Investing for good - the case for venture capital in global health
Nina Rawal, Ph.D
Global health - much has been won and much remains
The area of global health, here defined as diseases affecting low and middle income countries (LMIC), has seen some major wins over the past decades. Mortality rates for infectious diseases such as cholera have halved and polio is all but completely eradicated worldwide (1, 2). The malaria death rate in children under five has fallen by 69% since the year 2000 (3). These improvements have not only saved lives and reduced human sufferings they have also significantly contributed to strengthened economies in India and several African countries. They are the result of large scale efforts by players such as the WHO, The Global Fund to combat Malaria, TB, and HIV, and the Bill and Melinda Gates Foundation. They have all invested significant resources towards long term health improvement goals.
There are however large remaining challenges in the area of global health. Infectious diseases still cause one out of four deaths worldwide, and around five million children die every year before the age of five (4). In addition to communicable diseases such as tuberculosis and measles, and the increasing problem of antimicrobial resistance, LMIC increasingly struggle with lifestyle related diseases such as diabetes, cardiovascular disease and dementia 一 the so called double burden of disease. LMIC already account for 70% of all lifestyle related deaths worldwide and that number is expected to increase going forward (4, 5). Finding cost effective solutions for diabetes and dementia will thus be of utmost importance when thinking about global health issues ahead. The notion that low and high income countries face different disease challenges is increasingly outdated, cost effective innovations for LMIC could have large scale impact also in high income countries. Aravind Eye Care Systems which offer the best medical outcomes in the world at the lowest cost, and the Leveraged Freedom Chair, a wheelchair with superior features compared to Western competitors at half the price, are two examples of innovation with such potential (6).
'They became wealthy because they were healthy' - the importance of health for a country to move up the economic prosperity ladder
In addition to reducing human suffering and improving quality of life for the individual, good health also correlates with GDP development. Indeed, healthy people make for healthier workers, who can contribute more to society and economic growth. Experience from countries such as Japan illustrates that introduction of universal health coverage resulted in stronger financial growth 一 ‘they became wealthy because they were healthy' (7). Underlying economic growth, a willingness to spend tax income on health, and a system-wide perspective on its introduction are also important factors (8). Currently only 58 out of 195 countries offer universal health coverage, leaving around 6 bn people globally to finance their health care costs either partially or completely at their own expense (9).
For the 2.7 bn population living on less than 2.50 USD a day, that equation is virtually impossible to balance. When disease strikes people without health care insurance, poverty is a common consequence.
Looking ahead, LMIC economies are growing faster than high income countries and will soon account for 50% of the total global economy (2). Not only does it make financial sense for governments to invest in health, it also increases the attractiveness for corporations to develop product offerings tailored for this segment.
Equitable access - the mother of all global health challenges
Equitable access to health care services and products is perhaps the most complicated issue surrounding global health. Some will argue that access to basic health care must be addressed first. That challenge requires a different set of tools than outlined here. However, high quality and cost effective products, the focus of this whitepaper, offer unparalleled scalability and can also allow focusing of health care services where they are most needed.
Under current international Intellectual Property (IP) legislation, patent protected drugs and other treatment options are controlled by the company owning the IP and distribution of products is subject to their discretion. Low income persons or countries unable to afford the cost of drugs cannot access it unless the company decides to reduce the price or other stakeholders such as WHO or NGOs step in to finance the purchasing of product. This is one of the main reasons for the limited number of pharmaceutical companies focusing on global health diseases.
Countries such as India and Brazil have questioned the IP system, arguing that it disproportionately targets the world's poorest populations. These countries have developed large generics industries where the pharmaceutical is produced at a fraction of the cost of branded drugs. Indian generics companies are now global players with strong know how in reverse engineering of drugs and low cost production.
Well intended at the time of inception by providing incentive for development of new therapies, the current system is decreasingly relevant for areas such as antimicrobial resistance as well. Looking ahead, there is thus reason to believe that novel approaches will be identified. Low cost solutions that people can afford would also reduce the incentive to copy illegally.
Global health R&D is chronically underfunded, resulting in fewer available treatment options and large unmet medical needs
Pharmaceuticals remain the most scalable treatment modality but is a difficult business. The likelihood for a drug to pass from pre- clinical stage to approved product is only around 5%, and the total average cost amounts to around 1.5 bn USD (10, 11). In order to compensate for risk and cost, pharmaceutical companies enjoy premium margins on their marketed products. For the reasons outlined above, the limited ability for LMIC to pay for premium priced drugs have lead pharmaceutical companies to focus their R&D efforts on diseases mainly affecting high income countries. This results in a relative lack of innovation within the global health sector as well as lack of access to medicines available in high income countries. Less than 5% of total private R&D spending falls within the global health area (12). Issues such as macroeconomics, political risks, and lack of systematic data also contribute to global health being placed outside the spotlight of mainstream commercial R&D organizations.
The power of the venture capital model in translating science into commercial products
Meanwhile, great strides are being made in areas such as cancer and rare diseases. Breakthrough scientific discoveries such as gene therapy and immunology based technologies are being translated into cures and novel therapies for previously untreatable diseases. Rare diseases hold similarities with the global health area in that it was considered an unattractive market segment to innovate for. Few patients per disease were considered to represent a limited market opportunity. To address the low level of innovation, regulatory incentives reducing clinical trial size requirements and regulatory review time were introduced. The results have been remarkable；as an example 31 out of the 59 new drugs approved by the US Food and Drug Administration in 2018 were for rare diseases (13). Furthermore, the sub-categorization of patients into smaller, more homogenous groups, combined with the developments in precision medicine have influenced other areas of medicine to apply the same targeted drug development approach - an example of how innovating for a certain population can also have significant impact on other groups.
Venture capital (VC) and other active ownership financing models have played an essential role in this successful era by funding unproven high risk technologies and demonstrating their clinical benefits in patients. VC is the combination of capital and know how around building and accelerating science based companies to market. This is usually done through so called active ownership where the VC investor will support the company on clinical and commercial strategy, business development, financing, building the right networks, identifying the right board of directors and advisors - all with the purpose of speeding up the development process and accelerating revenue generation.
The typical life science VC fund will invest in a company with a 5-8 year investment horizon. After that, they will look to exit the company through an industrial trade sale to e.g. big pharma, or through listing of the company's shares on a stock exchange. The exit event is an integral part of the VC process as it allows the investor to in turn return capital to its investors, or in the case of evergreen funds, to invest in new companies. The role of big pharma and large medical device companies in the ecosystem is thus essential, acting as buyers of VC backed startup companies.
'The startup-big pharma partnership model has significantly increased the innovation rate in the pharmaceutical industry as a whole1
Over the past decades, there has been extensive outsourcing of the innovation process from big pharma and large medical device companies to small, often VC funded, startups. This fundamental shift, most clearly seen in the pharma industry - of the new drugs approved by the US Food and Drug Administration since 2013, 2/3 were initially developed by smaller biopharma companies (14)- has resulted in big pharma becoming large buyers of externally sourced innovation where development and other risks are shared between the parties over time in sophisticated models. The VC startup-big pharma partnership model has significantly increased the innovation rate in the pharmaceutical industry as a whole. The acquisition or in-licensing of innovative products is thus equally important to big pharma in their quest to stay innovative and command premium pricing.
In addition to mastering the risk component through extensive due diligence into each company, and the active ownership model, the VC model is mainly built around products that can command premium pricing. In the case of rare diseases, VC investors have identified an attractive niche where clinical trial size requirements tend to be smaller given the relative lack of patients, combined with the opportunity to apply health economic argumentation to command premium pricing.
It also focuses on products rather than services, mainly due to the easier scalability of products across geographies, countries, and cultures.
Of course the VC model is not perfect；the high risk high reward model has yielded mixed results over the past decades. Also, it is sometimes associated with greed and non-inclusive cultures. This paper addresses the merits of the VC methodology and toolbox, which in no way rely on the above mentioned types of organizational culture.
The opportunity for venture capital in global health
Given its success in challenging areas such as rare disease and oncology 一 areas until recently considered unsolvable, it begs the question what the VC model can do to accelerate innovation and address the market failure in global health?
Save lives and reduce human suffering through the development of new products and solutions
Scale innovative products across countries and populations. Large scale health gains could be achieved across LMIC with limited ability to individually fund innovation
The case for impact investing has been made and global health is a great example of where financial and social returns can coincide. Innovative products in this space could save lives/reduce human suffering as well contribute to economic development in LMIC
Opportunity for VC investors to access innovation in a less crowded space, at reasonable valuations. Low cost options for in vitro fertilization or diabetes care designed for LMIC could also have attractive market potential in high income countries
A way to direct larger share of VC capital to LMIC. Although many innovations might initially come from USA/Europe, some of the most innovative solutions should be expected from the local countries themselves, which are typically not on the map of VC investors or other stakeholders in the innovation ecosystem. Inflow of capital could thus contribute to the strengthening of local innovation environments.
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