This week's press release from Pfizer Inc. announcing its purchase of Anacor Pharmaceuticals Inc. emphasized the Palo Alto biotech company's forthcoming drug for eczema and noted its promising treatment for toenail fungus. There was no mention of Anacor's work on tuberculosis, river blindness, or lymphatic filariasis, commonly known as elephantiasis.
But Anacor's research into those diseases, which primarily affect poor people in poor countries, in 2013 attracted a $5 million investment from the Bill & Melinda Gates Foundation at a crucial time in the company's development. The world's largest foundation also provided Anacor with a total of $18.3 million in contracts to pursue the research in neglected diseases.
ImpactAlpha tells the story of the Gates Foundation's investment in Anacor as part of an in-depth report on the foundation's use of “program-related investments,” that was published this week in the Stanford Social Innovation Review. The article, “Returns on Investment: How a broad bet on a biotech company paid off in promising drugs for neglected diseases,” highlights the risks – and potential social-impact rewards – of investing in broad technology platforms, rather than only disease-specific research.
In a public filing this week, the foundation disclosed that it reaped a return of $86.7 million, or a 17-fold return, when it sold nearly its entire stake in Anacor last year. Because the foundation sold all but 1 percent of its holding in Anacor last November, it is not significantly financially affected by Pfizer's agreement to buy the company.
The Gates Foundation's research agreement with Anacor runs through April 2017 and is not affected by the sale. “We look forward to working with the Gates Foundation further through Anacor’s agreement,” a Pfizer spokeswoman told Bloomberg.
The equity investment, unusual for philanthropic foundations, helped overcome skepticism within Anacor about the 2013 research agreement, as we detail in the article. The deal obligated Anacor to research that was unlikely to yield profitable products, because the diseases affected primarily countries unable to pay commercial prices for drug discoveries.
“I thought it was important for the Gates Foundation to make an investment. If we didn’t have the equity investment, I didn’t think the company would get over the threshold and do the deal,” says venture capitalist Paul Klingenstein, a founder and managing director at Aberdare Ventures, who was on Anacor’s board at the time of the foundation’s investment. “We were very slow to embrace any of the non-commercial disease targets, without understanding the benefits to Anacor.”
In the end, says Klingenstein, “The company determined that the transaction was in the best interests of Anacor and its shareholders and we did it.”
The Gates Foundation’s investment came two-and-a-half years after Anacor’s initial public offering (IPO) of stock in 2011. The price of the company’s shares hadn’t risen much since the IPO. Like many development-stage biotechnology companies, Anacor needed cash to support its research and clinical development. It was still more than a year away from the US Food and Drug Administration’s approval of its first product, Kerydin, a toenail antifungal treatment. The company was also involved in an intellectual property dispute with Valeant Pharmaceuticals.
Having the Gates Foundation on board as a shareholder would also send a positive signal to the public markets about the value of Anacor’s technology. Equity would provide a fresh source of financing to the company, and gaining a $5 million commitment from a single investor was an attractive proposition.
Anacor’s share price, which had been drifting downward, rose modestly on the news of the Gates Foundation’s investment. But the subsequent run-up in Anacor’s share price had little to do with the company’s work in global health or with Anacor’s partnership with the foundation. Anacor's shares soared as Keryadin came to market, crisaborole showed promised in clinical trials and the company received a favorable ruling in its arbitration with Valeant.
“The Gates Foundation had stumbled onto a significant financial return,” we write in the SSIR article. In the two-and-a-half years the foundation held its stake, Anacor’s market value soared from $221 million to roughly $4.5 billion.
With the charitable goals of the investment ensured, the Gates Foundation was free to sell the bulk of its equity stake, with the exception of a small position that secures access to the firm’s library of boron compounds through 2018.
Anacor has identified molecules for the potential treatment of river blindness and elephantiasis. The company also identified promising antibacterial compounds for the treatment of tuberculosis. Work continues on cryptosporidiosis.
Traditional venture investors typically face criticism when they lose money on a deal. Philanthropic and impact investors can face criticism when they make money. In taking an equity stake in Anacor in addition to providing funding through the contract, the Gates Foundation took a broad risk as part of a high-level partnership to deploy Anacor’s capabilities on otherwise neglected diseases. And with risk comes the possibility of reward.
“The fact that the foundation’s equity investment in Anacor has generated some positive financial returns that we’ve then been able to turn around and use to try to eradicate polio in Pakistan, to me is icing on the cake,” says Julie Sunderland, the former director of the Gates Foundation’s PRI team.
“But it’s not why we do it,” says Sunderland. “We do it because we want to partner with great entrepreneurs and great companies and great scientists and develop low-cost products for the poor. The focus on achieving results for our beneficiaries is clear in every investment we do.”
Making Markets Work for the Poor is a collaboration between the Bill & Melinda Gates Foundation, Paul Brest of Stanford Law School, and ImpactAlpha Inc. The Gates Foundation sponsored the project to share its experiences in making program-related investments (PRIs) with others using investment tools as part of their social-impact strategies. The ImpactAlpha team interviewed dozens of stakeholders inside and outside the foundation. The Gates Foundation PRI team provided extensive access to investment memos and other documents, selected the investments for inclusion, and reviewed articles before publication.