Funding research undertaken within R&D intensive businesses is a complex challenge. It presents differently for different sized business, however there are common threads to the opportunities and challenges and common calls for improvements to the policy, commercial and regulatory protocols that influence engagement.
This paper examines key funding trends and challenges within industry research.
Characteristics of R&D intensive companies
Common characteristics of research intensive companies include:
- very little leverage in their capital structure;
- a negative correlation between leverage and R&D investments;
- an underinvestment in R&D — the funding gap — even by firms that are publicly traded and have access to the capital markets;
- a tendency to hold large cash balances; and
- use of external financing, relying on stock issues to finance R&D.
Boosting industry research
Research has become more difficult to finance through traditional methods. Traditional financing sources such as private and public equity may not be ideal for investment projects with low probabilities of success (even with the lure of significant upside), long time horizons, and large capital requirements.
As traditional models falter, stakeholders are beginning to ask whether new financial structures and corporate structures are the key to boosting research and whether perceptions around academic engagement can be reassessed.
Examples of recent developments in the financial markets include:
- the PLIPO: the productless IPO is a way to bring companies to the public markets before they have a product and diversify risk in the research pipeline before a market entry point is established. In bio, listing before a product is established offers a way to raise the funds need to take a candidate through the clinical trial process.
- regulatory collaboration: interesting analysis as to which financial instruments could be used to optimally finance R&D-intensive firms. Structuring solutions involve a repurposing of tools in the financing sphere and which commercial models could be used to approach the problem from a new angle. Proposals are sophisticated and include a key role for regulators who an increase probity in the system.
Examples of recent developments in the commercial sphere include:
- new metrics: the adoption of new metrics to show the productivity of research are becoming more familiar to those inside and outside the lab.
Reasons for internal difficulty within corporates often include the lack of readily available data by which to make comparisons both for internal productivity and for external competitive analysis, ultimately resulting in research teams pitching CFOs for research funding, in competition for distributable reserves (that CFOs are incentivised to return to shareholders). Metrics such as these can provide a useful yardstick by which measurements can be taken and communicated with those from the finance community.
Shareholder activism
The increasing pressure on corporations for short-term results has made investments in research problematic. Factors of influence are both internal and external. Internally, research teams struggle to justify continuing investment in risky long-term research to CFOs, who are incentivised to deliver dividends to shareholders and performance reports to markets on a frequent basis. Externally, shareholder activism has a noticeable negative impact on a company’s investment in research.
Academic collaboration
Many fast growing, forward-looking companies know that there are benefits to be found through academic collaboration. For some, these benefits justify the investment involved in establishing university level framework agreements, attending academic conferences to scout for research talent and enduring the bureaucracy involved in getting to the starting line. For others, the strings attached are too great.
Despite the macro-economic incentives to act quickly, many industry counterparts will only pursue a collaborative research project with academic counterparts if it is funded with government support. At the same time, industry considers that existing R&D incentives as either “promising but far to go” or “insufficient relative to the challenge”.
At the same time, governments repeatedly commission reviews of their R&D incentives structures and:
- continue to find that ‘spray & pray’ models could be replaced with more targeted use of incentives, but prefer to leave them in place.
- find that whilst the transition to the knowledge economy is important, they act to prioritise support for existing cash-cow industries.
Industry collaboration
Strange bedfellows emerge in that companies would would previously have held the R&D programs as closely guarded secrets are realising that they need to collaborate to address issues and can attract resources through the signal that collaboration sends to potential financiers (which is perceived as a valuable signal of market potential).
Data sharing
Interesting trends in both private data transfer and public sharing are emerging, including:
- information bridges: information asymmetry is a critical issue for research. The R&D conducted by a firm (and its decision to invest in it) relies on and generates highly specialised knowledge that external financiers and collaborators may lack. The establishment of effective information bridges is a critical part of the challenge in increasing capital markets flows to research. Interesting proposals to address this challenge are coming from the financial community.
- crowdsourcing data: the Community for Open Antimicrobial Drug Discovery is taking a fresh approach to collaboration. It is searching for new chemical diversity by crowdsourcing compounds from academic chemists around the world. To encourage collaboration (and in a rebuke to the bureaucratic overlords) chemists and biologists from industry and academia are working together by sending compounds back and forth, without legal agreements or barriers to collaboration. CO-ADD is attempting to recreate this collaborative effort by fostering a co-operative environment with as low a barrier to participation as possible. Importantly, all of the legal rights to the compounds and data are kept by the chemist sending the compound. The governance challenge is to protect and encourage this sharing, whilst preserving commercial incentives to engage.
Patent trends
Where the patent payoff does not sufficiently incentives markets to invest in research, political interventions and patent extensions are used to preserve monopoly control and discourage competition.
The issues are more complex in some markets, such as antibiotics, where patented drugs form a small percentage of the overall market. Policy makers are emboldened to make more drastic moves as these problems escalate up the public health radar. Within health science, the patent cliff illustrates the escalating sense of urgency in addressing this challenge.
More innovative financing methods are needed to continue funding risky research. To encourage risk in this field, innovating commercial structures and actors are emerging.
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