Where Next for Medical R&D?

30 March 2010 (Last Updated March 30th, 2010 18:30)

Investment in medical R&D has been severely affected by the global economic downturn. GlobalData's Akanksha Jain takes a look at the potential strategies universities and start-ups can employ to gain private sector backing, at opportunities for investment for the private sector and at future models for funding innovation.

Where Next for Medical R&D?

The economic upheaval has severely affected biomedical research activities by putting funding under increasing pressure. The R&D conducted by academia and the biomedical industry are the two most crucial aspects in new product development in the biomedical industry including medical equipment.

Private investments by the industry as well as federal funds are the most important sources of funding for research. However, with the recession hitting the industry and federal bodies hard, it has resulted in drastic research budget cuts.

Industry and academia: where R&D happens

Most biomedical research is conducted within the research centres of companies, university laboratories and federal laboratories. In the past decade, more than 60% of new medical technologies have been contributed by start-ups/SMEs and spin-offs from universities.

A third major source of biomedical innovation is the in-house R&D centres of big pharmaceutical and medical device players. An analysis of R&D in the US in 2008 revealed that industry accounted for more than 70% of all research conducted, followed by university laboratories with 13%, and federal government laboratories with 7%. Most biomedical research is conducted in private and university laboratories.

The universities and start-ups involved in product development have managed to create a distinct niche for themselves. The role of academia is most commonly found in initial product conceptualisation and prototype development, with most of the funding contributed by federal sources. Funding for biomedical research is distributed through the Department of Health and Human Services (HHS) in the US. Nearly all (96.5%) of the HHS research total is provided by the National Institutes of Health (NIH). 84.2% ($24.9bn) of the estimated HHS research funding for the fiscal year ended 2008 is slated for support of the life sciences.

On the other hand, start-ups are often created as spin-offs from universities after the product prototype has been developed, and the major source of funding is private in the form of bank loans, venture finance, angel investors, private equity and industry tie-ups. According to data published by the National Science Foundation, industry funded nearly 67% of the total research in the US, while federal and other government sources accounted for 28% of the research funds in 2007.

"The R&D conducted by academia and the biomedical industry are the two most crucial aspects in new product development in the biomedical industry."

In the case of biomedical research, industry funding remained the major source of funding (57%) in the same year, while the NIH accounted for 27%. However, most of the industry's research funds go towards research within organisations, while federal funds are also used to fund start-ups through research grants such as the Small Business Innovation Research (SBIR) programme and the Small Business Investment Company (SBIC) programme. Besides these, the NIH also allots research grants such as the Research Project grant and early-career training grant.

Trends in biomedical research funding

All research requires a regular stream of investment at different stages. The recession and federal policies have resulted in the stagnation of funds for biomedical research over the past few years, forcing researchers to spend valuable time looking for alternatives.

While overall R&D funding by the industry grew by 18% in 2002–7, federal funding grew by just 0.2% during the same period. The same trend can be observed in funding patterns for biomedical research, the bulk of which comes from the HHS. In 2004–8, HHS funding grew at a low 3.6% rate. However, taking into account the inflation rate, federal funding for HHS actually declined at an average annual rate of 1.5%.

The period corresponded with biomedical advances such as the completion of the human genome project. It also saw a rapid increase in research capacity, financed by increased federal investments, as well as a desire by state governments and the private sector to leverage these investments to secure additional funds. However, these expanded research facilities are now finding it increasingly difficult to sustain themselves.

A recent comparative analysis of biomedical research funding in the US published by the Journal of the American Medical Association reveals that NIH funding has waned over the past four years, while industry funding has grown during the same period. Because federal funds account for a large chunk of academic research, universities have come under severe pressure to look for alternative sources of funding. As a result of this growth discrepancy, research universities are increasingly forging partnerships with private sponsors and state and local governments to maintain their growing capacities.

Potential future funding

Unlike the domestic discretionary budget, the assets of the private sector grow geometrically with the GDP; industrial investment in R&D has grown much more rapidly than federal contributions. Consequently, universities and start-ups need to look at other options to generate funds.

"The recession and federal policies have resulted in the stagnation of funds for biomedical research over the past few years."

The industry primarily finances its own research, which results in long times to market for new products. A common problem is the mismatch between the availability of funding capital and availability of intellectual capital. Image 1 outlines three potential ways to use the funds already in the system.

The industry leaders are cash-rich; however, their product pipelines are rapidly drying out, while the small players with innovative products have to close down because of unavailability of appropriate funds.

More players are now exploring the concept of risk-sharing where funds are conditional on a demonstration of a product's effectiveness and efficiency in real life.

Making early investments in smaller companies can help bring successful products to market sooner. Collaboration at the early stages also reduces the investment required by large companies and maximises profit potential.

The major source of funding for academia is federal grants. Universities have traditionally been hesitant to seek out private funding for their research for fear of losing out on the intellectual property rights. By exploring innovative models to protect their interests, academic institutions can forge fruitful collaborations with the industry and secure funding for their research.

Incentives from governments can help attract more industry players to invest in early stage companies. Other important sources of funding for academic institutions are endowments and charity, either through individuals or through non-profit organisations. There are also a number of other investment solutions available, as detailed below.

Open innovation for collaborative R&D

"Making early investments in smaller companies can help bring successful products to market sooner."

Open innovation has the potential to drive technology development and partnerships in academia, the private sector and government. Historically, these research bodies conducted their studies in isolation, which resulted in duplication and studies that took a long time and many resources to complete. Open innovation enables individuals, institutions and regions to collaborate on a research project.

The term "open innovation" was coined to define a paradigm that recognises "that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well".

This provides companies and research organisations with great flexibility and a vast pool of individuals to address challenging research questions, decreasing the time to arrive at solutions and consequently decreasing the time to market.

Conversely, an internal idea that has potential but does not fit the company's own business model need not be discarded as before. The product may be commercialised by a different route by auctioning off or leasing out the IP or even spinning out a new company for commercialisation purposes. Strategies to gain access to outside ideas include licensing technologies, buying relevant IP from competitors or from universities, buying promising start-ups with products that are already being sold, investing through venture capital programmes, and cooperating with universities to keep an eye on cutting-edge research.

Crowd sourcing for innovative ideas

A new crowd sourcing model is popular in the knowledge market. Companies such as Fellowforce, Innovation Exchange, NineSigma, yet2.com and InnoCentive serve as platforms for companies and non-profit organisations to present problems to a community of solvers. InnoCentive allows users (also known as seekers) to post a unique problem, called an InnoCentive Challenge, to the community in InnoCentive's Open Innovation Marketplace (collectively referred to as solvers).

"In the medical device sector, a number of large players are involved in M&A activities to boost their pipelines."

The goal of an InnoCentive Challenge is to ask for solutions from the solver community and ultimately choose the one that best fits the criteria set out by the seeker. InnoCentive seekers are primarily prominent R&D firms and non-profit institutions. The challenge is categorised, assigned a monetary award value up to $1,000,000 and a deadline date.

A recent study by Forrester Consulting shows that the model generates 74% of return on interest for the seekers. Another study found that the more diverse the scientific interest of the solvers attracted to the problem was, the more likely the problem was to be solved.

The further the problem was from the solvers' research area, the more likely they were to solve it. These findings underscore the ability of open collaboration to solve seemingly insurmountable R&D challenges.

Leveraging intellectual capital to generate funding

Several strategies have evolved to use intellectual property (IP) for creating funding streams for companies and research institutions. The most common strategy is to obtain finance for research based on proof of concept, and then to sell off the IP. In the medical device sector, a number of large players are involved in M&A activities to boost their pipelines.

Uncertainty in the regulatory environment and declining reimbursement are putting pressure on medical technology companies to come up with cost-effective solutions. Industry experts believe that acquiring IP from smaller companies to expand pipelines will continue to be a key strategy for big companies in the future.

Other options are the out licensing and cross licensing of the IP. Out licensing involves one company granting an IP licence to another, creating a regular stream of funds in the form of royalties to the licensees. Cross licensing enables two parties with conflicting patents to either co-develop products or to commercialise their products without infringing on each other's patents. The medical equipment industry rarely employs this strategy, but more companies will look at this model due to its relative cost effectiveness. Many universities have set up technology transfer offices over the past decade to sort out IP-related issues.

"In Europe, innovation relay centres have been set up in 33 countries to provide personalised assistance for universities and industries focusing on start-ups."

A less explored strategy to leverage IP is to secure loans using IP as security. Many lenders require a security interest in a company's assets as a condition for providing a loan, and for many biomedical companies, their most valuable assets are their IP. Another advantage of this method is that a loan may enable a company to move its product development forward when additional capital is needed.

Industry sponsorship to promote research

Through this approach, private companies can support research at universities by directly funding projects or sponsoring departments. This provides companies with a ready pool of talent, while the basic and applied research of universities obtains a steady stream of funds. Philips collaborates with local universities at its Eindhoven campus and contributes to the funding of state-of-the art laboratories and other academic facilities.

The programme provides flexibility to the students to take on course projects with Philips, while scientists can join the company for the duration of a project and then return to academia. Similar private-university collaborations are common in the US, such as GE's University Strategic Alliance Program, a joint venture between the GE Aircraft Engines Program and university researchers and graduate students across eight universities in the US, Europe and China.

In 2001, Intel launched a partnership with several universities under a new model labelled Open Collaborative Research. This research programme enables open and collaborative research between universities and Intel, university research grants, and collaboration with industry partners and other laboratories located adjacent to universities.

One of the few programmes for biomedical research is the University of Pennsylvania, School of Medicine's Office of Corporate Alliances for strategic alliances/partnerships with industry. The overall goals of alliance partnerships are to advance biomedical research as rapidly as possible to new drug/device development and then to apply these discoveries in the clinical setting.

Public private partnership (PPP) opportunities

A number of PPPs are now focusing on open innovation models for technology development. PPP initiatives can involve an alliance of non-profit organisations, government research bodies, universities and private players in order to promote different types of research such as basic science, basic technology and applied science, integrated technology, and to commercialise products/services. While some PPPs target a specific field, technology, or particular area of innovation, others address technology transfer links R&D, education, entrepreneurship, and/or innovation.

In Europe, innovation relay centres have been set up in 33 countries to provide personalised assistance for universities and industries focusing on start-ups. In collaboration with the European university knowledge transfer association, they have created a simple and effective system that allows universities to share information on new technologies with companies across Europe. Similarly non-profit organisations such as Fraunhofer and the Bill and Melinda Gates Foundation promote research through grants, and have unique strategies to generate the funds for grants.

"Private sponsorship can often lead to the polarisation of research towards technologies that have commercial prospects."

In Europe, it is a common practice for several universities to come together to form a research consortium. The White Rose University Consortium and the University of Bradford in the UK have been awarded £4.7 million to establish a partnership to provide a framework to dramatically accelerate innovation in technologies, methodologies and practices within the medical and healthcare sector.

Fostering entrepreneurship at universities

Another approach to promote innovation is by creating a favourable environment at universities to start spin-out companies by students and staff based on their work. This strategy has been successfully adopted by US universities such as Stanford and Massachusetts Institute of Technology (MIT).

Over 4,000 companies have been founded by MIT students, staff and graduates since its foundation, with combined revenues of over $200bn and 1.1 million employees.

While these start-ups have gone on to become highly successful businesses, the universities have benefited by receiving generous endowments and royalties.

However, education about the commercial context of science and the encouragement of entrepreneurship are needed to foster an entrepreneurial environment at universities. Moreover, it is necessary to have a policy on IP originating from the universities to safeguard their interests.

Where next for innovation?

With the funds from conventional sources drying up, strategies such as an open source innovation policy, participation in various PPP initiatives and leveraging IP to gain private sector backing are expected to be rapidly adopted by academic institutions in the future.

At the same time, private sponsorship can often lead to the polarisation of research towards technologies that have commercial prospects. It is therefore imperative for academic institutions to strike a balance between basic research and applied research.