Who’s Going to Pay for Future Drug Development? (Part 2)


Xconomy National — 

In the first part of this article, I detailed how pharma and biotech companies, along with the federal government, provide the majority of funding for biomedical research in the U.S. In this second part, I’ll turn my attention to a number of other sources, both for-profit and nonprofit, that also provide the capital that drives drug discovery and development work.

Venture Capital on the Ropes, but New Models Emerge (Funding Level: $3.7 billion invested in biotech in 2010)

The venture capital (VC) industry is shrinking, the net result of a negative return on investments (in all areas, not just biotech) over the past 10 years. Many firms have gone out of business, and many fewer deals are getting done. Despite this, VC remains a significant source of innovation funding, with some $21.8 billion being invested in 2010 ($3.7 billion invested in 460 biotech deals). However, different approaches to funding companies are being explored in the ongoing search for a better investing model. For example, Eli Lilly is putting $50 million (and up to 20 potential drugs) into three separate funds covering different therapeutic areas, with a goal of raising an additional $250 million per fund from VC firms. Externally generated molecules acquired from academics or biotechs will also be investigated using these finances. The concept behind this funding is simply to increase the number of molecules being examined and speed up the development process. Lilly will have “preferential access” to reacquire molecules from these funds.

Other financing approaches abound. The Column Group is focusing on a “big idea” concept by only investing in transformative technologies that have the possibility of generating multiple products. Allied Minds has a similar philosophy in supporting “innovations with significant transformative possibilities”. Rather than start new companies, venBio has adopted the tactic of investing solely in existing companies. Another approach, a single asset, infrastructure light LLC model, is being tried that terminates a company and distributes its assets as a result of an ultimate licensing transaction. We shouldn’t expect any future Amgen or Genentech’s out of this investing strategy. Venture capital firms aren’t the only organizations making equity investments in biotech companies. The Bill and Melinda Gates Foundation recently made such an investment in the biotech company Liquidia. Whether any of these new models (or others) will be any more successful (either medically or financially) than ones used in the past remains to be seen. Changes in current tax laws may be helpful in reinvigorating investor’s interests in venture capital firms.

Disease Charities are Funding Many Drug Development Projects (Funding Level: Greater than $100 Million)

There are a number of disease-focused charities that raise money to fund researchers; their ultimate goal is finding treatments for various diseases. One of the first groups to do this was the March of Dimes, founded during Franklin Roosevelt’s administration to find a cure for infantile paralysis, more commonly known as polio. Its current mission is to prevent birth defects and reduce infant mortality. Traditionally, organizations such as the American Cancer Society, the Muscular Dystrophy Association, and the Leukemia and Lymphoma Society fund academic investigators at research universities. More recently, these and other charities have stepped up to the plate to fill the gaps caused by industry cutbacks. For example, The Michael J. Fox Foundation has some 38 active industry collaborations, as well as partnership arrangements with Elan Pharmaceuticals and Merck Serono. The Juvenile Diabetes Research Foundation is funding, through its Industry Partnerships, some $71 million of work at 30 companies. The Multiple Myeloma Research Foundation awarded $11 million recently through its Biotech Investment Awards Program and Research Consortium.

Non-Traditional Private Companies Enter the Clinical Funding Arena (Funding Level: Tens of Millions)

These companies represent an unusual (and not very widespread) source of capital that is being focused on specific disease targets. Billionaire and philanthropist John Kluge made his fortune as a television industry mogul prior to his death in 2010. Metromedia, his privately held broadcast and communication’s company, recently established a biosciences unit to fund a clinical cancer trial. Metromedia Bio-Science LLC has put $50 million into a clinical trial at New York’s Rogosin Institute to test the ability of cancer cells from one species (mice) to fight the growth of human tumors. Any profits from the venture are to be pumped back into Kluge’s separate charitable foundation. More recently, philanthropist John Flatley established a venture group to fund development of treatments for cystic fibrosis. Flatley, a real estate developer, started the new Flatley Discovery Lab because he felt that nonprofits were not the appropriate vehicle for funding ideas from entrepreneurs interested in developing treatments for CF. The most unusual feature of this venture fund? It’s stated goal is to break even, not return a profit to investors.

Open Source Opens a New Research Path (Funding Level: Millions)

The open source movement has flowed from software to scientific journals (e.g. PLoS, the Public Library of Science) and biomedical research (e.g. Sage Bionetworks). Much of the funding for the open source movement has come from philanthropic investments and government resources, but it also includes income from collaborative research partnerships as well as traditional grant support. Sage Bionetworks, for example, has just announced an oncology partnership with AstraZeneca. The question has been posed as to whether open source research and development can reinvigorate drug research. It has certainly stimulated thinking about novel ways to do drug discovery research. Transparency Life Sciences is in the process of being launched to do open-source drug development using telemedicine apps for clinical trial monitoring. Open source resources include the National Cancer Institute’s Biomedical Information Grid that allows cancer researchers to work together. A recent commentary pointed out the open source research will be facilitated by the creation of standards for different types of research data. This approach will enable a wider spectrum of users to access these large datasets. The Biobricks Foundation is a nonprofit group focused on coordinating the production of DNA “modules” encoding basic biological functions or structures. These modules can be combined in a synthetic biology approach towards engineering novel proteins. The P2P Foundation hosts some interesting discussions on the concept of open source biotechnology, with links to projects that both the public and private sector can tap in to.

When All Else Fails, Ask the Patients to Pay (Funding Level: Tens of Thousands)

Clinical trials are generally paid for by their sponsors, which are usually pharma or biotech companies (or sometimes the federal government). But what happens when a biotech company sponsoring a clinical trial runs out of money before the trials are completed? Suppose the company goes out of business, or can no longer afford to produce the drug being tested? This situation arose during a trial for ALS, which is classified as a rare disease because there are only about 20,000-30,000 patients in the U.S. The clinical trial ran short of money because the sponsoring company went out of business. As a result, patients were asked to pay for their drugs by the doctor who was running the trial. The burden of having to find funding for their own clinical trials may fall hardest on patients needing medicines being developed as orphan drugs (such as this ALS trial). Historically, few biotech companies have wanted to work on orphan drugs because these diseases have a smaller number of afflicted individuals. However, this trend has been reversed as pharma and biotech executives witnessed Genzyme’s commercial success in developing some of the worlds most expensive and profitable drugs for rare diseases. In 2010 alone the FDA granted 192 orphan drug designations out of 328 applications, illustrating the current strong interest in working on these rare diseases.

An interesting approach for developing new breast cancer treatments is being undertaken by the Pink Army Cooperative. This organization asks individuals to join their cooperative by contributing $20 to fund the development of oncolytic viruses that will be created (using open source synthetic biology technologies) for treating breast cancer. Members of the cooperative will gain access to any treatments that arise from this funding. Unfortunately, details are in short supply on the organization’s Website, and it is unclear how many co-op members have signed on since the group was launched in 2009.


This survey was not meant to be exhaustively comprehensive, but was intended to illustrate that a wide variety of funding sources are being used to pay for various stages of the drug development process. The decline in the number of new drug approvals over the past 10 years indicates that a variety of developmental approaches are both necessary and desirable. Many of these approaches have arisen out of frustrations with conventional financial support mechanisms as well as the perceived shortcomings of the current drug development system. The numbers I’ve posted above make clear that spending by pharma, biotech, and the government vastly dwarf the other players at paying for research and development work. However, the other organizations that invest their time, energy, and money are filling in gaps and enabling approaches (especially on the translational side) that might have not been undertaken otherwise. Financial resources have a way of waxing and waning as the political winds blow in different directions. I strongly favor having a diversity of financial resources because it is impossible to predict where the next breakthrough will come from. How the balance shifts among the various U.S. funding sources, both for profit and nonprofit, will depend on the overall health of the economy, the strength of the VC sector, and the generosity of philanthropists large and small to the nation’s disease-focused charities and other organizations.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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4 responses to “Who’s Going to Pay for Future Drug Development? (Part 2)”

  1. In the “Funding by Patients” section (aka Crowdfunding), a very interesting example is the one of MyProjects from Cancer Research UK, where people can refinance researches in the range of £10K-£200K – http://myprojects.cancerresearchuk.org/

  2. John k jr says:

    Metromedia and the Kluge Foundation will continue to see these trials completed and until victory is achieved.

  3. Lynn Hammerschmidt says:

    Great article. We need to shake-up the system and re-energize how we diagnose, treat, and eventually prevent many diseases. There have been very few home runs in recent times. And, some basic things are broken that need to be fixed- how we grow crops, raise animals, and allow chemicals (high fructose corn syrup and hydrogenated oils to name two) into our system for shelf life, profit etc. As a veteran of three medical diagnostics and one pharmaceutical services start-up companies, two acquired by big pharma, I have seen first-hand the inefficiencies that occur not just in R & D but the whole corporate culture once success is acheived. It’s hard to change a system that has promolgated past successes, and that is led by many of the people who experienced those successes.

    And, it seems like one place to look for additional funding would be from other countries that benefit from US R & D expenditures. Many of the countries, for example Canada and most of Europe, deliver healthcare under a socialized model and buy medicines at a substantial discount to the prices paid by Americans. In fact, it’s probably one of the biggest reasons socialized medicine works (I use the term loosely) for them. If they want to continue to receive access to these medicines, wouldn’t it make sense to require them to pay for some of the costs?