What do you get when you combine onerous government regulations that have increased exponentially, experimental climates that mean lots of products just may not work, and if they do work you get a product that will only be yours for a few years and during that time a whole bunch of lawyers will look for ways to sue you?

You get modern biomedical research.  And a terrible climate for private investment.

It used to be that drug development did nothing with academia; the glacial pace of university research was too slow for the private sector but increased regulation and skepticism of pharmacy companies has left government-controlled research as the only way to go for many. It was just too expensive for companies so they would just wait until a Phase III clinical trial and buy anyone that survived.  But more regulations have even dried that up.

With an impending fiscal cliff coming in US funding - which means an end to tax breaks and mandatory cuts in funding for everyone - it may be time to rethink the role of venture capital.

In a commentary to be published in the Dec. 12 issue of The Journal of the American Medical Association, two Johns Hopkins faculty members point to flat government funding for biomedical research, those higher-than-ever costs of clinical trials, reduced drug industry investment due to the difficulties of the modern regulatory environment and the threat of cuts to the federal research budget without Congressional action by January to stop them. The commentators warn that without "creative" new sources of funding, biomedical innovation faces a crisis.  By creative, they mean the way it used to be before researchers figured government funding would be better.

"Regardless of what happens in Congress, biomedical research must look to the private sector and not the federal government as the source of new funds," write Hamilton Moses III, M.D., an adjunct professor of neurology and onetime chief physician of The Johns Hopkins Hospital, and E. Ray Dorsey, M.D., M.B.A., an associate professor of neurology at the Johns Hopkins University School of Medicine.

"The uncertainty of federal support of biomedical research now and in the near-term only makes the need to look to the private sector for support more certain," adds Dorsey.

Moses runs the Alerion Institute, which conducts studies on research policy, while Dorsey is an associate professor at the Johns Hopkins Carey Business School. Moses says the National Institutes of Health, which supports $32 billion a year for research, has already reduced the proportion of grants to individual investigators, the historical producers of most biomedical advances, and is focusing instead on collaborations, multicenter clinical trials and large-scale projects such as the Human Genome Project.  It's the legacy of government Cold War/Manhattan Project thinking.

Research costs at universities are rising at three to four times the U.S. rate of inflation, in line with student-loan-fed universities but out of whack with reality, and that is decreasing the amount of research by one-third every three years. Meanwhile, Moses and Dorsey say, the pharmaceutical and drug device companies, which spend roughly two-thirds of the estimated $100 billion spent each year on biomedical research in the United States, are focused on large clinical trials and late-stage research, rather than the basic research that fuels future innovation and used to be handled by start-ups when the government was more science-friendly. 

A small fraction (5 percent) of research funding comes from private charities and foundations so Moses says the best way forward is to create new forms of funding, such as mutual funds for individual and institutional investors, "Biomedical Research Bonds," or patent pools to share risks and rewards inherent in innovation and technology transfer. 

"These measures are analogous to those used to build sports arenas, ports, bridges or highways, lessening the financial burden on government," the Hopkins experts write. "They also promise to lower barriers that prevent collaboration between competing universities, companies and researchers."

Some areas of science, such as basic biology and mechanisms of disease, will likely never yield financial value to a discoverer, and consequently should continue to be the major focus of the NIH, Moses says. But to realize the benefits of translational research and the development of marketable new therapies and good businesses, funding must increasingly come from sources other than the government - and government needs to stop finding new ways to get in the way, especially by demonizing drug companies.

Moses' idea is to create new financial instruments that invite individuals, investors or pension funds to invest in research bonds that help cover the cost of making new scientific discoveries. Such bonds would draw not only those looking for financial rewards, but also those with a personal stake in a disease, a willingness to delay financial returns or a desire to help others. Buying a "cancer bond" or an "autism bond" has appeal for many, he adds.

"These bonds may not return anything in five to 10 years, or ever," says Moses, who believes raising $10 billion a year or more this way is doable. "Science is a form of speculation and the risk of failure is quite high. Yet it's precisely the high-risk, high-reward scientific endeavors that aren't getting funded anymore. We need to find a way to ensure they are. Clinical need and scientific opportunity far outstrip our current ability to support innovation."