Harold Smith is a professor at the University of Rochester and the founder of OyaGen, Inc. a biotech company based in New York. In this Industry Viewpoint, Smith discusses the challenges of non-diluted funding in the preclinical space.

Henry Kerali: To start with, what is non-diluted funding?

Harold Smith: Non-dilutive funding relates to the capitalization of a company’s efforts by means that do not involve equity. So, what are those sources – your friends and family to name a few. While they may not provide a substantial amount, companies need investments of $1-5million USD or more, meaning they have to turn to stakeholders with enough financial clout.

Most of those stakeholders do not philanthropically give out to biotech companies because they realize the purpose of biotech is to create commercial value. So, what you’re left with are people looking for grants from states, countries and governments – some of which are gifts, while others must be paid back. In the U.S., the best sources of capitalization are federal grants through the National Institutes of Health (NIH).

HK: What is the process like for universities obtaining funding?

HS: On the one hand, there’s intramural funding from the NIH, and on the other there’s extramural funding, which is financed through grants. That’s the main type of funding I’m interested in. Obtaining a grant requires writing a proposal. This can be time-consuming as you have to demonstrate to investors that you’ve thought through a critical path, understand your goals clearly, and appreciate alternative approaches should you have any setbacks.

HK: What are some of the main challenges you face in attaining funds for research?

HS: One of the main issues that provoke the need to find other sources of capitalization is that it’s expensive to do. Maintaining a biotech costs millions of dollars. Depending on how rapidly funded it is, it can take 10 years or more on the preclinical side before the company reaches the clinical stage.

So you’re looking at this and you’re asking investors to come in and fund the project. Investors tend to look at everything in the view of the short-term ROI (return on investment). Consequently, biotechs don’t fit in the paradigm that most investors like; they want in and out within two to five years. Biotech is in it for the long haul and investors don’t favor that model – there’s a lot of trial and error in preclinical research that requires more money beyond what was initially costed. You’re looking at a situation where investors will not be able to sustain this, and if they do, they will extract a significant toll of ownership.

HK: Would you say that is part of an industry-wide problem? How does that impact your research?

HS: It raises all sorts of questions, such as, how do you generate value for investors? How do you ensure companies can weather all storms? And crucially, how can companies make it to the end and have appropriate preclinical data before filing with the FDA? These are issues that don’t presume anything about the money necessary to go through clinical trials, but rather the money necessary to get yourself sufficient evidence for a clinical trial being approved.

Over the years, industry has backed well away from R&D. Several years ago, if a company had an interesting idea, it was interesting to everyone. As time went on, the ‘too early to invest’ attitude became commonplace among investors and the industry. As a result, companies then began to move away from R&D and focus on internal programs, optimizing current drugs they had in their pipeline, and were no longer investing in drug discovery.

This left university science with no clear bridge to the industry, other than investor money. This meant researchers would spin-out a company, suffer massive dilution, and never have enough funds to get into clinical trials. Conducting clinical trials is essential to bringing a drug to market. For biotechs, having a strategic partner with the infrastructure to do that is critical.