Scott Anderson

Weekly Roundup – 9/28/13 : A shot in the arm by lowering the risk

There are two things hurting global health care financing, and neither shows any sign of stopping. First, cuts from the U.S. and other governments to aid programs in developing countries have led to a 4.4 percent global decline in funding this year, according the Institute for Health Metrics and Evaluation.

The second is perennial in nature. Increasing R&D costs, primarily for pharmaceuticals, means the risk continues to go up for drug companies getting new drugs to clinical trials. You can up that risk even more if you’re aiming these late-stage medications for the developing world where pricing and margins are even more razor sharp.

Given the drop off in government funding, now is the time for the private sector to step up, or so we’re told. But it’s difficult to step up when, well, you’re not sure your next step will be on solid financial footing. This week, a new $94 million impact investment fund J.P. Morgan Chase & Co. is launching with the Bill & Melinda Gates Foundation looks to address both problems.

Targets of the fund will be new drugs and vaccines, emerging diagnostic tools, child-friendly formulations of existing products, and expanding manufacturing capacity. But what makes this fund different is, as a Bloomberg reporter put it, “a nice big cushion to limit the downside.”

Fund managers are aiming for returns on investment in the neighborhood of 5-10 percent. That’s pretty decent, but the ROI is made all the more enticing by the fact that Gates and the Swedish International Development Cooperation Agency, have both committed offset potential losses in the fund – as much 60 percent of the potential capital loss.

The investor group also includes International Finance Corp., GlaxoSmithKline PLC, Merck & Co., the Pfizer Foundation, and Storebrand. And London-based LHGP Asset Management will be responsible for originating, managing and exiting the fund’s portfolio investments.

“If we target people that care about the social impact and we throw in the downside protection to mitigate the risk, we think we can get the private sector excited and get capital flowing,” Glenn Rockman, vice president of social finance at J.P.Morgan, told Bloomberg TV.

On that basis, anything is possible. The $94 million is nothing to sneeze at, of course. But it’s the money that can be leveraged by decreasing the risk, thus enabling investors to finance late-stage global health technologies in low-income countries that really has the potential to take off.

We’ll be watching this closely, not only for its potential to bring health devices and pharmaceuticals to emerging markets, but also to see if other impact investing funds and backers from other sectors might follow suit.

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