Important notice

The material provided herein is for informational purposes only and is directed only at professional investors as defined by the Markets in Financial Instruments Directive (MIFID). It does not constitute an offer to sell or a solicitation of an offer to buy any interests in the funds discussed or any related vehicles. The investor should make an independent assessment of the risks associated with making investments in fund units and to obtain appropriate professional advice where necessary.

Any such offering will only occur in accordance with the terms and conditions set forth in the offering memorandum pertaining to such fund if and when offered. The latest version of the memorandum is available on request from
[email protected].


My country/region:


Click here to see our full terms and conditions and cookie policy.


Access to medicine, access to markets… A tale of two crises

August 2007 marked the start of the global credit crunch and, over two and a half years on, the impact of the financial crisis is still being felt. Taxpayers, especially in the US and the UK, have been saddled with debt for years to come. In fiscal 2009, the US deficit hit a record $1.4 trillion due to the government’s huge borrowing needs in the wake of the crisis. Official figures from the UK show that government support for the banking system reached a staggering £850 billion, including £200 billion of liquidity and £250 billion in guarantees, on top of the £76 billion to save RBS and Lloyds.

At its nadir, the crisis saw the Dow slip below 7000 and the FTSE below 4000. We could cite numerous other record statistics that make for sobering reading for investors as they look back over this period of market turbulence, but mercifully the worst may now be over.

As investors, though, we would do well to be mindful of another global crisis that has been running for decades, with only gradual and patchy progress being made in containing it. The crisis in question is that of the global health burden. By comparison, the banking crisis and the credit crunch feel like short lived shocks, from which we will surely recover, as international action and vast injections of cash help to repair the damage done.

The financial impacts of this other global crisis relating to human health, and the statistics associated with it, are equally and indeed even more sobering, especially when the human cost is factored in. Like its financial counterpart, the global health crisis also sucks in vast amounts of money and requires the mobilisation of politicians and industry leaders on an international scale. But if the crisis can be fixed, not only will human beings benefit, companies and investors too will reap the rewards from having engaged with this issue. There will be growing commercial incentives and opportunities for companies and investors in extending access to medicine.

In the past, the task of eliminating diseases was almost entirely the responsibility of governments and inter-governmental bodies. Charities and NGOs, backed by film and pop stars, also lent their support. In the West, governments and UN agencies accepted the need to pool their efforts with those of private donors.  More recently, however, innovative new ways of raising and spending money are now materialising.

Multi-lateral agencies are finding new ways to raise money, one such being the GAVI alliance, a public-private partnership that channels money to vaccines for neglected diseases in the developing world. It has raised more than $1 billion by issuing bonds backed by sovereign commitments to give aid money. By making large sums available in the shorter term, rather than promising to drip feed investment over a long period of time, the initiative has helped to create the economies of scale that make widespread vaccination possible, and in so doing has provided an incentive for pharmaceutical companies to get involved. Another initiative, The Global Fund, also has new ideas; in 2010 it plan to launch an exchange-traded fund (ETF), the basis for which will be an index of firms investing in health and development. The ETF will be aimed at mainstream and ‘Responsible Investors’. The emergence of these new funding models will only enhance company and investor involvement in access to medicines.

The turnaround in the way that healthcare funding is raised is very evident and has implications for business too. In 1990 more than two-thirds of the $5.6 billion spent on global health assistance came from governments (see chart above – DAH = development assistance on aid, figures in $ billion). By 2007, when total funding for health was estimated at almost $22 billion, government spending still accounted for a significant proportion of the overall spend, but more and more donations and investments stem from non-traditional sources. In 2007, private money from corporations and charities such as the Gates Foundation eclipsed the total from all sources back in 1990. Such charities are stepping up the pressure on companies to do more and ‘Big Pharma’, which traditionally has been criticised for inaction on the issue of access to medicine, is now being heavily scrutinised in this area.

The “Angle” for Investors

The future of the global pharma sector will be shaped to a considerable degree by a single phenomenon: the accelerating expiration of the patent protection enjoyed by various commercially successful drugs. This trend has already begun, with expiries wiping nearly four percentage points off of the industry’s sales growth rate from 2005-2008. While the recession provided a temporary stock market boost for the sector, as its perceived defensive characteristics looked relatively attractive, this short-term buoyancy, only served to mask the much more powerful underlying negative impact of expiring patents. Between now and 2014, the expiry-driven decline in growth rates will reach a tipping point; negative  growth rates may well materialize by 2012.

In short, from a macro perspective, the pharma sector is rapidly becoming a slow/zero/negative growth sector. If pharma companies wish to avoid a continuation – and, indeed, acceleration – of the stock market’s 2005-2008 downwards revaluation of their worth, they must take action – now.

Enter the access to medicine challenge. Two things appear clear:

  1. Emerging markets generally have much better growth prospects than OECD markets. AstraZeneca, for example, is currently achieving 10% annual growth rates in emerging markets, compared to only 2% in developed ones; and
  2. One of the most critical prerequisites for tackling the emerging markets effectively will be “solving” the problem of access to affordable medicines.

At IPCM, we have been involved with the entire access to medicines problematic for quite some time. (Indeed, several of us were directly involved in conducting the initial research, analysis, and company rankings for the Access to Medicines Foundation’s initial Index in 2008, when we were at Innovest.). For us, the investment thesis here is quite straightforward: the ATM challenge is an excruciatingly difficult test of both management quality and execution capabilities. Familiar business models need to be radically revised, if not overturned altogether. As a general observation, pharmaceutical companies with a superior capability of meeting those challenges – and creating opportunities out of them – are quite likely to be better managed overall, and therefore superior investment candidates.

Indeed, the company that came top of the access to medicine index referred to above was GSK, and it has been highly innovative in this field and committed to good governance. Such initiatives point to a well run firm. GSK has developed an ‘Open Innovation’ agenda, and now thinks differently about R&D, re-investing 20% of profits into developing countries. In another break from the ranks, last year it announced the reduction of medicines prices for 52 of the world’s poorest countries.

As the CEO of GSK put it, “…we are changing GSK, making the company more responsive, more flexible, more open. A company actively searching for new ways of working, new partners. A company willing to take risks, committed to doing all it can to address neglected tropical diseases. A company driven by the values of integrity, transparency and respect for people. A company constantly earning the trust of society, not just by meeting society’s expectations, but exceeding them. Because if you don’t have the trust of the societies you serve, you don’t have a long term sustainable business model.”

The Major Health Issues

To understand the scale of the problem, it is useful to view it within the context of the Millennium Development Goals. In September 2000, 189 heads of state adopted the UN Millennium Declaration and endorsed a framework for development. The plan was for countries and development partners to work together to increase access to the resources needed to reduce poverty and hunger, and tackle ill-health, gender inequality, lack of education, lack of access to clean water and environmental degradation.

They established eight Millennium Development Goals (MDGs), set targets for 2015, and identified a number of indicators for monitoring progress, several of which relate directly to health. All goals and their targets are measured in terms of progress since 1990. Reporting on progress towards the MDGs has underscored the importance of working with countries to generate more reliable and timely data. Currently available data show that while some countries have made impressive gains in achieving health-related targets, others are falling behind. Often the countries making the least progress are those affected by high levels of HIV/AIDS, economic hardship, conflict, or all three.

The Key health goals were as follows:

Halve the proportion of people who suffer from hunger (MDG 1, target 1C)

Globally, the proportion of children under five years of age suffering from under-nutrition, according to WHO Child Growth Standards, declined from 27% in 1990 to 20% in 2005. But, the progress is uneven, and an estimated 112 million children are underweight.

Reduce child mortality by two thirds (MDG 4, target 4 A)

Globally, the number of children who die before their fifth birthday has been reduced by 27% from 12.5 million estimated in 1990 to 9 million in 2007. This reduction is due to a combination of interventions, including the use of insecticide-treated mosquito nets for malaria, oral rehydration therapy for diarrhoea, increased access to vaccines for a number of infectious diseases and improved water and sanitation. But pneumonia and diarrhoea continue to kill 3.8 million children aged under five each year, although both conditions are preventable and treatable.

Improve maternal health (MDG 5)

The global maternal mortality ratio of 400 maternal deaths per 100,000 live births in 2005 has barely changed since 1990. Every year an estimated 536,000 women die in pregnancy or childbirth. Most of these deaths occur in sub-Saharan Africa where the maternal mortality ratio is 900 per 100,000 births and where there has been no measurable improvement since 1990. A woman in Africa may face a 1-in-26 lifetime risk of death during pregnancy and childbirth, compared with only 1 in 7,300 in the developed regions. There are, however, signs of progress in some countries in Asia and Latin America and the Caribbean.

Combat HIV/AIDS, malaria and other diseases (MDG 6)

HIV/AIDS: The percentage of adults living with HIV worldwide has remained stable since 2000 but there were an estimated 2.7 million new infections during 2007. Moreover, deaths are increasing in parts of Africa, particularly eastern and southern Africa. The use of antiretroviral therapy has increased; in 2007, about 1 million more people living with HIV received the treatment. That means one third of the estimated 9.7 million people in developing countries who need the treatment were receiving it.

Tuberculosis: The MDG target for reducing the incidence of tuberculosis was met globally in 2004. Since then, incidence has continued to fall slowly. Thanks to early detection of new cases and effective treatment using the WHO-recommended DOTS treatment strategy, treatment success rates have been consistently improving, with rates rising from 79% in 1990 to 85% in 2006. Multi-drug resistant tuberculosis is a challenge in countries, such as those of the former Soviet Union, while the lethal combination of HIV and tuberculosis is an issue particularly for sub-Saharan African countries.

Malaria: Efforts to control malaria are beginning to pay off with significant increases in the proportion of children sleeping under insecticide-treated mosquito nets. Although it is still too early to register the global impact, 27 countries – including five in Africa – have reported a reduction of up to 50% in malaria cases between 1990 and 2006. In 2006, the number of cases was estimated to be 250 million globally.

Other diseases: Progress has been made in treating neglected tropical diseases that affect some 1.2 billion people. For example, only 9585 cases of dracunculiasis (guinea-worm disease) were reported in the five countries where the disease is endemic, compared with an estimated 3.5 million reported in 20 such countries in 1985.

Halve the proportion of people without sustainable access to safe drinking water and basic sanitation (MDG 7)

The number of people with access to safe drinking water rose from an estimated 4.1 billion in 1990 to 5.7 billion in 2006. But 900 million people still had to rely on water from what are known as unimproved sources, for example surface water or an unprotected dug well. Since 1990, an estimated 1.1 billion people in developing regions have gained access to improved sanitation. In 1990, just under 3 billion people had access to sanitation. Their number rose to more than 4 billion by 2006. Yet, in 2006 some 2.5 billion did not have access to improved sanitation and 1.2 billion had to practise open defecation.

In cooperation with pharmaceutical companies, provide access to affordable essential medicines in developing countries (MDG 8, target 8E)

Although nearly all developing countries publish an essential medicines list, the availability of medicines at public health facilities is often poor. Surveys in about 30 developing countries show that availability of selected medicines at health facilities was only 35% in the public sector and 63% in the private sector. Lack of medicines in the public sector often means patients have no choice but to purchase them privately or, worse, do without treatment altogether.

The Financial Burden

Investors have a vested interest in the long-term health of society. Improving access to medicines in emerging markets creates healthier workers, savers and consumers to the benefit of the global economy. The implied financial costs of poor health and lack of access to medicines can be estimated, and data are available that reveal the extent to which a country’s economy may be constrained and adversely affected, both in human health terms and financial prosperity. Global Burden of Disease analysis provides a comprehensive and comparable assessment of mortality and loss of health due to diseases, injuries and risk factors for all regions of the world. The overall burden of disease is assessed using the disability-adjusted life year (DALY) model, a time-based measure that combines years of life lost due to premature mortality and years of life lost due to time lived in states of less than full health.

According to the World Health Organisation, one DALY can be thought of as one lost year of "healthy" life. The sum of these DALYs across the population, or the burden of disease, can be thought of as a measurement of the gap between current health status and an ideal health situation where the entire population lives to an advanced age, free of disease and disability. The DALY metric is used to provide a single number to capture all of the health costs caused by a disease (or averted by an aid program). One DALY could represent one year of life lost (due to early death), 1.67 years spent with blindness, 5.24 significant malaria episodes, 41.67 years spent with intestinal obstruction due to a parasite. The benchmark country against which other countries can be compared is Japan, since that is the country with the longest life expectancy levels. 

Quite apart from the obvious humanitarian implications, these statistics also have important implications for investors. On the downside, escalating health costs and their potential to generate social unrest and conflict create an increasingly important – but largely overlooked – additional dimension of sovereign risk. Countries struggling to combat public health issues with inadequate budgets hardly make for the most stable and attractive investment environments.

On the upside, companies capable of generating sustained contributions to ameliorating these major health problems have the potential to generate superior returns for their investors. As always, while detailed and painstaking research is necessary to discover such companies, such efforts can create a meaningful information advantage for investors, particularly in the newly-emerging competitive environment characterized by greater information transparency and increasingly credible and well-resourced NGO’s.

New Markets for Drugs Firms

With improved health, the spending power of individuals and the prospects of economic development improve markedly. In turn, companies can find new consumers and new markets.

Take for example neglected diseases. These are currently diseases that destroy the bodies of about 1.4 billion people, and most of them live on less then $1.25 a day. In the case of a common disorder such as hookworm, it is possible to improve a person’s future wage earnings by about 43% by controlling the parasite.

The Gates Foundation has reported some interesting statistics. In Kenya, they found that de-worming could raise per capita earnings by over 30%. In India, controlling Lymphatic Filariasis could add $1.5 billion to the country’s GNP.

Many of the emerging market countries that today are attractive to investors and experiencing high growth rates, such as Brazil, China, India and Mexico, owe much of their success to years of development assistance.

There is a growing recognition in the pharmaceutical industry and in the investment community of the significant opportunities presented by developing countries. These include access to substantial markets; epidemiological trends creating new opportunities e.g. the increased prevalence of non-communicable disease; low R&D and manufacturing costs; and the opportunity to build political goodwill with emerging economic players.

Incentives for Pharmaceutical Companies

A number of new ideas are spurring growth in the area of access to medicines, giving pharmaceutical companies an opportunity for much needed growth. Recent announcements, for example by AstraZeneca, showed that growth in developed markets was 2%, while in emerging markets it rose by 10%.

One such idea is the Affordable Medicines Facility-Malaria (AMFm), to be rolled out by the Global Fund by mid-2010. In Africa and parts of Asia malaria parasites have grown resistant to older drugs like. Artemisinin, a drug made from a Chinese plant, does work but the ideal formulation (an Artemisinin Combination Therapy, or ACT, which involves other drugs too) can cost $10 a treatment, ten or more times the cost of straight artemisinin or older drugs.

The Global Fund is going to spend $216m over two years subsidising the cost of ACT to wholesale buyers who will then supply it to ten countries. By insisting that the benefits be passed down the supply chain, it intends to reduce the retail price to only 20 to 50 cents. The fund will spend another $127m on marketing, training and other support for the effort. ACT is already being produced by private firms; giving rise to the possibility of an expansion of the market that will lead to economies of scale and lower costs.

Another incentive-based approach is that of Advance Market Commitments (AMC). Since the victims of most neglected diseases have very low incomes, drugs firms cannot count on enough profitable customers to recoup their investments. The AMC mechanism offer drugs firms a large incentive by subsidising the initial purchase of new vaccines for low income communities, if the companies commit to sell those vaccines cheaply in future. GAVI has launched a $1.5 billion AMC programme to reward the first firm to find an adequate vaccine for pneumococcal disease.

What is becoming increasingly clear is that companies are recognizing a need to revise traditional business models to address access, improve performance and meet societal expectations. Those which look set to fare best are those abandoning developed country models and experimenting with newer and bolder approaches. That sounds like good medicine to us...

See all articles