GAVI's Finance Model Strikes Vaccination Gold for Emerging Markets

Imagine you are Rwanda's minister of health. You have a problem – actually many problems, but we'll start with one. Pneumococcal diseases kill 1.6 million people per year around the globe, nearly one million of them children under 5 years old, and nearly all of them in emerging markets like Rwanda. Why only in emerging markets? Because the diseases can be prevented with a vaccine, one that costs as much as $104 per dose in developed countries, $312 per patient since the vaccination protocol requires three doses. Your government, even with help from NGO's like UNICEF, can't afford to vaccinate even a tenth of Rwanda's population at these prices, but you are very tired of watching your children die.

The GAVI Alliance, a non-profit partnership of governments and NGOs, recently announced an agreement with Pfizer, Inc. and GlaxoSmithKline (GSK) that will go a long way to solving your problem. First, GAVI recognized that the patent protected price of $104/dose reflects the cost of R&D, testing and approvals, production facilities, marketing, etc. not to mention some profit, but that the actual marginal cost of producing one extra dose would be tiny, perhaps a few dollars per dose. The marginal cost of producing many extra doses, enough to make a real dent in the needs of emerging markets would still be relatively low (since it would not reflect sunken costs like R&D, testing and approval, marketing) but it would have to include the cost of expanded production capacity. Nonetheless, big pharma could sell at a huge discount to fully absorbed cost and still make a few bucks on a marginal cost basis, provided it could actually sell the extra volume to emerging markets at a deeply discounted price.

The problem? How could big pharma invest in expanded production capacity with no assurance that emerging markets would actually buy the extra vaccine output, even at steeply discounted prices? The GAVI Alliance solution – AMC. Old timers, push away those blurry notions of Ramblers and Mitt Romney's dad and think Advance Market Commitment. GAVI and the emerging market governments have committed to pay Pfizer and GSK for 30 million doses per year from each supplier for ten years, at a price of $7.00 per dose for the first 20% of the doses purchased and $3.50 per dose thereafter.

Nice work GAVI (and attaboy Pfizer and GSK too). Exactly who, to quote Butch Cassidy, are those guys? Launched in 2000, the GAVI Alliance is a global health partnership representing stakeholders in immunization from both private and public sectors: developing world and donor governments, private sector philanthropists such as the Bill & Melinda Gates Foundation, the financial community, developed and developing country vaccine manufacturers, research and technical institutes, civil society organizations and multilateral organizations like the World Health Organization (WHO), the United Nations Children's Fund (UNICEF) and the World Bank. The agreements with Pfizer and GSK are a culmination of the first AMC project, commenced in June 2009.

GAVI uses a second financial wrinkle, IFFIm, collecting binding governmental pledges from donor countries (G-7 types) and then borrowing against the pledges in capital markets to accelerate effective receipt of the pledged funds. Look for AMC and IFFIm to show up again, and again, possibly with an even more dramatic application. Some diseases, malaria for example (a primary focus for the Bill & Melinda Gates Foundation), present a more difficult variation on the Pneumococcal problem. The emerging markets offer a huge potential market for a vaccination that will prevent malaria, but instead of just adding production, big pharma needs to invent the drug, and it is reluctant to invest billions in anything where the potential customers are generally very poor. The potential market is so vast that a malaria cure could be profitable even at a low price per dose. An AMC arrangement might be enough to move a promising malaria vaccine research program into development and ultimately production,

Photo Credit: hdtpcar

Shop til you Drop: China’s Online Retailing Sector

In the wake of a global recession, China’s online retailing market continues to grow at an increasingly rapid pace. The trading size of the online retail market rose to nearly $37 billion, sustaining high growth throughout a tough year. At the end of 2009, internet users in China totaled 384 million, with an annual growth rate of 29%. According to the China Network Information Center (CINIC), almost one in four of these netizens have shopped online. Although the market is still adjusting to new development strategies and marketing mechanisms, companies from across the globe are hoping to tap into this booming domestic market via the worldwide web.

While e-commerce has been present in China for the past decade, new players are jumping on the bandwagon in C2C, B2C, and B2B forms. Although C2C still accounts for the largest share of the online retail market, the B2C is the main driving force of e-commerce, with an 8.7% growth rate. This is partially because the foreign firms entering China via internet are having the most success using this model.

The key to sustainable B2C sales is not only customer base acquisition, but also the quality of the customer service a company offers in addition to logistics, payment and policies. In this huge domestic market reaching consumers in rural regions can create logistical nightmares. Further, the quantities of inventory needed on hand to satisfy the potential demand can be daunting. E-commerce experts suggest that companies entering the market should focus on premium products that are exclusive and unique, rather than competing with established brands. Chinese consumers are eager for exciting foreign products and have the disposable income to buy at premium prices.

Smartdirect.cn, China’s first online supermarket, offers Western and Chinese food and household items. The one-stop shop sets itself apart from similar online vendors that sell only their brand or separate sales and logistics, which is common in the Chinese market. Smartdirect sells a diverse range of products and provides accompanied services including orders receiving, logistics and distribution, settlement of payments and after-sales service. Easier said than done, the real value from this operation comes from lean supply chain logistics. But first China’s distribution channels need to mature to meet market demand.

Another challenge in this unique marketplace is the need for a safer and more efficient online payment system to handle credit-card transactions. Cash on delivery is still a common mechanism in online shopping. However with the rapid development of new technologies, online payment tools like Alipay and Paypal are improving quickly, reducing the risks of online shopping.

While there are still some obstacles, companies entering this market now have a better shot at fostering strategic alliances and improving distribution systems in addition to obtaining first mover brand loyalty. So what is your company waiting for?

Wachovia’s Dirty Money

Is turning a blind eye to your customers’ illegal activities a crime? Apparently so. Wachovia entered a deferred prosecution agreement with federal authorities in Miami this week, agreeing to pay $160 million to settle claims that it willfully failed to establish an anti-money laundering program. The bank failed to effectively monitor for potential money-laundering activity on more than $420 billion in financial transactions with currency exchange houses, or “casas de cambio”, according to a news release by U.S. Attorney Jeffrey Sloman. An investigation into the transactions with CDC’s revealed that Wachovia knowingly failed to identify, detect and report suspicious transaction in third-party payments processor accounts. Not only were Wachovia’s actions irresponsible, but they were actively harmful, providing liquidity to drug cartels in Mexico.

According to court documents, Wachovia was aware, as early as 1996 and through 2004, that high risk drug money was being laundered through CDC’s in Mexico. Wachovia was also aware that other banks had stopped doing business with the CDC’s, however the bank continued to expand its business with the shady exchange houses and providing correspondent banking services to them, including wire transfers, bulk cash, pouch, and remote deposit capture services. In plain English, Wachovia allowed the CDC’s to wire drug money to recipients all over the world and physically transported large sums of money to the U.S. for deposit. These funds were used to purchase airplanes for narcotics trafficking, from which over 20,000 kilograms of cocaine were seized.

Other agencies involved in the case are the attorney general’s office, U.S. Drug Enforcement Administration, U.S. Department of Justice, Internal Revenue Service, Florida Controller’s Office and the Federal Financial Crimes Enforcement Network (FinCEN). While the federal indictment alleged that Wachovia violated the Bank Secrecy Act (BSA), criminal charges are being deferred as long as Wachovia continues to cooperate and implement remedial actions.

Sloman, called the bank’s actions “blatant disregard for our banking laws” by giving international cocaine cartels a virtual carte blanche to finance their operations. As Wachovia merges into Wells Fargo Bank later this month, they have to be wondering if this acquisition was worth the soiled name they are bringing to their business.

No More Free Lunch: Purchasing Directors in China Face Rising Prices

The cost of doing business in China is rising. China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices. Now, factories in throughout China are being forced to raise the prices of exports as the costs of energy and raw materials soar in a fiercely competitive market. While China is still considered cheap by Western standards, suppliers are no longer eager to race to the bottom. They are investing in the capital and knowhow to improve their production and compete on a global scale. Purchasing directors able to adapt their sourcing strategies in this rapidly changing market will find that new advantages and rich opportunities await them.

Corporations that began outsourcing production to China in the early 1990’s have benefited from dramatically lower costs and thus high corporate profits. The challenge for medium and large multinationals in China these days will be to maintain consistent prices from reliable suppliers while continuing to cut costs and improve efficiency. While some companies contemplate moving inland, where labor costs are lower, or to other parts of Asia, such as Vietnam, India, or Bangladesh, many purchasing directors realize the advantages China has to offer. Rather than moving factories or massive supply chains, resulting in logistical nightmares and productivity losses, firms willing to invest in a competent procurement team and strategic sourcing processes will continue to dominate in this unique market.

So where does that leave companies just now starting to source from China? According to a recent survey by AT Kearny, over 70% of companies surveyed plan to procure from China by 2010, a 40% increase from just a decade ago. Yet many purchasing directors are not prepared to manage these sourcing efforts efficiently and cost effectively. They lack the experience on the ground to fully understand the intricacies and obstacles associated with emerging market procurement, especially in a market as cutthroat as China’s. Companies often underestimate the value of working with an expert who knows the territory, the costs and the players, inside and out. Beyond cultural and language obstacles, logistical issues like proximity and expertise come into play. Locating a reliable supplier is just a start. It takes a true professional with their finger on the pulse to ensure reasonable pricing and fair contracts in these dynamic market conditions.

While increasing costs have their downfalls, companies that procure strategically will maintain their low prices and benefit from better suppliers, standards, and quality. Don’t be left in the dust.

ARPA-E: VC, Angel Investor or All of the Above?

ARPA – E, that's Advanced Research Projects Agency for Energy. It's like DARPA, but instead of creating the Internet, it fosters transformative energy technologies. It's like a VC or an angel investor, but with a half-open DOE checkbook instead of private capital. It's even a little like the old depression era CCC, spending government reconstruction money on projects that employ people, but in this case they employ a few scientists who will lead us, eventually, to a greener future filled with high tech jobs, secure energy sources and stabilized greenhouse gas levels. ARPA-E is prepared to get involved with transformative energy technology anywhere from the laboratory stage to the difficult juncture between development and early commercial application.

Enough with the alphabet soup. What's new with ARPA-E, how much funding does it have and how is it being spent? On March 2, 2010 ARPA-E announced its third funding opportunity, with $100 Million available to focus on grid-scale energy storage, electrical power technology, and building energy efficiency. This came relatively hard on the heels of ARPA-E's December 2009 news releases establishing a fellows program and announcing a second funding opportunity, also with $100 million available, to focus on electrofuels, carbon capture, and batteries for electrical energy storage in transportation. 37 projects have been selected for funding (at cost to ARPA-E varying from $500,000 to $10 Million each) as the result of the initial funding opportunity, a relatively open ended call for transformative energy related proposals. The selected projects are too diverse to summarize. The winners include a mix of universities and private companies, small and large.

Is ARPA-E an angel investor or a venture capitalist? Of course, it's the government and it's not investing for a financial return. The cost of funded projects is shared with the project proponents, and the percent ARPA-E contributes varies depending on several factors, particularly on the technology's stage of development. The closer the technology is to the basic research stage, the higher the percentage of the tab ARPA-E will pay. DOE does get some rights in intellectual property developed with its funds, although the ARPA-E structure allows the bulk of the IP value to remain with the project proponents. The low end of that $5000,000 to $10 Million per project does not sound like much, but remember, ARPA-E isn't covering the whole cost, and in some cases projects might be able to attract private capital well before the technology is commercialized. So, the angel or VC answer, is, (as always), all of the above, depending on the project.

ARPA-E is more than a source of capital. ARPA-E Director Arun Majumdar writes, “We are determined to attract the best and brightest minds to solving the energy problem”. Top engineers and scientists are serving as reviewers for project selection, but now ARPA-E is seeking program directors, to guide funded projects and identify new areas for breakthroughs. So ARPA-E, like a successful angel or VC, is providing guidance and connections, but the focus remains technical. ARPA-E's funding is a drop in the bucket compared to what other nations, particularly China, are spending on energy research, but innovation isn't all about money. With the right choices on projects and people, ARPA-E can be the catalyst for the next........you fill in the blank, think energy Internet.

Photo Credit: C-Ali

Entrepreneurs Believe in Angels

As venture capitalists tighten their purse strings, entrepreneurs are seeking out angel investors for funding. Too many venture firms need to make large investments with huge payoffs on individual companies to keep their funds’ overall performance appear attractive. Over the last two decades, the number of venture funds has grown from 650 to over 1,600, with the average fund size ballooning from $53 million to $350 million. Since VCs are focusing on existing companies, and the limited partners are not giving them additional capital, deals that would have traditionally gone to VCs are flowing to angels. One VCs trash is another angel’s treasure.

Angel groups are made up of high-net-worth individual investors, generally based in San Francisco, Seattle, New England and Washington D.C. These loosely collaborative bodies are receiving far more funding requests from a higher caliber of start-ups while keeping prices low. By increasing their investments in companies that are in post-product and post-revenue, angels have significantly improved their risk profile. Groups like the Alliance of Angels, based in Seattle, and Hub Angels in Boston have seen a substantial increase in companies requesting funding from both coasts. And numerous angel groups have seen their membership double and triple in size.

The Angel Capital Association recently surveyed 150 angel group leaders and learned that nearly 60% of them said that the number of business plans they received and the quality of those opportunities was better or the same as in 2008. Those comments were based on improved economic conditions for angel investors, but all access to good companies. However, 16% of those surveyed said that the quantity and quality of investment opportunities was down, while the remainder felt increases in quality or number of opportunities, but not both.

Angel investing, which generally provides financing in smaller slices than venture capitalists would consider, has not been immune from the financial downturn. One report from the Center for Venture Research suggests that the average amount of money angels are investing per deal is dropping even as the number of deals trends upward. The fact that dollar allocation per angel is decreasing can be frustrating for entrepreneurs as well as investors. Competition for angel financing has intensified, driving companies to improve products, find compelling markets, form impressive management teams and propose attractive deal terms. While competition should be a good way to weed out the weaklings, it can be a mixed blessing. Some firms are seeing the quality of early stage deals declining because there are more bad deals made, increasing the odds that really good deals will slip through the cracks.

Photo Credit: Metropilot

Local Law Red Lights - What's SRI Now?

Life is tricky for the international corporation and the socially responsible investor. Consider poor Google. First Google withdraws from a gazillion dollar potential market in China rather than accepting censorship (OK, it was a little more complicated than that). Now Google finds its Italian managers convicted of a crime for failing to prevent a posting on Google's subsidiary YouTube – thereby violating the privacy of an Italian autistic child who was tormented by bullies in the posted video. UBS wants to disclose customer information in the US (to settle some tax evasion problems it created for itself) but is told not to by a Swiss judge. Variations in law from one country to the next have long posed problems for business, lawmakers and socially responsible investors, but the increased scope of cross-national businesses that could call anywhere home and the fact that the Internet knows no borders seem to be revealing some new strains.

In ancient times, when I was young, corporations doing business in more than one country knew each operation had to comply with local law, and they didn't think much beyond that. Suddenly, the SEC started using US accounting requirements to investigate US public companies that had paid bribes abroad and then failed to account for the bribes clearly and disclose them. The US Congress went a step further with the Foreign Corrupt Practices Act of 1977– it didn't matter if bribing public officials was an accepted way of life in Lower Slobovia, bribing a public official was illegal for the US public company (even if all the activity took place entirely in Lower Slobovia). Japan and most of Europe lacked similar laws. For some years US companies complained that this was a disadvantage in winning government contracts in emerging market nations, but the complaints drew little sympathy, and much of the world eventually adopted similar anti corruption laws with extraterritorial effect. FCPA enforcement is actually undergoing a revival right now.

Another 1977 Congressional action went beyond simple extraterritoriality to effectively supervene local law. The Anti-boycott law banned any form of complicity or cooperation in the boycott of Israel, even when refusal to comply would violate local law in some Middle Eastern countries. US companies effectively had to withdraw from certain markets unless they could find a way to sell that kept them completely insulated from any activity related to the boycott of Israel.

The world was just warming up. South African Apartheid triggered action by Congress (the Comprehensive Anti-Apartheid Act of 1986 banned new trade and investment), a call for boycott by the UN General Assembly and an unprecedented level of activity by investor groups.- all designed not just to supervene local law, but to overturn it.

All these older instances of government and investor social action around local law concerns had a common element – a response to a situation or activity that was widely perceived (at least at the time) as immoral. Some of todays local law issues seem a little more complicated. Consider China – censorship of political speech – bad. Attack on servers to find dissidents -worse. Here we have a good old fashioned evil activity – yet so far governments and investors don't seem to be lining up to protest. Part of this may be fear, China is a big enemy to make and a big market to lose. Part of it may be a philosophy of staying engaged with a country that sometimes seems to be moving in the right direction. Part of it may be timing, the censorship issue hasn't been in sharp focus for long – it may yet generate some serious heat from the SRI community or even a few governments.

What about the Italian YouTube situation?. Wherever you come out on this issue – and free transfer of information, decriminalizing activity that is a mere conduit for free information and other aspects of the YouTube side have merit - it's hard not to recognize that the Italians have a legitimate interest in protecting the privacy of Italians, especially autistic children - not exactly evil. Maybe Google can find a better way to screen YouTube postings for privacy violations, maybe it will have to pull YouTube out of Italy, maybe Italians will be so worried about losing YouTube they will change their law. In any case, you won't see Congress looking for ways to override Italian law and you won't see investors boycotting Italian stocks in Google's defense. Google is on its own.

Which brings us to the Swiss, noble defenders of bank secrecy. With Swiss Army knives opened wide, they hold their banks hostage to this policy – even when it may lead to a disastrous outcome on tax evasion charges in the US. Bank depositor privacy may not sound as good as privacy for autistic children, but it's probably not evil, especially when you consider the fact that the policy is supposed to have an exception where active tax evasion is involved. Once again, no legislature or investor group will ride to the rescue of UBS, they will just have to figure something out. The IRS will keep squeezing and the IRS will not really care about Swiss law applying to Swiss based accounts when US operations of a Swiss based bank have abetted tax evasion by US taxpayers.

For Google in Italy and UBS in America, it's back to the sixties. No matter how complicated it gets, multinationals still need to figure out how to comply with local law in every jurisdiction where they do business. Multinationals doing business in China may be headed for some South African style fireworks. First it was antifreeze in the toothpaste and lead in the toys, now its censorship and server attacks to preserve the status of the powerful. Who knows what's next, but running a capitalist economy with a dictatorship of the proletariat (as represented by party officials and friends, many of whom are getting rich) is like tectonic plates pushing against each other, sooner or later we will have an earthquake. Companies accepting censorship or otherwise accommodating Chinese laws that are 180 degrees away from rights Westerners perceive as fundamental may ultimately need need to do more than just comply with local law, they may need to placate active, socially responsible shareholders.

Photo Credit: Conner395