How do you finance medicine for people in poor, undeveloped nations when it can cost up to $1 billion to create a drug?
With the launch of the $94 million Global Health Investment Fund (GHIF) in late September, the Gates Foundation is pilot testing the viability of leveraging philanthropy to catalyze private sector capital to help finance expensive later-stage testing and approval of medical products for the developing world.
The fund, whose pipeline of deals will be supplied by Gates, will help finance diagnostics, vaccines and drugs that address HIV, tuberculosis and malaria, as well as other neglected infectious diseases, including cholera, dengue, polio and yellow fever.
Managed by Lion's Head Global Partners, a London-based merchant bank, the fund is aiming for a five- to seven-percent annual return for the 10-year life of the fund. Gates and another partner will provide first-loss capital up to 20 percent and share additional losses with accredited investors totaling 60 percent of the fund's capital. If there's an equity position in a drug that ends up being a blockbuster in the developed world, investors and Lion's Head will share the profits using the conventional 80/20 split, and the fund manager's "carry" will be invested in the Global Health Investment Corporation, a new Delaware nonprofit established to support global health research and development.
Fees for Lion's Head are 80 basis points per year plus a performance fee after a 2-percent hurdle rate of 2.4 percent of returns if the fund earns its target during the fund's 10-year life, or 1.6 percent of returns if it achieves those returns after the 10 years.
Anchor support for the fund came from Grand Challenges Canada, the German Ministry of Cooperation and Economic Development and the hedge-fund backed Children's Investment Fund Foundation. Other initial investors include the International Finance Corporation, Storebrand, the Pfizer Foundation, pharmaceutical firms GlaxoSmithCline and Merck, JP Morgan Chase and individuals and family offices. The minimum investment is $250,000.
In effect, the GHIF's success hinges on consumers in the developed world subsidizing the world's poor in the developing world.
"In cases where there are significant developed world markets [where HIV and tuberculosis drug are in demand, for example], the GHIF will also share in the upside from successfully commercialized products," says Glenn Rockman, vice president of social finance at JP Morgan Chase, which structured the deal. "Other areas and interventions, such as dengue fever and point-of-care diagnostic technology, also offer very promising dual-market applications that would allow the GHIF to profit from developed world sales while still making a major impact in low-income countries."
This is not the first time that Gates has tried to leverage philanthropic support for global health with private capital. Using its charitable budget, it has made foundation mission-specific program-related investments, or PRIs, in individual companies. Likewise, its guarantee for the GHIF, if called upon, will also be a program-related investment (PRI), which is why the GHIF, in addition to a conventional investment committee, has a charitability committee that will ensure that its activities comply with Gates' charitable requirements.
Gates has also been a key player in supporting another pivotal innovation in global health: the roughly 16 product development partnerships, or PDPs, that manage over 40 percent of global grant funding for neglected disease research and development.
These not-for-profit organizations, like the Medicines for Malaria Venture and the Meningitis Vaccine Project, partner with traditional R&D players in the public and private sectors, coordinating activities and funding among them, but working on a portfolio basis. Because projects can be ditched and funding not entirely lost, PDPs are extremely cost-effective. According to the Milken Institute, the 12 products they've developed in the last 10 years cost about $4 billion, or about one-third what they otherwise would have cost.
Although the GHIF will also work directly with researchers, biotech start-ups and pharmaceutical firms, PDPs will be important partners. GHIF will make mezzanine loans that partners will have to pay back when certain milestones are achieved.
But while GHIF is funding the more expensive later-stage R&D, Lion's Head partner Christopher Egerton-Warburton has said that he hopes to invest about $10 million per project.
This means that GHIF will be working "surgically," as one insider explains it, by doing things like providing gap financing for, say, a phase three trial that already has $290 million in grant funding (possibly from Gates).
There is a lot of pressure to succeed: If the GHIF does not perform well financially, it will have a chilling effect on the broader market to raise subsequent capital. But vaccines, even in late state trials, carry venture capital risks because they require enormous populations and you have to prove people did not get infected taking the vaccine, according to the insider, who requested anonymity. With drugs, you simply have to prove someone was cured.