Moharem El Gihani, Ph.D.

An alignment of “patient capital” and focused deployment, to give the double bottom line of social benefit and a return on investment.

Pharmaceutical industry stalwarts will be familiar with drug discovery pipelines, the cost of developing new medicines, and the lengthy timescales involved in getting a drug to market.

The financing of this process for biotech firms—angel investment, rounds of venture capital—is also well established.

That this paradigm of venture capital investment is also commonly understood to be “broken” is another industry-accepted truism. (Mulcahy et al., 2012, p.3)

Outside of the drug discovery ecosystem, sovereign wealth funds (defined as sovereign-owned funds that invest in stocks, bonds, real estate, and other financial instruments [Johan et al., 2013]) have developed tenfold over the last 20 years so that they now stand at an estimated $5 trillion—more than double that of hedge funds. (Bernstein et al., 2013)

Historically, their investments have tended to include monopoly infrastructure assets, safe-haven real estate, and commodities. More speculative investments in areas such as drug discovery, either directly or via venture capital funds, have generally been scant.

The need, however, for new sources of capital investment in drug discovery is clear—a requirement that has led to the spawning of a number of new investment models. Aside from the reconfiguration of existing capital within the industry in the form of corporate venturing and university venture groups, innovative models such as equity-based crowdfunding have emerged. Arguably, equity-based crowdfunding is representative of a new class of innovative finance that accesses new sources of capital. Its wider application in drug discovery is, however, largely dependent on the evolution of an adequate regulatory framework.

Another innovative financing model that is impacting on drug discovery is venture philanthropy. The model involves nonprofit organizations investing in R&D using similar strategies to venture capital firms. Significantly, the drivers for this model are both commercial and linked to a real-life impact on patients—a “double bottom line”.

The importance of venture philanthropy can also be gauged by its ability to fill the funding gap in areas of research that have hitherto been deemed too risky (from a technical or business case perspective) for pharmaceutical companies to invest in. A notable example being the Cystic Fibrosis Foundation contributing $75 million towards the early-stage development of Kalydeco, Vertex Pharmaceuticals’ drug for the treatment of cystic fibrosis.

Elements from these new models—a social component, a focus on a therapeutic area, a double bottom line, and an innovative source of investment capital—emerge as idealized constituents in an innovative new blueprint for funding drug discovery. Arguably, the proviso must also be that returns are attractive, and yet realizable. This is particularly pertinent as return on investment in the healthcare sector has been routinely maligned—something that is largely unwarranted if one considers a recent survey of 1,300 U.S. venture capital firms from 2000 to 2010 (Figure 1), which concluded that healthcare had the highest return of any sector, with 15% IRR on realized deals (7.4% for realized and unrealized). (Booth & Salehizadeh, 2011)

With the merits of investment in healthcare contextualized, the sector can be seen as an attractive proposition for potential investors. The risks, however, remain and the inherent timescales (10–15 years) involved in drug discovery do not sit comfortably with the timeline expectations of the venture capital community for a return on their investments. The requirement for “patient” capital must therefore be seen as an additional component in any new funding model.

In considering the funding of drug discovery with this wider lens, potential blind spots to the innovation process can be eliminated. Such an approach, for example, opens up a broader vista on the investment landscape, with “strategic development sovereign wealth funds”— sovereign funds that seek social benefit as a well as a financial return—emerging as a new source of funding for drug discovery.

This growing appetite amongst sovereign wealth funds for strategic investments that have a societal benefit for their populations chimes with the “socially responsible investment” (SRI) aims of venture philanthropy. 

Figure 1. Cross-sector venture capital IRR, 2000–2010 (Booth & Salehizadeh, 2011)

With this natural alignment, it is possible to conceptualize a new investment model for drug discovery that combines sovereign wealth as an investment source, with a deployment based on venture philanthropy. Furthermore, such a model could be tuned to the requirements of a particular sovereign wealth fund’s population: Developed nations like Norway, for example, could target research into diseases such as Alzheimer’s, dementia or cancer; GCC nations like Abu Dhabi could focus on diseases prevalent in their populations, e.g. Type 2 diabetes, while developing nations (e.g., Angola) could focus on infectious diseases.

Whatever the chosen therapeutic area, the longer investment timelines inherent with sovereign wealth funds will allow for the extended timescales required by drug discovery.

With such “patient” capital helping to deliver “Evergreen” funds, implementation of strategically focused sovereign funds (SFSFs, Figure 2) could be envisaged in the following stepwise manner:

  • Set a realistic IRR (high single-digit)
  • Series A funding: emphasis on the social benefit/ SRI component
  • Series B funding: emphasis on growth and an increased IRR
  • Series C funding: a mature fund delivering target IRR

Besides affording a view of an innovative new funding model for drug discovery, a wide lens approach to innovation can also be used to highlight risks to its adoption.

Traditionally, the only fly in the ointment concerning sovereign wealth fund investments has been political sensitivity surrounding foreign nations acquiring stakes in strategically important industries. For this reason many of the ad hoc investments that have been made by sovereign wealth funds in drug discovery—or in other areas for that matter—have remained private.

Figure 2. Strategically focused sovereign funds (SFSFs): a new investment model for drug discovery.

Arguably, in a globalized economy with an emphasis on foreign direct investment, this is something that is in abeyance. Furthermore, the social benefit of drug discovery—amplified in a model like SFSFs, where the benefit to a particular patient population is tangible—can help to de-politicize such investments and allow for their widespread acceptance.

In conclusion, SFSFs represent an innovative new source of capital for funding drug discovery. The model provides a double bottom line of social benefit and a return on investment.

In addition, it takes into account the extended timeline requirements for successful research, whilst focusing on specific therapeutic areas (Figure 3).

Such a focus has the potential to help progress research into particular diseases, whilst providing strategic and societal benefits for sovereign wealth funds, their populations, and the wider community.

Figure 3. Implementation of strategically focused sovereign funds.

Moharem El Gihani, Ph.D. ([email protected]), is founder of Silphium Ventures.


  1. Bernstein, S., Lerner, J., Schoar, A., 2013. The investment strategies of sovereign wealth funds. The journal of economic perspectives, a journal of the American Economic Association, Vol.27(2), pp. 219–238
  2. Booth, B.L. and Salehizadeh, B., 2011. In defense of life sciences venture investing. Nature biotechnology, 29 (7), pp. 579–583.
  3. Johan, S.A., Knill, A., and Mauck, N., 2013. Determinants of sovereign wealth fund investment in private equity vs public equity. Journal of International Business Studies, 44, pp. 155–172.
  4. Mulcahy, D., Weeks, B., & Bradley, H., 2012. We Have Met the Enemy… and He is Us: Lessons from Twenty Years of the Kauffman Foundation's Investments in Venture Capital Funds and the Triumph of Hope Over Experience. Available at SSRN 2053258.
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