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 develop- ment-stage biotechnology companies, Ana- cor needed cash to support its research and clinical development. It was still more than Returns on Investment a year away from the US Food and Drug Ad- ministration’s approval of its first product, How a broad bet on a biotech company paid off Kerydin, a toenail antifungal treatment. in promising drugs for neglected diseases. Some biotech companies, particularly young ones, are eager to take on contracts to By David bank & dennis Price do early-stage research that demonstrates their technology prowess. Anacor had dis- n its work on sleeping sickness, ma- lymphatic filariasis (commonly known as covered a number of molecules for the poten- laria, tuberculosis, and other diseases, elephantiasis), and other diseases. tial treatment of infectious diseases caused the Bill & Melinda Gates Foundation Once the research project came into focus, by bacteria, fungi, and parasites, including Inoticed that many of its global health the challenge was structuring the financing. one with potential for treating tuberculosis partners were getting promising results from The research funding provided Anacor with under a partnership with GlaxoSmithKline. their work with a small biotech company in non-dilutive capital to expand its early-stage Anacor would welcome the implicit Palo Alto, Calif. Whereas most biotech com- efforts in global health. But the company was validation that would come with a Gates panies looked for carbon molecules, Anacor also looking for a broader equity investment Foundation partnership, which would al- Pharmaceuticals Inc. had found a novel way from the Gates Foundation. Helping seal the low it to develop its technology platform to develop drugs based on boron and precise- ly target them in the human body. In a partnership with the neglected dis- ease initiative of Médecins Sans Frontières, Anacor had developed a promising drug for sleeping sickness, which affects people living in three dozen African countries. All told, a half-dozen Gates Foundation-funded part- ners, including the Medicines for Malaria Venture, the TB Alliance, and OneWorld Health, had worked with Anacor to evaluate the potential of boron-based compounds. That progress caught the attention of the Gates Foundation just as its global health team was shifting its drug-discovery strat- egy away from disease-specific initiatives. Instead, the foundation was looking for partners with the best technology platforms that could be applied broadly across a range of diseases in the hope of finding promising candidates for drug development. To gain access to the company’s unique platform for the benefit of neglected diseas- es, the Gates Foundation in 2013 reached A man is examined for tuberculosis at the Kiribati Hospital in the island nation of the Republic of Kiribati. an agreement with Anacor for a broad re- search program, ultimately funded with deal was an additional $5 million investment further while addressing the unmet needs of

m $18.3 million in contracts. The agreement in Anacor’s Nasdaq-traded common stock neglected diseases. The partnership would focused the boron platform on developing that gave the foundation a 2 percent equity also provide entry to the foundation’s net- raha G new drugs for tuberculosis, river blindness, stake in the company. It was the foundation’s work of researchers.

orrie first program-related investment (PRI) in a

L Under the proposed three-year research David Bank is editor and CEO of ImpactAlpha: Investment publicly traded company. agreement, Anacor would focus on develop- News for a Sustainable Edge. He was previously a reporter for The Wall Street Journal and a vice president at Encore.org. ing drugs for tuberculosis, river blindness, Dennis Price is a writer and project director at ImpactAlpha. Global Access and elephantiasis, diseases affecting mil- He has more than a decade of experience at the intersection of photograph by by photograph markets and development. The Gates Foundation’s investment came lions of people in the developing world.

Making Markets Work for the Poor / Summer 2016 35 Supplement to SSIR spons ored by the Bill & Melinda Gates Foundation

The contract called for the discovery of two “global access” rights to any products devel- Coincidentally, Anacor’s stock market preclinical drug candidates for macrofilari- oped for the neglected diseases. The legally performance in the same period was driven cides, an adult worm-killing drug, and one binding rights were outlined in a side-letter by progress in bringing its late-stage com- advanced lead compound for tuberculosis. agreement that required Anacor to sell the mercial drug assets to market. First, the com- The team would later add another target products produced with foundation funding pany got a favorable ruling in its arbitration disease, cryptosporidiosis, a leading cause at an affordable price in developing coun- with Valeant Pharmaceuticals and reached a of pediatric death due to diarrhea in the de- tries. Anacor would also make its expanded settlement agreement in which Valeant paid veloping world. library of boron compounds available to Anacor $142 million. Investors now believed There were opportunity costs to pur- the Gates Foundation as well as academic, Anacor had the cash to complete its devel- suing such research, however. The Gates governmental, and nonprofit researchers. opment work and bring Kerydin, its lead Foundation’s research proposal would Such rights are often easier to get through product development candidate, to market; commit Anacor to three years of research an equity investment than through grants, its stock rose more than 20 percent in the that was unlikely to yield profitable prod- says David Rossow, a program investment month following the announcement. ucts. There are market-based reasons that officer at the foundation. In July 2014, Anacor announced that it tuberculosis remains a human catastrophe “It was our team’s belief that this was a had entered into an agreement with a divi- that has infected nearly a third of the planet novel platform,” Rossow says. “Anacor also sion of Sandoz Inc., to distribute and com- and kills 1.5 million people each year. “Anyone who is familiar with TB re- search and development realizes there In the two-and-a-half years the [Gates] foundation hasn’t been very much activity in the past held its stake, Anacor’s market value soared from 40 years because it’s extremely difficult,” says Eric Easom, head of neglected diseases $221 million to roughly $4.5 billion. at Anacor. “TB drugs are not often viewed as commercial drivers for large pharmaceuti- cal companies.” Even if a successful tuber- had an interest in and passion for neglected mercialize Kerydin in the United States. culosis drug could achieve revenues mean- diseases. And because they were a relatively And last year, Anacor announced positive ingful to a biotechnology startup, he says, small biotech company, they were willing to phase 3 clinical results for another product “It may not be worth the opportunity cost work with the foundation.” candidate, crisaborole, for the treatment of for the major players in the pharmaceutical “Companies tend to massively overval- atopic dermatitis. The stock soared 65 per- industry.” ue their intellectual property,” he explains. cent the week following the announcement. Having the Gates Foundation on board “If we said, ‘We want to license your IP on The Gates Foundation had stumbled as a shareholder would also send a posi- these targets, in these countries,’ they would onto a significant financial return. tive signal to the public markets about the likely demand more than the IP is worth.” Since that time, progress has continued value of Anacor’s technology. Equity would on the neglected-disease research work. provide a fresh source of financing to the Win-Win Anacor has identified molecules for the company, and gaining a $5 million commit- Anacor’s share price, which had been drift- potential treatment of river blindness and ment from a single investor was an attrac- ing downward, rose modestly on the news of elephantiasis. The company also identified tive proposition. the Gates Foundation’s investment. But the promising antibacterial compounds for the “I thought it was important for the subsequent run-up in Anacor’s share price treatment of tuberculosis. Work continues Gates Foundation to make an investment. had little to do with the company’s work in on cryptosporidiosis. If we didn’t have the equity investment, I global health or with Anacor’s partnership With the charitable goals of the invest- didn’t think the company would get over with the foundation. ment ensured, the Gates Foundation was the threshold and do the deal,” says venture Anacor made steady progress on the free to sell the bulk of its equity stake, with capitalist Paul Klingenstein, a founder and research effort. Six months after the Gates the exception of a small position that se- managing director at Aberdare Ventures, Foundation’s investment, Anacor was design- cures access to the firm’s library of boron who was on Anacor’s board at the time of ing and adding more than a compound a week compounds through 2018. The founda- the foundation’s investment. “We were very to its boron-compound library, ultimately tion sold all but 1 percent of its holdings in slow to embrace any of the non-commercial creating 900 new molecules with drug poten- November 2015. disease targets, without understanding the tial. The company worked with technical ex- In selling, the Gates Foundation gained benefits to Anacor.” perts at the foundation to evaluate extremely $86.7 million, or approximately 17 times its In the end, says Klingenstein, “The com- early in vitro and in vivo data to identify com- initial investment. In the two-and-a-half pany determined that the transaction was pounds with promise against river blindness years the foundation held its stake, Ana- in the best interests of Anacor and its share- and elephantiasis. Last year, Anacor allowed cor’s market value soared from $221 million holders and we did it.” Gates Foundation partners to evaluate much to roughly $4.5 billion. From the Gates Foundation’s perspec- of its boron-compound library to determine tive, an equity investment in Anacor’s core whether these molecules have potential Unexpected Challenge platform would help the foundation secure against priority target diseases. Traditional venture investors typically face

36 Making Markets Work for the Poor / Summer 2016 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 pro- viding funding through the contract, the Gates Foundation took a broad risk as part of a high-level partnership to deploy Ana- cor’s capabilities on otherwise neglected Private Financing for diseases. And with risk comes the possibil- ity of reward. Public Education “If you’re going to go and collaborate with these young engines of innovation Investing in collaboration between public school seeking capital, make the broad bet,” says districts and charter school networks. Klingenstein. The US Internal Revenue Service (IRS) By Jessica Pothering rules for PRIs state that financial returns cannot be a significant purpose of a PRI. n the back of the auditorium on open- Charter Compacts have been signed across But tax regulations don’t prohibit financial ing day at Blackstone Valley Prep the country, making the vitriol and even gains as an unintended consequence. The fi- middle school, a petite woman with death threats she received more tolerable. nancial outcome of the Anacor investment Iclosely cropped gray hair seemed an The decade-long battle over the expan- was indeed a side effect of the foundation’s unlikely pioneer of a new model of public sion of charter schools—public schools charitable purpose and strategic thesis. school financing. operated outside of the supervision and re- It happens that some of the world’s best In the hallways, middle-school students quirements of traditional school districts— technologies for global health are held by slammed their freshly painted blue lock- has been fueled by competition for scarce small companies that may achieve outsize ers and rushed to get into their classrooms education funding. The District-Charter financial returns. As fulfilling as it may be, before the first bell of the first school year Compacts, supported with $40 million research on neglected diseases may divert at the newest school in Central Falls, R.I., from the Bill & Melinda Gates Foundation, resources from these companies’ core mis- a down-at-the-heels factory town of fewer aim instead to share resources and expand sion of commercializing drug candidates than 20,000 people. the availability of financing while promot- that might deliver a blockbuster drug that Gray skies and drizzling rain didn’t ing collaboration between the two sectors. rewards shareholders. In those cases, equi- dampen the mood as parents, teachers, The compacts are the Gates Foundation’s ty investments can help align the incentives administrators, and city and state officials latest strategy in a long quest to improve ac- of private companies with the goals of the toasted an unprecedented collaboration cess to high-quality K-12 education. At the foundation. between a traditional public school district core of the foundation’s facilities strategy are Unlike a traditional venture capitalist, and a network of charter schools. For a mo- new financing mechanisms to catalyze pri- of course, any returns from PRIs go back to ment at least, it seemed that district and vate financing for public education, strength- the foundation for philanthropic purposes. charter schools—public schools serving the ening not only the emerging networks of Pursuant to IRS rules, the profits from the same families and communities—could not high-performing charter schools, but the re- investment will go back to the foundation’s only coexist, but support one another. source-strapped public school districts that overall endowment; the returned principal Frances Gallo, the former superinten- serve the same communities. In addition to must be redistributed through grants, con- dent of Central Falls, did not speak at the grants, the foundation has provided capital tracts, or other PRIs within one year. opening ceremonies. Under Gallo’s leader- to finance charter school construction on “The fact that the foundation’s equity ship, and against enormous pressure from public property and even in former district investment in Anacor has generated some the teachers’ union, Central Falls became schools. The compact also obligates char- positive financial returns that we’ve then the first school district in the United States ter schools to help the district with teacher been able to turn around and use to try to to sign a facilities investment agreement as training and curriculum and the district to eradicate polio in Pakistan, to me is icing part of a broader District-Charter Compact. make resources available equitably. on the cake,” says Julie Sunderland, the After the event, Gallo explained why she Blackstone Valley Prep is a nonprofit former director of the Gates Foundation’s bucked the opposition to welcome charter charter school network with 1,400 students PRI team. schools. “I felt I was everyone’s superinten- that has opened an elementary school and “But it’s not why we do it,” says Sunder- dent,” says Gallo, her voice rising. Nearby four middle-school campuses in Rhode land. “We do it because we want to partner districts have been attracted to Central Island. Its two new facilities in Central Falls with great entrepreneurs and great com- Falls’ progress, and more than 20 District- are the first schools to open through the panies and great scientists and develop new financing strategy. The Gates Foun- Jessica Pothering is a business and finance writer, focusing low-cost products for the poor. The focus on impact investing, social entrepreneurship, and economic dation made a 10-year, $10 million loan to on achieving results for our beneficiaries is development. She previously reported for financial publications Civic Builders, a nonprofit charter school covering the global private equity, real estate, and insurance clear in every investment we do.” ◆ markets. facilities developer, to be used for the proj-

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