Digging Deep into the Relationship of Research and Healthcare Investing

I enjoyed reading Regis Kelly’s insightful discussions about the state of academic research, and the September 14 blog post in Xconomy, The Social Contract of Science, was no exception. As the director of the California Institute for Quantitative Biosciences, the QB3 Institute, Regis enjoys a close and intimate perspective on academic research and its relation to the broader communities of government, business and society at large.

I would like to broaden the conversation to include the role that investors play in the generation of great ideas and the transition of into the private sector. At Claremont Creek Ventures, we focus on computational advances with applications in health care and the life sciences – what we like to call the application of Moore’s Law to medicine. So, we are constantly on the lookout for great ideas bubbling up in academic institutions such as the QB3, and we regularly invest in early stage .  We have even funded projects right out of university labs.

Although I respect Regis Kelly’s position, I would point out that venture financing is coming back to life after a few quiet years.  In fact, several large new venture capital funds specializing in life sciences have recently been formed.  These include Third Rock Ventures, which raised $426 million for its second fund focusing on , medical device and diagnostics companies; OrbiMed Advisors, which closed its fourth venture fund at $550 million in February; and SV Life Sciences, which recently secured $523 million for its fifth fund. Dozens of additional life science focused-venture funds are also active investors.

In addition, venture capital investments totaling more than $3.4 billion were poured into 241 companies in the biotechnology, medical device and health information technology sectors in the first half of 2010, according to the PricewaterhouseCooper MoneyTree report. This money supports the flow of ideas from university research into startups, which work to turn the research into commercially viable products and services.

The overall availability of for scientific research and life sciences startups is excellent, largely because of enormous investments by federal and state governments into the life sciences and health care sector. The budget of the National Institutes of Health for fiscal year 2011 is $32 billion, most of which goes to grants for academic research. California also supports direct research through its funding of the University of California system and other projects. And there is ample money to pay recipients for the fruit of their success. The Department of Health and Human Services has a staggering budget of almost $900 billion, the majority of which pays for reimbursements of Medicare-funded and Medicaid-funded  health care costs, including products and services manufactured by American pharmaceutical, biotechnology and medical device companies.

It is true that the new healthcare restructuring law phases in complex new regulations, taxes and incentives – both carrots and sticks – that will radically change the way health care is provided and funded.  But the law, for all its complexity, has provided investors and greater clarity about opportunities in an industry that will soon be serving an additional 31 million newly insured citizens.

Lastly, I would also like to address the ROI for patents and intellectual property created by academic research. Does the government get its money’s worth? I believe so. In the aggregate, the patents created by university research represent incalculable value. The medical industries purchase the patents, universities receive royalties from them, and government receives a return in the form of corporate and sales taxes. What of funding that doesn’t lead to a financial return? Basic researchers never know when they are going to develop a world class idea, but this uncertainty and risk is what makes them tick. As Regis said, “Scientists … are motivated by the sheer beauty, elegance, and excitement of fundamental discovery.” However, the financial return is generated by the huge number of scientific projects under way.

Venture capital investors take similar risks. Like a researcher, a VC evaluates the best place to put his time and resources, and makes investments without knowing the ultimate outcomes. Like a government granting agency funding basic research, the VC takes a risk that some of his investments don’t pay off. When one does pay off, then everyone benefits. One thing is certain – without government funding for academic research, and the vital university research atmosphere, the medical and health care sector of our society would be nowhere near the level of sophistication and success as it currently is.

It therefore follows that the government does get good bang for its buck, and the social contract is intact. The medical devices, pharmaceuticals, advanced treatments for disease, and the promises of more exciting personalized medical innovations resulting from the collaboration of the three stakeholders – government, universities, and private sector investment is a priceless part of our national economy and social system.