NEW YORK – Cuts and freezes to federal funding for scientific research could lead to fewer academic spinouts and a reduced pipeline of investment opportunities in the life science tools space, said a number of industry investors and stakeholders.
Several of these individuals expressed optimism that the Trump administration's recent disruptions of federal science funding will prove temporary, but all noted the essential role academic research plays in generating the discoveries and intellectual property that drive the commercial life science tools market.
The GenomeWeb Top 40 — GenomeWeb's index of leading publicly traded life science tools and diagnostics firms — offers strong evidence of the importance of academic research to the commercial pipeline. Top 40 companies including Illumina, Grail, Myriad Genetics, Pacific Biosciences, Personalis, Quanterix, and QuidelOrtho are based on technologies spun out of academic labs. Others like Bruker, Exact Sciences, Bio-Techne, and Thermo Fisher Scientific have licensed academic inventions and/or acquired academic spinouts.
University spinouts are also prevalent among privately held companies, including firms like Cytovale, Inflammatix, Cleveland Diagnostics, and Colossal Biosciences, which have notched some of the largest funding rounds in the space in the last several years.
Academic spinouts "have been a big area of interest for us, and I've done a lot of investments in the last decade … in businesses that are spinning out of various universities," said Zal Bilimoria, solo general partner at venture capital fund Refactor Capital and a former partner at Andreessen Horowitz, where he helped launch the firm's Bio Fund. "In early-stage VC funding, whether it is seed funding or Series A, we look at a lot of these amazing academic labs across the country to source companies and source deals."
The type of work funded by the National Institutes of Health (NIH) has always been "path-breaking, paradigm-shifting, [and] innovative, and part of the implications of that are … startups [and] spinouts," said Elena Fuentes-Afflick, CSO at the Association of American Medical Colleges (AAMC). "NIH-funded work is absolutely essential."
According to AUTM, a professional organization for the university technology transfer field, in 2023, academic institutions made 25,124 invention disclosures, filed 14,634 new US patent applications, and signed 9,299 license agreements, with 714 new commercial products created and 903 startups formed. Between 1996 and 2020, US academic institutions have spun out more than 18,000 startups and contributed an estimated $1 trillion to the country's gross domestic product, the organization said.
Kristen Cook, a managing director and partner at Boston Consulting Group whose work focuses on innovation in life science tools and diagnostics, said the impact of cuts and disruptions in NIH funding will likely appear in waves, with the talent pipeline impacted first as universities cut slots for graduate students and postdoctoral fellows. This will likely be followed by declines in technology development and, perhaps two or more decades from now, gaps in "new foundational understanding of biological pathways."
Cook said that more immediately, funding disruptions could impact work nearing commercialization including "collaborations of different sorts looking at specific targets and molecules or the direct licensing of IP."
Fuentes-Afflick said that the disruptions to research funding under the Trump administration fall into three main categories: delays of the NIH study sections required to award grants; cancellation of existing grants; and the administration's move to cap NIH indirect payment rates at 15 percent.
The first of these appears to be resolving as NIH is again scheduling study sections. While NIH did not publish in the Federal Register notices for any study sections between Jan. 21 and March 3, since March 4, it has published notices for several dozen.
Fuentes-Afflick said that while the degree of the pause in study sections was atypical for a changeover in administrations, scheduling "seems to have resumed, and we look forward to those groups completing their work and dispersing funds to investigators."
More worrying is "the abrupt termination of NIH-funded grants," she said, noting that while it is difficult to determine exactly how many grants have been canceled by the administration, she puts the number at 1,000 or more. According to the US Department of Health and Human Services' Tracking Accountability in Government Grants website, as of March 20, the agency had terminated 340 active grants. NIH did not respond to a request for comment.
"This is of major concern … to the whole biomedical community, because NIH has been the global leader in funding biomedical research for decades," she said. "The termination of grants with no notice after they have been approved and work is ongoing — to call that disruptive is an understatement."
Fuentes-Afflick noted that while NIH has terminated grants in the past, it is infrequently done and typically due to things like researcher misconduct or financial irregularities.
"The wholesale and abrupt notification that we are witnessing is unprecedented in any of our lifetimes," she said. She added that AAMC is reviewing the cancellations to assess, among other things, their legality.
The new caps on the use of federal research grants to fund indirect costs could also hamper academic research and downstream spinouts. Indirect costs include items like physical infrastructure and computing facilities that are used by researchers. On Feb. 7, NIH issued a guidance capping the proportion of grants that can be spent on indirect costs at 15 percent, which is below the national average of 27 percent and well below the rates of 50 to 60 percent that some institutions have negotiated. A group of state attorneys general sued NIH to block the move, and on Feb. 10, US District Judge Angel Kelley issued a temporary restraining order preventing it from going into effect.
In the face of these headwinds, universities have become more cautious with spending, Cook said, noting that institutions have put into place staff and faculty hiring freezes as well as reductions in graduate student slots and capital spending freezes.
"We're seeing universities taking pretty significant steps to reduce their spending now to ensure they can support the science they currently have," she said.
Less funding and less spending will very likely lead to fewer discoveries, fewer spinouts, and a diminished investment pipeline down the road, said AUTM CEO Steve Susalka.
"I can say with certainty that more research leads to more inventions, and more inventions leads to more startup companies," he said. He cited data on annual research funding levels and academic invention disclosure numbers the organization has collected since 1991 that shows an essentially linear relationship between the two.
Susalka noted that federal funding as a proportion of total academic research funding has been declining steadily over the last three decades, from around 70 percent in 1992 to around 56 percent in 2023. This represents not a decline in total federal research dollars, Susalka said, noting that this has continued to increase, but rather a more rapid increase in other sources of funding such as foundation and state funding as well as royalties and licensing fees institutions are generating through inventions they transfer to commercial entities.
But while nonfederal funding could help compensate for declines or delays in federal spending, it is in many cases leveraging academic infrastructure and personnel that are paid for by money from NIH and other federal agencies, said Vikram Bajaj, managing director of life sciences investment firm Foresite Capital.
Even with current indirect spending rates, research still typically costs universities money above and beyond what is provided by their grants, Susalka said.
"For every research dollar they spend, the university is losing a few cents," he said, noting that they use sources like tuition funds, donor contributions, and investment returns to cover these costs.
"That's with the current indirect rate," he added. "You reduce that, they are going to lose even more."
Susalka suggested that the indirect spending caps could lead some academic hospitals to pull back on research and focus their resources on patient care.
He said he expects that larger institutions with substantial endowments will best weather spending disruptions. However, even wealthy institutions like Harvard and Stanford University have put hiring freezes in place due to uncertainty around federal funding.
Private financing is unlikely to make up any gaps in federal spending on basic research, Bilimoria said.
"I don't like to fund basic research out of venture dollars," he said. "I want that to be funded at the university or government level, and then when they are ready to spin out and go raise capital, go raise a three, four, five million-dollar seed round, that's when they come and talk to me, and I think about leading those rounds."
The ultimate impact of the recent funding disruptions on the life science spinout pipeline will largely depend on how long they persist. The uptick in NIH study sections suggests the NIH grant-making process has begun to move once again. Termination of active grants continues, however. Science reported, for instance, that NIH this week ended a number of grants funding research into COVID-19 and antiviral development.
The question of indirect costs remains unresolved. While the federal district court order has blocked the cuts for the time being, the government has other routes it might take to lowering indirect costs, Dan Graham, a partner with law firm McDermott Will & Emery, said in a recent note to investors from investment bank TD Cowen. Graham suggested that NIH could, for instance, renegotiate lower rates with individual institutions when their indirect contracts are up for renewal. He said he expects indirect spending rates in three years to be at least 5 percent lower than current levels.
Cook expressed hope that the disruptions will be short term.
"The optimist school of thought says that we are taking a careful look at how we spend the money, but that everyone agrees that biological research and life sciences research is an important priority and no one wants to change that," she said. "And if that's the case, then what I would expect is potentially some near-term disruption … and that could cause some near-term pain if you look at quarterly results for life science tools companies that will ultimately resolve itself over the next couple of years."
"I can see how this could potentially erode the [spinout] pipeline in the coming months and years," Bilimoria said. However, he added, "I'm not as concerned because I do think that universities still have budgets to support these companies, and there are still going to be lots of opportunities to create new businesses."
Susalka said that the first Trump administration provided some indication that it recognized the value of academia as a pipeline for commercial products and investments. Most notably, the administration included in its presidential management agenda (PMA) the goal of improving "the transfer of federally funded technologies from lab to market," which, Susalka noted, "is effectively tech transfer."
PMAs are meant to lay out administration priorities with regard to improving the operations of the federal government. The current Trump administration has not yet put out a PMA, but, Susalka said, based on the first term PMA, "I'm hopeful the administration recognizes the value of tech transfer and drives it forward."