Money and medicine are inextricably linked. In the U.S., for example, health expenditures in 2010 approached $2.6 trillion, according to the Centers for Medicare & Medicaid Services. Likewise, the financing of “red,” or medicine-related, biotechnology research is an expensive proposition the world over. But in Africa, attracting investment for red biotech is especially challenging.
Communicable diseases plague sub-Saharan Africa more than any other part of the world. Fortunately, the latest G-FINDER survey reported that more than $3 billion is now being spent globally each year on R&D for new products aimed at tackling diseases endemic to the continent, including HIV/AIDS and malaria. Most of this money, however, continues to come from donors in the developed world that focus more on funding innovate therapeutics wherever they happen to be developed, rather than on creating a life sciences industry in Africa.
The lack of local innovation is not for lack of good ideas. “Most of the innovation is stagnating in Africa,” says Solomon Nwaka, acting director of the African Network for Drugs and Diagnostics Innovation, an Addis Ababa, Ethiopia-based drug development initiative. “There is no mechanism to transition them into concrete projects.”
The financing gap remains one of the largest roadblocks. “The funding environment is so abysmal here that you’re left with very few options,” says Nuno Pires, chief executive of business development at Altis Biologics, a tissue-engineering company in Pretoria, South Africa, that has relied on government technology funds for its limited financial support. Some African companies hoped to overcome the funding hurdle with venture capital (VC).
Pressure on the Pioneer
Bioventures emerged as Africa’s first VC firm dedicated to life sciences innovation. Established in 2001, the Cape Town–based fund had a total of 80 million rand ($12 million) that it used to support eight homegrown biotechnology startups in South Africa.
Some of Bioventures’s investments flopped, as might be expected, but others paid for themselves with notable returns after large drugmakers bought up the companies. In 2008, for instance, Abraxis BioScience, a Los Angeles company now owned by New Jersey’s Celgene, snapped up two Bioventures-backed companies—Port Elizabeth–based Shimoda Biotech and its subsidiary PlatCo Technologies—for $15 million upfront plus potential milestone payments. Still, the fund did not sustain itself or attract more investment, and it performed worse than the Johannesburg Stock Exchange, which often grew by up to 20 percent annually over the past decade.
One central problem with Bioventures came down to the size of the fund. “The big issue was that we just didn’t have an adequate amount of capital,” says Bioventures founder Heather Sherwin, now an investment manager for the Investment Fund for Health in Africa, a Dutch private-equity firm focused on health delivery rather than biotech. “We had to be globally competitive on a fraction of the money that everyone else had.”
Another failed African life science VC firm called Bridgeworks Africa, launched in 2002 in Nairobi, Kenya, had even less money—just $2 million. In the case of both Bioventures and Bridgeworks, the funds did achieve moderate success at evaluating and identifying promising biotechnologies. But both funds over-reached with their limited resources, spreading what little money they had too thinly across multiple investments. Ultimately, that meant both funds failed to fully capitalize.
Bioventures “was not a huge success, but it was not a failure either,” says Hassan Masum, a policy and technology strategist in Toronto who has studied the fund. Given the problems experienced by Bioventures, Masum advocates sidestepping the traditional profit-driven VC model and looking to “social” venture capitalists who invest for financial and societal gains. For example, investors in the Acumen Fund—headquartered in New York, with regional offices in India, Pakistan, Kenya and Ghana—typically wait longer than other VCs to recoup their financial investment, and they accept health benefits as part of their overall “returns.” “The focus of our investment strategy is totally driven by our social mandate,” says Yasmina Zaidman, Acumen’s director of communications and strategic partnerships. “Our commitment is to identify and scale innovative business models that are showing a different way to address issues of poverty.”
Risk Begets Success
In the United States, early-stage life science funds typically manage at least $100 million. That might sound like an impossible sum of capital for a developing-world VC, but BioVeda China, based in Shanghai, has raised more than $170 million since its inception in 2005.
Of course, the investment climate in Africa isn’t the same as in Asia. In Africa, “you tend to raise in rand what you need in dollars,” says Greg Starke, chief executive officer of DISA Vascular, a Bioventures-backed medical device company in Cape Town. “Then, you adjust your business plan to the amount of money that’s available, which is the most terrible habit, and we’ve done it more than once. You fall on your face every time with that approach.”
Starke notes that the lack of capital caused his and other startups to quickly become self-sustaining through sales. Unfortunately, this results in companies being judged based on their revenue, rather than on their underlying intellectual property. “In some sense, the minute you start making sales you actually devalue your company,” Starke says. “It often has a limiting effect on your ability to raise further capital.” That problem also speaks to the types of investors in Africa, who will put money into information technology or healthcare delivery but don’t usually appreciate what it takes to develop drugs or medical devices.
The solution could lie in educating investors about Africa’s potential for a life sciences industry. That industry, however, isn’t likely to take off until investor mindsets change, says Paul O’Riordan, cofounder and chief executive officer of Synexa Life Sciences, a biotech in Cape Town. “There’s no way you’re going to have a thriving biotech sector in South Africa or any other part of Africa,” he says, “unless you have the kind of private, risk-taking, smart venture capital funds that you have in other parts of the world.”
Enhanced with a new guidebook and region-specific ratings, the 2016 Scorecard ventures deeper than ever to track down the latest in biotech innovation