New USAID report provides recommendations such as blended finance instruments and improved technical assistance to address the current lack of private investment in global health innovation
|Jordan Kassalow, Founder, VisionSpring and EYElliance, speaks during the panel|
2030 is fast approaching, and with it, the much anticipated target date for completion of the 17 Sustainable Development Goals (SDGs). By current estimates, there is an annual investment gap as high as $US134 billion for the health SDGs in low- and middle-income countries (LMICs). The USAID Center for Innovation and Impact’s recent report, Unleashing Private Capital for Global Health Innovation, hypothesizes that substantially scaling up current public health interventions is likely not adequate to fill this gap.
On 17 June, GBCHealth attended a joint UBS Optimus Foundation and USAID event in New York featuring a discussion of the Unleashing Private Capital report and its proposed solutions. In his technical summary of the report, USAID’s Omer Imtiazuddin used the example of malaria bed nets to illustrate why it’s important to focus on supporting innovative companies rather than simply providing funding for existing solutions. Companies developing long-lasting insecticide-treated bed nets (LLINs) such as Sumitomo Chemical and Vestergaard received support through investment, market development, improved data analysis and distribution, and technology transfers and joint ventures with local manufacturers. This support led to much greater sustainable malaria control than would have been achieved had the same funds been invested in earlier technology.
The event featured a panel of leading global health and private sector engagement experts, who explored challenges and opportunities for private sector investments in public health initiatives. By proposing solutions such as shifting the risk profile of global health investments and reducing information asymmetries, USAID’s recommendations aim to solve the current inefficiencies in global health financing to ensure innovative companies and private investors work together to catalyze and scale innovation for the greatest possible impact.
Mitigating investment risk for global health innovation in emerging markets
The report begins by outlining possible causes for the current lack of private investment in innovative health solutions, one of which is the potential mismatch in risk-reward profiles. Typically, investors have high perceived risk in certain health investments due to factors such as unfamiliarity with healthcare regulations and general lack of specific healthcare knowledge relating to certain aspects of potential investments and their ecosystems.
Additionally, investing in interventions for emerging markets, by nature of weak intellectual property protection, nascent regulatory bodies, and limited physical infrastructure, can carry increased transaction costs and/or greater risk of failure. Therefore, although there is investor interest in healthcare, higher perceived risk is a prominent factor in explaining why global health investments trail behind impact investments in other areas like agriculture.
The report identifies that innovators (USAID’s term for innovative companies and entrepreneurs), even those that create ideas with significant potential, often lack the technical and industry expertise required to effectively scale up and tailor these innovations to specific environments, which results in failure to achieve market entry in the communities where these innovations can make a difference. The report highlights a lack of “investable innovators” due to this knowledge gap and related flawed business models.
Moreover, small, innovative start-up companies often lack access to the specific types of capital that are required at every stage of innovation, especially in the so-called “missing middle,” the stage when a firm is between the early idea stage and full scale-up, two periods which tend to attract relatively greater amounts of investment. These issues, and others affecting both innovators and investors, hinder the development of innovations that could reduce or even eliminate many public health issues.
Blended finance and healthcare-specific technical support present opportunities to de-risk and promote investment
The report then presents a number of approaches to solve the aforementioned problems and drive private capital investments into healthcare innovation, one of the most crucial being various means of “financial de-risking” for investors looking to contribute to global health innovation. One such strategy is blended finance, the strategic use of developmental funds to soften the typically higher risk of a social investment, effectively shifting the risk-adjusted return to one that better aligns with investor expectations, which is detailed further in a precursor report from USAID.
Examples of blended finance instruments include guarantees that a portion of the initial investments will be returned in the case of downside, and the use of first-loss capital, wherein the first investor accepts the initial losses of an investment to attract future investors.
Other innovative finance mechanisms also hold promise, such as development impact bonds (DIBs), which are performance-based investment instruments that create a contract between private investors and governments who share a common goal.
The report also calls for investor education via a “healthcare expert advisor panel” that could complement innovative finance interventions with the goal of informing investors of healthcare-specific risk and strategy, ultimately improving their ability to evaluate investment opportunities.
The report groups all these recommendations into what it calls “A blended finance and global health investor support facility” which would provide a platform for the facilitation of blended finance instruments, supplemented by a network of advisors to provide education and access to sound investments in global health.
Specialized capital and advisory services could ensure innovators present an attractive investment
The report recommends strategies to help innovative companies translate a potential breakthrough innovation into a viable business model that attracts investment. Robert Schneider, Senior Director of Strategy at the Lemelson Foundation, explained that supporting inventors requires more than just financing; it requires advisory services, business development assistance, regulatory acumen, and experienced talent. Connecting promising innovators to experts could provide them with technical assistance, commercialization knowledge and valuable market access strategy in emerging markets with nascent regulatory environments. These connections will not only transfer the required business acumen, but create the strategic networks needed for local talent acquisition and other support required to successfully launch and scale-up products and services in developing markets.
Another unmet need on the side of the innovators that the report emphasizes is access to specialized and flexible finance at every step of their journey, especially during the “missing middle,” which can be ensured by the provision of grants and concessionary capital. Similarly to the previously-mentioned investor support facilities, these recommendations, could be clustered in “catalytic, early stage innovator support facilities” which would provide necessary financing and include paid industry experts to provide mentorship to innovative start-up firms.
Finally, the report acknowledges the need for market shaping initiatives from both local governments and development actors to support investors and innovators in their endeavors. Market shaping seeks to ensure a well-functioning market, often by incentivizing a balance between long-term demand and supply. To support health innovation specifically, it’s important to work with country governments and multilateral agencies to create policies and practices that would oversee tendering process for health commodities, aggregating demand and effectively negotiating a fair price. Another recommended strategy is to create transparent benchmarks to evaluate health innovations, helping innovative companies improve and investors evaluate potential deals. Market shaping strategies can therefore help to ensure the “health” of the market by increasing efficiency, reducing cost and ultimately promoting patient access to life-saving innovation.
Unlocked private sector capital results in groundbreaking innovation
The report estimates that every US$1 invested in a blended finance instrument could unlock $US4–6 of private capital for investment in global health innovation. This estimate demonstrates the synergistic impact achievable if development funds are used to catalyze the investment of private funds, such as through the investor and innovator support facilities recommended in the report.
The SDG expiration date is quickly approaching, but leveraging untapped private sector investment may just hold the answer to ensure that lifesaving healthcare interventions successfully reach all communities in need.