April 29, 2016

UBS Cancer Fund Shows Power of Impact Investing

A new oncology fund will finance academic research and access to cancer care in developing countries

By Abby Schultz – Barrons.com  April 29, 2016

UBS Wealth Management is proving investors in Asia will warm to funding projects with social and environmental benefits if the potential returns deliver.

Earlier this week UBS closed the $471 million UBS Oncology Impact Fund, a vehicle aimed at accelerating cancer cures by investing in companies involved in early stage oncology treatments. The “impact” part — grants for academic cancer therapy research and access to cancer care in developing countries — is funded by 20% of the manager’s performance fee and 1% of royalties on drugs that come to market.

This global initiative — expected to earn an internal rate-of-return of 15% to 20% — is notable for its nearly half-billion-dollar size in the arena of impact investing and for the fact at least 60% of the fund’s assets reportedly are from investors in Asia. The fund manager is MPM Capital, a U.S. venture investing firm that has nurtured successes like Pharmasett (later bought by Gilead Sciences), which developed Solvadi, a blockbuster hepatitis C drug.

“This notion that impact investing doesn’t work in Asia, I think is completely debunked,” says Simon Smiles, chief investment officer for UBS Wealth Management’s ultra-high-net-worth practice. “If you have a really good investment opportunity that has a strong positive social impact, it clearly resonates in Asia.”

The private bank’s approach is a bit unusual for what has become known as impact investing, where dollars are deployed directly into investments that create social and environmental benefits. Yet, the emergence of impact funds is relatively new, still evolving and to many, “impact is in the eye of the investor,” says Jessica Matthews, head of Cambridge Associates’s global mission-related investing practice.

The $108 million Global Health Investment Fund, developed by the Bill and Melinda Gates Foundation and JPMorgan Chase in 2013 fits a more conventional description. This social impact fund finances late-stage approaches to diseases like malaria or infant mortality that affect low and middle-income countries, the fund says.

The UBS Oncology Impact Fund takes a different tack by investing in early stage biotechnology companies focused on curing cancer. Half the combined proceeds from the performance fee and drug royalties will go to grants for academic research into cancer therapies that are short on funding, an increasing issue in the U.S. where federal funding is shrinking. The other half will go to the UBS Optimus Foundation, which will provide access to cancer treatment in developing countries.

The future royalties are likely to contribute the most to the impact elements of the fund. “Those projects will take several years before they get approved and reach patients, but those numbers could in the end be very large,” says Ansbert Gadicke, MPM Capital’s co-founder.

Offering foot in the door of a venture capital fund

The idea for the oncology fund came about as a way to give UBS private clients access to MPM Capital’s early stage investments, as they typically don’t have that access, says Christiana Bardon, managing director at MPM Capital.

The oncology fund, which completed its first round of financing in January, is getting this access by co-investing in private and public companies alongside MPM Capital’s $400 million BioVentures 2014 fund. Together the funds already have invested in TCR² Therapeutics, which is focused on engineering t-cells for cancer therapy, and Oncorus, which MPM Capital says is developing a “next-generation immunotherapy platform to treat cancer.”

“The future of cancer therapy is we will actually cure a portion of patients and that’s really the goal we are shooting for,” Bardon says. These therapies will lead to “dramatic improvements in the outcomes of patient lives.”

James Purcell, head of UBS’s ultra-high net worth cross-asset strategy, argues the value of impact investing has been lost in efforts to define it, and on financing smaller projects, while a larger, mainstream effort allows for wider social and environmental benefits. “Hopefully it can be catalytic not only at an industry level, but at a client allocation level as well,” he says.

The oncology strategy may be extra-appealing in Asia now as cancer becomes more of a tangible concern, Purcell says. More people in China, in particular, are at an age where cancer is becoming prevalent, and improved medical services in the country has led to more cancer identification.

Cambridge Associates, which along with GIIN began publishing an impact investing benchmark last June, says there’s rising interest in impact investing from Asian investors. UBS plans to continue offering impact investments. Future funds could be in the area of affordable health-care in emerging markets or in meeting the world’s rising demand for protein by using less water-and-energy intensive alternatives than meat and poultry. Any project they come up with needs to succeed, to keep investors interested in the sector, though.

“If we have something that disappoints we run the risk of losing the entire momentum behind this,” Smiles says. “It’s about finding great partners, a sensible structure, and something that makes sense to our clients.”