Introduction
What does it take to create and nurture life science innovation and why is it important? No doubt, this is a broad and deep topic, and would not be adequately addressed in a single white paper. As a result, this will be the first in a series of deeper dives into a variety of sub-topics, including but not limited to: Patient-Driven Considerations; Universities to Start-Ups; Federal, State, Local & Other Support; Product Development & Commercialization; Measuring Success or Failure; Lessons Learned & Areas for (Future) Improvement. But in this initial overview, I would like to spend some time focusing on a macro view of the component parts, the value they provide, how they interact, and where there may be gaps. To be clear, I am addressing this topic from a national perspective, and intentionally not focusing on Regional or State considerations, which are very much dependent on local circumstances. By way of setting boundaries, my definition of life sciences includes pharmaceuticals, vaccines, medical devices, diagnostics and related assets such as reagents, consumables and other enabling technologies.
Benefits
First and foremost, what value does supporting innovation in the life science space provide? In other words, why should we care (and why should you continue reading this article)? Numerous studies indicate that the transition of early discoveries from research universities, institutes and national labs is essential to the creation of new, life-saving technologies, giving the US a leading position in global healthcare innovation. But what about discoveries originating in the private sector? Industry is facing an increasingly concerning situation in which it is losing patent protection for blockbuster products, and—at the same time—failing to replenish pipelines. The diagram figure below highlights this trend in the biopharma subsegment.
Biopharma innovation deficit (2010-2027): A post-pandemic downturn due to the loss of product patent exclusivity
Paradoxically, this decline in “replenishment rate”—the ratio of incremental sales from products launched in the last five years to losses in sales from patent expirations over the same time period—is happening even as industry spends more on research and development every year, yet new product approval rates continue to fall. Interestingly, smaller companies have seen their approval rates rise substantially over the same period. The take home message? More and more large companies are looking to smaller entities to access cutting-edge technologies, which are often based on university-driven and -sourced research.
Another readily quantifiable metric of the value of innovation is jobs: The life science industry employs highly trained well-paid personnel, which results in the retention of both talent and income in the US. Current estimates suggest there are just over 2 million jobs in the sector with a median salary of $143,000. The life science job market is expected to see significant growth in 2025, driven by advancements in technology, increasing investment in research and development, as well as a growing need for healthcare solutions, particularly related to an aging population with roles focused on product innovation, regulatory compliance, emerging technologies and real-world evidence being especially in demand.
Life science sector job growth (2004-2024)
Finally, let us not lose sight of the fact that the domestic development and manufacture of safe and effective lifesaving products avoids relying on foreign powers to provide them, not to mention providing countermeasures against chemical and biological threats, thereby rendering them less devastating. As a nation, the bulk of the products we buy each day are increasingly manufactured abroad, in countries such as China, India and others. It is quite likely that—without a robust innovation economy—we will find ourselves relying on these same foreign entities for pharmaceuticals, vaccines, medical devices, diagnostics and other critical items.
Ecosystems
Stage-based innovation ecosystem map
Several concepts illustrated in the schematic above require further explanation. First, the definitions of the development stages: Basic Research includes all efforts up to, but not including preclinical research; Early development entails preclinical through Phase I (or similar) clinical study; Late Development involves Phase II and Phase III (or similar) evaluation; Launch encompasses regulatory approval and commercialization of the product. Second, the traditional cutoff for defining a “small business” is 500 employees, but does not reflect segment-specific considerations. Here, we use a headcount of less than 50 for earlier stage life science companies.
As mentioned before, the vast majority of new inventions are created by universities, institutes and national labs around the globe. Industry contributes to the funnel also, but at an arguably lower volume, and tends to be more of an acquirer than an originator. The funding for university-driven breakthroughs is primarily through grants from national sources. Here in the US, the NIH provides the bulk of the so-called “basic research” dollars for life sciences, which is a bit of a misnomer given that there is nothing “basic” about much of the cutting-edge work being done, leading to significant advances across all aspects of human health, such as drugs to treat cancer and heart disease, antiviral therapies, gene editing, mRNA vaccines, MRI diagnostics and many more. Obviously, not all university research has commercial potential, and it is the responsibility of the resident Technology Transfer Office (TTO) by-in-large to identify and prioritize those technologies worthy of further support, including pursuing patent protection, mentoring inventors and marketing the asset to potential advisors, investors and/or partners. There are also an increasing number of funding mechanisms that universities (GAP funds) and their local governments (matching grants, incentives) can tap into to further the development of promising technologies beyond what basic research funding is intended for.
The ultimate goal is to find the resources necessary to move the technology into and—hopefully—through the “Valley of Death”: A veritable no-man’s land where technologies are too early to attract infusion of large amounts of needed capital. This paradoxical catch-22 means that investors increasingly want to see greater de-risking which itself can take millions if not tens of millions of dollars to obtain before deploying funding.
Life Science Innovation Timeline
One way to at least partially bridge the Valley of Death is to license the rights to the asset to a start-up company, which can then pursue funding sources not available to the university: Early-stage dilutive and non-dilutive capital.
Non-Dilutive. Grants and contracts from Federal, Regional, State, and Local governments, NGOs, Foundations and others ranging in size from hundreds of thousands to millions of dollars. Pros: No equity requirement and name recognition/credibility of funding entity. Cons: Long timelines and some weaknesses in the review process (e.g. scientific bias, lack of commercialization understanding, etc.).
The largest of these programs is the Federal SBIR/STTR grant mechanism. Beginning in the 1980s, Congress mandated that Federal agencies with extramural research budgets exceeding $100M must set aside 3.2% of their budget for SBIR programs, while agencies with budgets over $1B must additionally set aside 0.45% for STTR awards. From fiscal years 2018 through 2022, just over $17B was provided, mostly to companies with less than 500 employees. After the DOD, HHS is the largest source of these funds at nearly $5B during the 5-year period, or an average of $1B each year. These awards are critical fuel for moving essential technologies ahead in these small companies. Without SBIR/STTR and similar grant/contract funding mechanisms, our Nation’s life science innovation would be severely impacted.
These fledging newcos require capable and experienced management to navigate the critical first few years of operations, and having a pool of industry-specific veterans is key to this. A close second is access to a network of service providers (legal, accounting, contract research and manufacturing, regulatory and clinical consultants, etc.), and third is the availability of specialized space essential for life science research. Worth noting is that these three elements do not inevitably need to be co-located. Many young companies employ a virtual model, tapping into best-in-class resources regardless of geography.
Let us now fast forward, and assume that a scrappy start-up has raised enough funding to get to and through the earliest stages of product development. Now, with some de-risking of the technology in hand, securing Series A and later rounds may be feasible and provide sufficient capital to test the asset in initial clinical evaluation. Often, however, smaller companies opt to partner with larger entities to access the specialized expertise, resources and capital needed to conduct these expensive studies. In some cases, this may be a point at which the asset is acquired outright, providing and exit event and return on investment to shareholders. This is not to say that the small company cannot continue to move the asset into late development and possibly even to market without itself morphing into a larger organization, but it is uncommon and entails raising hundreds of millions of dollars from the largest VCs, private equity, and/or possibly via an IPO. If retained, the small company will either need to grow its headcount or continue to rely on external expertise, such as regulatory affairs and clinical development, manufacturing, and eventually product launch, marketing and sales. A larger organization would likely have much of this capability already in-house, with limited need for outside support.
---
About VIC Tech: We are a life science-focused Venture Studio, creating portfolio companies based on best-in-class innovation sourced from universities, national labs and institutes around the world. Our team provides the operational expertise during the initial start-up phase, ensuring maximal impact while mitigating burn, allowing as much funding as possible to be allocated towards de-risking the licensed asset.