement of Principles and Strategies for the Equitable Dissemination of Medical Technologies” (AUTM Statement), although, in my opinion, tech transfer people and universities could do more (“An Academic Approach to Global Health” 11/12/09).

Given the smart people in the PRI program and the time since founding (three years), I would think these points have been worked out but my quick look around the internet did give me much assurance.  In a recent blog posting, Julie Sunderland, the director of the PRI program who has foundation investment experience (Sunderland bio), described a continuing and slow roll-out of biotech company investment.  She wrote “we are working closely with the venture capital community to bring in senior-level investment expertise on an advisory basis” and “over the next couple of years, we expect to scale-up our biotech investment activity” and noted the intent to hire one additional person (BMGF blog).  From the position description (PRI officer position), it looks to me like the new person will concentrate on the financial analysis of possible investments (although my experience is that the earlier the stage of the company, the more fictitious by necessity, are the numbers), and I can only assume the PRI program has access to a team that knows about biotechnology companies and the biotech/pharma industry and can do the rest of the due diligence.  The BMGF will also need someone who can see the big picture and effectively negotiate deals.  As Ms. Sunderland pointed out in an interview last May (Responsible Investor article), “With Liquidia, we’re investing alongside firms that are in it for purely market decisions.  Our primary purpose is charitable, but we don’t want to be the dumb money.  We want to negotiate rigorous terms.”

A toe in the water is OK, but jumping in with both feet is better.


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