South African Start-Ups: Bridging the "Valley of Death"

South Africa may have the most developed market for biopharmaceuticals on the African continent, but there are a few critical shortcomings, writes William Looney.

South Africa may have the most developed and sophisticated market for biopharmaceuticals on the African continent, but discussions with executives of the five start-ups participating in the Gauteng Innovation Hub’s recent visit to New York reveal a few critical shortcomings.

First and foremost is the absence of a strong network for private-sector investment capital. The existing infrastructure of commercial banks along with that regional powerhouse, the Johannesburg Stock Exchange, is geared almost exclusively to extractive industries. Private venture capital firms are rare, without a supportive regulatory backstop to compensate for risk. And while there is a disproportionate number of wealthy angel investors compared to the rest of Africa, this group remains largely ignorant of the life sciences sector. “Generally speaking, private funders want a return on their investment in three years or less-far too short for the long development cycles in biotech,” says Nuno Pires of Altis Biologics.

Government seed grants, which are still the principal support for South African life science start-ups, often lead to a perverse result: these provide just enough money to help companies demonstrate their product concept is feasible, only to have the entire effort collapse when no private investors come forward to underwrite the larger outlays for end-stage clinical trials and other regulatory benchmarks required to obtain a final market approval. Adds Pires, “from an economic standpoint, it is an inefficient allocation of resources; even assuming you do eventually get the necessary private financing, the most realistic outcome is that the innovator, whose idea takes wing with a government grant, ends up holding a minority position in his own company.”

Still, he sees a silver lining here. “Not having the funding concentrates the mind very nicely. It forces you to focus on what is essential while keeping things simple, with solutions that are practical and scalable in line with the resources in hand.” Pires tells Pharm Exec that his company has spent only $2 million so far to get its novel bone regeneration therapy to market, while his US competitors have dropped more than $600 million in pursuit of the same objective, albeit around a larger geographic map. Could there be a future in the science of the scarce?

Government can play a direct role in addressing a second barrier to commercializing good science in Africa. This is the lack of institutional interconnectivity among the national innovation ecosystems of the continent, a situation that exists even within South Africa itself in the form of competing regulatory objectives, poorly prioritized trade relationships, and the misaligned incentives that drive practices in industry, academia, and government. Most of the entrepreneurs contend public policy can change this dynamic, especially in making the transfer of technologies from lab to the market more efficient via stronger IP protection and subsidized incentives geared toward small enterprise. Rather than a welter of underfunded initiatives driven by politics and administered inconsistently, governments should concentrate on a few things, done well, with an eye to making local African expertise more competitive internationally.