Tossed from the Balcony

Last week, it was announced that the world’s first investment fund dedicated to global health product development had completed raising money and was ready to start investing.  In a press release, the aptly-named Global Health Investment Fund (GHIF) stated that $94 million had been committed by twelve foundations, government agencies, and companies to be invested in organizations that have products in clinical development and nearing commercial use (new drugs, vaccines, diagnostics, and child-friendly formulations of existing products are mentioned) or that are expanding manufacturing capacity (GHIF press release).  Although the release did not specify the types of investee organizations, in an interview JP Morgan Chase’s head of corporate responsibility said the primary investees will be the not-for-profit product development programs (PDPs) and then “pharmaceutical companies, emerging biotech companies, academia and developing world manufacturers of innovations that fall outside of the current PDP pipeline” (One.org article).  The fund-raising has been in the works for almost two years led by the Bill and Melinda Gates Foundation which is using a chunk of its “program-related investment” program money as I noted in a post last January, “Nothing Ventured”.

From the GHIF website and poking about elsewhere, I learned the full list of fund partners (below) and that the fund will be managed by London-based Lion’s Head Global Partners which will identify and structure the deals (LHGP).  The fund will provide mezzanine financing (as in a floor added to an existing building), a type of funding that is typically used by established companies to grow and is in the form of a loan that gives the lender rights to ownership/equity if the loan is not fulfilled (Investopedia terms).  As for the return on investment, the GHIF investors apparently will receive a minimum of a 2 percent return plus 80% of the returns greater than 2%, according to Impact IQ post from last September (Impact IQ post), not the more lucrative venture capital returns of hundreds of percent.  The investors will also be protected from loss in that Gates Foundation and Sida of Sweden will guarantee 60% of the fund’s capital; 20% of invested capital will be fully covered and 50% of the rest (GHIF About).  I did not see an estimate of the time frame for yielding returns, but I am guessing, if everything goes right (unlikely), a first product may complete trials, be approved and launched, and generate revenues in 6-8 years.

I’m in the dark on several other points.  It is not clear on how many investments will be made in a year and how much each will be.  The GHIF noted the fund has identified more than 200 new products in development “including drugs and vaccines against the full spectrum of global diseases including cholera, diarrhea, HIV, malaria, and TB, as well as products for improving global nutrition and family planning.”  I would think there are many more opportunities since this number is 1.5% of the 14,570 or so projects underway throughout the world, according to the 2012 G-Finder database.  At $94 million the GHIF is a bit light for a life sciences investment fund.  Current early- to mid-stage life science investment funds are in the $200 to 400 million range (e.g., the recent announcements for Wellington Partners and Frazier) and typically invest at least $12 million into four start-ups annually (Timmerman Xconomy).  For the GHIF, because a Phase III trial costs about $20 million (based on the mean cost per patient of $10,000 and an average of 2000 patients (CISCRP Facts), a single investment in an organization with a late-stage drug development program may be $10-20 million.  I’m guessing the GHIF will be able to handle 2-3 investments of this size over two years, a more modest rate of investment than that of VC firms.  Its also not clear if the GHIF investment is intended to cover the other costs associated with getting a product to market such as the cost of regulatory filings and tooling up manufacturing and distribution.  Theoretically some or all of these costs will be borne by a commercial partner who may also pay upfronts which may or may not be considered returns on investment.  As an example of the type of project it will invest in, the GHIF cited the meningitis vaccine, MenAfriVac.  This product was brought to market by the Meningitis Vaccine Project, a PDP, at a cost of $50 million and a price of $0.05 per dose with the Serum Institute of India as a commercial partner (my post, “Watch Out Big Pharma?”, and Meningitis Vaccine Project).

It is also not clear how investment decisions will be made.  I see several key parameters that need to be weighed:  the potential impact the product will have on global health, the scientific/technical risk, the likelihood of regulatory approval (if sought), the availability of alternatives on the market or in development, and the involvement of a partner that will actually put the product into commerce and use.  The GHIF did note one criterion to be considered, those products with public health applications in both developed and emerging markets.  In contrast, one of the more successful VC firms and locally-based Third Rock Ventures uses three criteria according to a recent interview in Nature and a Fierce Biotech story:  “Projects must be no more than three years away from clinical trials; companies must be able to replicate their key findings without spikes in toxicity; and Third Rock doesn’t pull the trigger unless it’s sure Big Pharma isn’t going to step in and compete.”  Of course, Third Rock funds early stage companies and is looking for a higher return on investment like 5x in 5 years.

I also wondered if GHIF will be bringing more than money to the party.  Successful investors are involved in their investments (some times too much).  Will GHIF bring in experts in clinical design, take seats on boards, promote specific commercial partners, advise on where to run tests, seek approvals, launch products?  More importantly, will it be able make tough decisions on when to reinvest (a typical result) or when to write-off an investment (a distinct possibility)?  Looking at the management structure of the GHIF (GHIF Leadership) and the added complication of working through a fund manager, I’m concerned that its size and complexity will prevent rapid and effective decision-making.  But then, I’m glad the GHIF is up and running and look forward to the lessons to be learned through its efforts.

 

* Investors: Bill & Melinda Gates Foundation, Grand Challenges Canada, KfW Bankengruppe, the Children’s Investment Fund Foundation, the Swedish International Development Cooperation Agency (Sida), the International Finance Corporation, Glaxosmithkline, Merck, The Pfizer Foundation, Storebrand and JP Morgan Chase’s Social Finance

 

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