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Is crowd funding an alternative answer to the African pharmaceutical investment conundrum?

09 October 2013 Mark Hollis

I attended the African Pharmaceutical Summit, held recently in Tunisia, and noted that delegates appeared to rally behind the notion of pharmaceutical industry development driving healthcare improvements in Africa. But to me there was an elephant in the room, or rather a dinosaur, in the form of the traditional models used to fund this development.

Debate continues to focus on traditional funding
The presence of the development banks and private equity firms at the event likely reminded everyone that should you be an African pharmaceutical company looking to expand you could access credit from these groups. However, as was pointed out in a number of heated exchanges between delegates, you may be doing so on the terms, timescales, and conditions of investors whose interests may arguably be vested.

Alternative funding options exist
If you are a small company looking to get small amounts of investment, on your terms, could the answer be alternative financing? Specifically angel investors and crowd funding. Both these models evolve around the notion of one or a small group of investors directly providing funding for projects, with companies pitching for the funding typically through web based platforms. For investors it gives them a choice of who they invest in, and in the case of angel investors some degree of input (normally in a mentoring way) in the future use of the funding. For the companies which obtain this funding, it can provide them with terms fixed to their priorities - given that the need for funding and terms are set out clearly directly with the investor, alongside guidance. Both the investor and company benefit both financially and loan term wise from cutting out the middle man (banks and private equity). Crowd funding has grown rapidly, at least in my home country, the UK, with one of the biggest providers FundingCircle lending £155 million to UK business since its inception in 2010 (source: company reported information).

Despite challenges other funding options are worth considering
Of course, there may be challenges with this model. First it may be challenging to obtain large amounts of money though such funding mechanisms as they are mostly geared to small enterprises, the timeline of the loan may preclude longer term investments, and the ability to secure a loan depends on the companies' ability to pitch the idea to directors. Although there are these challenges, it is important to note that these schemes appear to be in their infancy and there seems to be significant scope for the complexity of pitches, maximum size of loans, and interest rate terms to improve with time.

There also seems to me to be no reason why this funding model could not be reversed with groups of pharmaceutical companies seeking to take out a combined loan from banks, or other traditional financial institutions, with their combined size providing an incentive to invest, and offsetting risk. Of course this can also present challenges with the risk of 'peer pressure' on the repayment of loans likely necessitating the setting of formal terms for the group dynamic.

I put the suggestion of these alternative financing models, off the record, to a high ranking development agency executive, who suggested to me that it was 'not a strategy'. I'm no development funding expert, but I feel that the debate needs to consider truly innovative funding solutions to help smaller African pharma companies to get small amounts of funding aimed at helping expand, rather than current efforts of copying/adapting traditional bulky models. Otherwise I fear that the debate may continue with little progress.



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