The Future of Funding for Medical Devices

24 May 2010 (Last Updated May 24th, 2010 18:30)

Avenues for funding need to be reassessed in the medical device market following the global financial crisis. Research organisation GlobalData explains what new models should be investigated for funding innovation using the US as a key example

The Future of Funding for Medical Devices

Despite levels of support growing, biomedical research activities have suffered heavily as a result of the global financial crisis, and it seems R&D could be the area that has been hardest hit, for now.

The effect of a lack of funding is likely to be seen throughout the entire industry at one time or another, according to a specialist report undertaken by our research arm GlobalData.

R&D conducted by academia and industry are the two most crucial aspects in new product development for the biomedical industry, including research done into medical equipment. And private investments by the industry, as well as federal funds, are the most important sources of funding for research.

In recent times, however, the recession has hit both the industry and federal bodies hard, and drastic research budget cuts have been seen.

Most biomedical research is conducted within the research centres of companies, and university and federal laboratories. In the past decade, more than 60% of new medical technologies have stemmed from research undertaken by start-ups, small to medium-sized enterprises (SMEs) and spin-offs from universities. In-house R&D centres are also important for 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 (13%), and US Federal Government laboratories (7% – a figure largely made up of defence-related projects).

"Despite levels of support growing, biomedical research activities have suffered heavily as a result of the global financial crisis."

For start-ups in the US, (most of which are often created as spin-offs from universities after the product prototype has been developed), the major source of funding is private – from bank loans, venture finance, angel investors, private equity and industry tie-ups.

According to the 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.

In the case of biomedical research, industry funding remained the major source of funding (57%) in the same year, while the National Institutes of Health (NIH) accounted for 27%, and other federal funding sources accounted for another 10% during the year.

Nearly a quarter of the federal funds allocated for research go to universities and colleges, which also receive funding through endowments.

The importance of 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 2002–2007, 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. During 2004-2008, Department of Health and Human Services (HHS) funding grew at a low 3.6% rate. Taking into account the inflation rate, however, the federal funding for the HHS in the US actually declined at an average annual rate of 1.5%. This trend has been in contrast to the preceding period between 1994 and 2003, where federal funding doubled.

During that period, the NIH budget grew faster than those of other sectors, while the overall research budget share stayed fairly constant. The period corresponded with many 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.

Now these expanded research facilities are finding it increasingly difficult to sustain themselves, due to a lack of funds.

Where to now for funding?

The current situation means that universities and start-ups need to look at other options to generate funds in future. Currently, the industry primarily finances its own research, which results in long times to market for new products. Differences in timings for the availability of funding capital and intellectual capital often delay product launches.

As a result, industry leaders are cash-rich but their product pipelines are rapidly drying out. Meanwhile, small players with innovative products have to close down due to the unavailability of appropriate funds.

One way of overcoming such dire outcomes would be for stakeholders to form close collaborations to streamline the flow of 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 also help to bring successful products to market sooner and collaboration at the early stages also reduces the investment required by large companies, thus maximising the profit potential of investments.

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

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 intellectual property rights.

By exploring innovative models to protect interests, academic institutions can forge fruitful collaborations with the industry and secure funding for research.

Incentives from governments can help attract more industry players to invest in early stage companies. The provision of increased incentives for supporting basic and discovery research rather than more applied research will also stimulate support for higher-risk, innovative research programmes.

Other important sources of funding for academic institutions are endowments and charity, either through individuals or through non-profit organisations. With the funds from conventional sources drying up, however, strategies such as an open source innovation policy, participation in various public private partnership initiatives and the leveraging of intellectual property to gain private sector backing are expected to be rapidly adopted by academic institutions in the future.

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

For the full report, and to find out more on how you can access each particular type of funding mentioned above, visit GlobalData's report store at www.globaldata.com.