South Korea's Ministry of Health and Welfare is moving to design an "investment-type R&D" model, stepping away from its current practice of simply funding research and development at pharmaceutical and biotech companies. Under the structure, the government would share the risks of drug development with companies and, when results materialize, recover its money and channel it back into new research. With the Ministry of Science and ICT and the Ministry of SMEs and Startups already pursuing R&D programs that incorporate investment mechanisms, the health ministry is drawing attention by starting work on a separate model reflecting the particular nature of drug development.
According to the pharmaceutical and biotech industry on the 25th, the Korea Health Industry Development Institute recently commissioned a 60 million won study on designing a model for investment-type R&D in bio-health. The move follows a joint government plan for investment-type R&D drawn up by relevant ministries in June, with the health ministry now searching for an investment structure that can be applied to health care fields such as new drugs and medical devices.
Most government R&D funding is currently provided as grants to companies or research institutions. Even when research led to large technology exports or commercialization, there were limits on the government's ability to recover returns like an investor and reinvest them in other research. The core of investment-type R&D is creating a recover-and-reinvest structure, in which the government directly shares risk and puts the proceeds from successful projects into new research.
Experiments at the government level are also gaining momentum. The Ministry of Science and ICT is running pilot R&D programs that incorporate investment mechanisms, and the Ministry of SMEs and Startups is expanding support that links private investment with government R&D. The SME ministry has created a new program, private-sector cooperative investment-type technology development, in next year's budget proposal, allocating 20 billion won to take direct equity stakes in companies.
The health ministry is building a separate model because of the distinctive nature of drug development. Developing a new drug typically takes 10 to 15 years from the discovery of a candidate compound to commercialization, and the risk of failure is high at every clinical stage, making it difficult to apply investment structures from other industries. Private venture capital firms also tend to put money into projects where technology has largely been validated, rather than into riskier early and mid-stage work, fueling calls for the government to serve as patient capital that shares risk over the long term.
The institute plans to compare and design at least two models through the study, including a project-based special purpose company and an R&D investment fund. It will spell out the ratio of government and private contributions, investment conditions and limits, ownership of equity and intellectual property, follow-on investment, and methods for recovering and reinvesting funds. It will also review ways to link clinical milestones for new drugs with the timing of investment and recovery. A pilot program proposal is planned as well, covering eligible companies, selection criteria, standard contracts and how to handle research failures.
The key question is how the model will differ from existing bio policy funds. Government-backed investment resources for the sector already exist, such as the K-Bio Vaccine Fund. Existing policy funds function largely as financial support, investing in companies through professional fund managers, whereas investment-type R&D differs in that it combines investment mechanisms with national R&D programs themselves, tying investment and recovery to the research results of specific drug projects. The crux is not simply creating another bio fund, but how much of the risk in the stages of drug development that private money avoids the government is willing to shoulder.
Institutional hurdles are considerable. A legal basis is needed for using national R&D funds to acquire stakes in companies or investment funds and to put investment returns back into research. Another issue is how far to hold investment decision-makers responsible when a clinical trial fails in the normal course of research. Excessive accountability could push the government to select only projects with a high chance of success, undermining the purpose of the system. In cases of success, the relationship between existing royalties and investment returns, the allocation of equity and IP between government and companies, and the timing of fund recovery also need to be settled.
A health ministry official said revision of the Act on National Research and Development Innovation, the parent law for R&D, is being handled by the Ministry of Science and ICT, and that the health ministry is at the stage of reviewing whether there are areas in health care that need to be addressed supplementarily. "There is a degree of difficulty, such as the structure for receiving investment and setting up an SPC, so it will take time," the official said. The official added that this is very much uncharted territory, and that while the concept of investment-type R&D is sound, many issues must be examined to turn it into an actual system.
