Falling investor confidence has and will cost us dear

This blog began 2007 with a comment on the fickle nature of investment in medical research.

Citing a recent Tufts University study on the pharmaceutical industry, I commented that rising development costs could not be the only cause for the high attrition rate in drug development. I wanted to turn the direction of causation around and suggest that pharma faces a problem with investor confidence.

After all, the increase in development cost is a long term trend in biomedicine, and the additional cost has been passed on to the consumer, i.e the sick. When an industry focuses so strongly on the risks of investment, is it not time to ask whether investment culture is itself in bad shape?

By July, that same investment culture made headline news when it collectively switched off interbank loans and other forms of short term commercial lending.
The results were immediate and visible across much of the globe; the 2007 liquidity crises was born.

The finger of blame pointed towards risky mortgages in the US. But problems in the mortgage sector cannot explain the ongoing calamity in the financial markets.
The numbers just don't support such a conclusion. So far, declared losses in the banking industry still fall short of the $300B mark that analysts estimate to be the losses for the sub prime mortgage sector.

When and if such losses are realized, $300B just happens to be the amount that banks made as profit in 2006. These kinds of losses shouldn't be a problem. Industries don't normally face mass annihilation when they wipe out the previous year's profit margin in losses.

To come full circle with my January blog, we can frame this situation as a problem in investor confidence and lending. Lenders are placing a high price on risk. Lending has dried up, and with that financial development comes the possibility of years of under-investment in all the industries upon which our prosperity depends.

If you are interested.... Nassim Taleb

Visit Tom Keen's Bloomberg November 16th podcast for a fast paced tour of 20th century banking and finance by Nassim Taleb. Author of Black Swan: The impact of the highly improbable, Taleb ruminates on why financial risk estimation remains such an imprecise science.

"Physicists do prediction very well," Taleb explains. "Let's say, to 10 decimal places. Whereas Economists? Well they can't predict better than cab drivers".

Why? Physics is empirical, or "bottom up". It pays, argues Taleb.

Risk methods give a false sense of security. In Taleb's words: "Instead of teaching people 'This is what we don't know'. They teach 'what we think we know'. The illusion of understanding uncertainty"...

The short story on Carbon Capture & Storage

Over the past two days, Swiss Re has gathered together a discordant group of experts on carbon capture and storage (CCS) at their spectacular Centre for Global Dialogue overlooking Lake Zurich.

After a tip off, I had the luck to walk into a panel discussion rounding off the event and heard the best of it, re-stated by the top speakers, in 1.5 hours.

You might have heard about this much toted miracle cure for global warming. Positioned as a solution good for the immediate term, current CCS technologies would greatly facilitate the elusive 80-90% reduction in CO2 emissions, - downing 7 gigatonnes of the stuff per year, required to shove the planet off its collision course with overheating.

I learned about BP's toy CO2 burying project in Algeria, In Salah, showcased by a slick Iain Wright. Equally slick Humphrey Institute of Public Affairs professor Elizabeth Wilson outlined the miracle possibilities of CCS and, with help from Swiss Re Risk Management VP Christina Ulardic, the associated risk of the gas leaking out again and possibly killing people.

But a deadpan delivery by Energy Research Centre Netherland's PhD student Heleen de Coninck more or less dispensed with the whole proposal. Coninck pointed out that pumping CO2 back underground was itself highly energy intensive (even with the existing well developed CCS technologies the so called energy penalty is 15-20%), and likewise highly unlikely given the disparity between the financial market value of carbon (very low, and falling) and the 25-40 euros per tonne needed to pay for CCS.

So there you go. I hope I have summarized the 90 minutes I enjoyed at Swiss Re in 3 minutes of reading.

Sorry you missed the excellent coffee, fruit juice and snacks.

Links: New science/culture organisation in Paris

Nature (October 18th) reviewed a new showcase for "art meets science" in Paris. Le Laboratoire opened on October 19th in 4, rue de Bouloi (75001 Paris) and has a gymnastic website to go with it. Visit www.lelaboratoirs.org and you'll see what I mean.

More alchemy from the political caste

Please forgive my fascination for the easy formulas offered by politicians as they promise to transform research into economic prosperity.

The European Commission is always the catalyst for this magic chemical reaction, and somewhere in the discussion the catalyst is named as none other than the European Institute of Technology (EIT).

Here's my latest alchemic discovery, published yesterday. Award winning MEP Dr. Chatzimarkakis asserts that "research is about turning money into knowledge and innovation is about turning knowledge into money".

This elegant statement of reversible chemistry reminds me of remarks made earlier by EIT champion Jerzy Buzek, MEP. Buzek believes that "it is impossible to finance innovation directly". Something is needed to fill the gap in between, he says.

Like Buzek, Chatzimarkakis calls for innovation to overcome the strong equilibrium constraints that make Europe's research treasures inaccessible to economic exploitation.

Using this logic, innovation becomes something money can't buy. Either you have it, or you don't. Or to follow these particular Parliamentarians to their logical conclusion, European researchers must innovate. On their own. Chop-chop!

Hope springs a leak

Few people knew about it, but until last month more than 1 trillion dollars in risky mortgages were ultimately being financed by loans that were being held for a matter of only days at a time. That might sound strange to the financially uninitiated. And now, even among financial types, the whole arrangement is suddenly on the decline.

Welcome to the current credit crunch in the world financial system.

Household banking names have had to turn out their pockets to finance the original mortgage obligations. Many of these mortgages were made to borrowers with slight chances of meeting their monthly payments.

By the beginning of September, several banks hit the panic button and said they couldn't afford to pay. Central banks around the world have had to step in to keep the loans afloat.

You might be asking how a bank could get caught out funding 30 year mortgages using loans that last only days?

The banks drove into this mess at high finance speed using what are called Structured Investment Vehicles, or SIVs. SIVs are offshore investments, virtually unregulated, for special purposes.

The banks earned good money from these racy little investment vehicles by selling the loans on to buyers in the so called commercial paper market. But commercial paper must be re-negotiated every few days, and that's where things went pear-shaped in August. No one wanted to finance the loans.

Is all this sounding far away form your everyday? Overly risky US mortgages. Offshore investment vehicles. And a rescue package from central banks. Maybe. But closer to home we have people camping out overnight to be first in line to withdraw their savings from UK building societies.

'More' should mean 'better' in research...

More news from the European Commission about how it plans to foster research in the European Research Area.

Science and Research Commissioner Janez Potocnik explained that 'Europe needs more research, but we will never have more research without more researchers'. Potocnik is taking advantage of the Summer Pause to promote the European Network of Mobility Centres (ERA-MORE), which aims to get researchers moving around Europe.

This is a great endorsement for increasing European research efforts but I miss, a little bit, a focus on quality.

It's heady stuff, but then that is never really in short supply in these kinds of announcements. Another memorable one was Potocnik's recent declaration that knowledge should be a "fifth freedom of movement" in the EU after the free movement of goods, services, capital and labour.

US joins the Basel II party

The Federal Reserve, Federal Deposit Insurance Corp. and other US financial institutions issued a joint statement on July 20th saying that they would join Basel II, a key global accord of financial regulatory bodies that has been hammered out in the Swiss city of Basel.

Various sticking points prevented the US from coming to the table, despite the fact that European and Asian economies had signed up more than a year ago.

At the core of Basel II is a promise from Banks to put aside capital reserves as protection from serious loses. The accord has been drawn up against a backdrop of financial deregulation over the past 15 years, and is seen by many as a critical guard against a global financial meltdown.

Basel II features a cocktail of complex methods for calculating the value of bank reserve assets, including novel methods to assess the riskiness of the reserve assets themselves. The complexity of these methods have created much hand-wringing debate. It was the techie, quantitative side of Basel II that drew my own interest.

Early on, the financial community feared that Basel II would bloat capital requirements and threaten bank competitiveness. Interestingly, one of the final sticking points for US participation was that the capital reserves would actually be lower under Basel II.

Thus, it was the Federal Deposit Insurance Corp. that threatened a veto, because Basel II would allow banks to hold lower reserve assets than those stipulated by existing US Bank lending rules.

The 12 large banking institutions in the US that will now comply with Basel II will also remain bound by the so called leverage ratio, a government imposed lower limit to the proportion of assets that banks are entitled to lend. With an agreement on this additional claus came the final settlement for US membership.

Earlier in the month, Middle East financial institutions made an announcement about their own progress with Basel II. A roundtable discussion involving financial representatives of the United Arab Emirates highlighted vulnerabilities in operational risk, i.e. risks associated with failures in systems, processes and people. A press release issued by the roundtable explained that regulators in emerging economies "lack credible, quality data" with which to evaluate their financial risk.

Basel II, the UAE roundtable argued, could be a source of competitive advantage for emerging economies by increasing banking efficiency and productivity. All of which is good news for those at the Bank of International Settlements in Basel, who can now count all major European economies, Japan and now the US at the Basel II table.

Gain or pain?

The European Research Council (ERC) received 9167 project proposals for its new Starting Independent Investigator Grants. With a significant portion coming from outside Europe, the ERC hailed this tsunami of interest in its new research funding scheme as hope for a "brain-gain" to counter years of European brain drain.

Anyone can apply for the grant as long as they are based in an EU country during the funding period.

But with a budget of €290 split across all research domains, not to mention the arduous task of sifting through nearly 10000 grant proposals, I wonder if the scheme will be a bit over stretched?

It really is a lot of proposals. A lot of effort on the side of the applicants. I would wager that this interest is driven by falling US grant acceptance rates more than anything else.

How will the ERC carve up its relatively petite spoils? Who is going to suffer through the evaluation of those many thousands of eager applicants?

What is missing, for my taste, is a research focus; say medicine or social sciences. And there should be at least some evidence that the ERC will garner together expertise to judge the successful proposals. Otherwise I fear an outcome involving more pain than gain.

Money isn't everything in research

China is awash with new cash to spend on research, Nigeria has a $5 billion trust to develop applied technologies and India boasts over 20 000 pharmaceutical startups alone. But still it seems there are some things that research money can't buy.

China and India are emerging as places where money is no issue when it comes to research. The Chinese Ministry of Science and Technology just announced that more than a billion yuan (US$130 million) will fill the coffers for research into traditional chinese medicine (TCM).

That is 5-6 times the previous spending round. A further 8 billion yuan has been allocated to the health budget for traditional medical treatments. Yet beneath this rain of additional funding, skeptical voices can be heard. China is being questioned about the way the money will be spent, and its medical safety record is poor.

There's no evidence that things will improve by simply spending more. And according to an editorial in the April 5th edition of Nature, China's share of the global market in TCM is being eroded by Japan and South Korea. There, cash flows at a reduced pace but the quality is better.

Affordable, but not ethical

Biotechnology is booming in India and investors are flocking to the generics market, that is, to the production of drugs that are no longer covered by patents. But some are uncomfortable about this boom taking place alongside India's yawning economic disparities.

Sanofi Aventis Chairman Jean-Francois Dehecq denounced the pharmaceutical industry in India, Thailand and Indonesia in an interview with Reuters in January. He said local producers are "exploiting people" and then selling drugs cheaply to those that "can already pay".

This is an issue of opportunity cost. Foreign and domestic players are queuing to invest in the pharmaceutical sector. But with such handsome profits to be made from cheap copies of popular drugs, little investment is finding its way to research.

Finally, there is the dicey situation in Nigeria. Riding on the back of abundant oil revenues, outgoing president Olusegun Obasanjo recently endowed $5B for science and technology. That's enough for a research budget more than twice that of relatively well-off South Africa.

Combined with co-financing from businesses and international aid organizations, Nigeria could afford a program on a par with many nations in the developed world. But these plans are clouded by the country's bottom 6th ranking on the global Corruption Perception Index.

The UN Educational, Scientific and Cultural Organization (UNESCO) is bracing itself to ensure the money goes to vitally important research in health and agriculture. But no one is holding their breath for the spending boost that outside partners would bring.

Thus, even with a supreme effort to allocate funds wisely, the Nigerian government is unlikely to get the same benefit from its investment that could be obtained in a more politically stable environment.

These three examples tell the same story. China, India and oil-rich Nigeria currently have the cash and the will to fund research. But they are likely to struggle to realize the full potential of this enormous additional funding.

Slow and steady...doesn't always win the race

Humans currently live on the North side of the Earth's sustainable limits, running up a growing debt with the environment. Our approaches to fighting climate change apparently fail to account for the growth of this debt.

You might have missed news about the recent Global Roundtable on Climate Change, which brought together prominent business leaders to summarize the view of big business on the issue.

The last big business story about climate change was Chrysler's chief economist Van Jolissaint opining, at the January Detroit Motor Show, that it was all in the imagination of 'quasi-hysterical Europeans'.

The story of the Global Roundtable makes better reading. After much deliberation, the Roundtable published its views in a document called The Path to Climate Sustainability. It describes a course of action to curb global resource use and waste production to within sustainable limits.

An exclusive club, its members boast great confidence in the endeavor. Quotably, General Electric CEO Jeff Immelt says that 'global businesses are assuming their just place as catalysts for action on climate change', and that political leaders are "lagging behind".

Immelt is right to highlight the problem of lagging behind.

Lags are a no-no when it comes to moving along a path to sustainable limits. Why? Because if you lag behind long enough, the sustainable limits will themselves change substantially, and move further away from your well intentioned path.

The basic idea is simple: if you lag behind in your debt payments, debt grows larger, forcing up the cost of repayments. The longer we spend sitting around planning the path to sustainability, the less likely we'll reach the goal.

Netherlands creates Minister for Research

Sustaining research funding in Europe remains complex and challenging. Solid representation in Government is probably the only way to secure a future for innovative research.

Good news from the Netherlands. It has created a new minister for research and universities. Molecular biologist Ronald Plasterk will fill the new post, bringing experience as a top flight researcher as well as nearly 10 years of involvement in Dutch politics.

I met Plasterk more than a decade ago at a residential training course at the Cold Spring Harbor Laboratory (Long Island, NY). The workshop brought together everyone from PhD students (like me at the time) to professors to learn a new technique aimed at discovering genes involved in learning and memory.

Plasterk was already a rising star back then, having just returned to the Netherlands to start his own research group after postdocs in the US and UK . I remember him as open and friendly, participating in the lab work with as much enthusiasm as the PhD students.

News of Plasterk's appointment came at the same time as a squabble in the UK about research funding. The Department of Trade and Industry (DTI) had just announced that £65 million of funding initially allocated to research had instead been spent propping up the Rover car company and maintaining Britain's aging nuclear energy infrastructure.

The DTI blithely announced the funding cut as a mere budget reallocation from one division to another. But as Biotechnology and Biological Sciences Council head Professor Julia Goodfellow explained, "science and innovation is about the medium term. If you start cutting it because of short term need then you have real problems".

Medical Research Council head Professor Colin Blakemore agrees. In an interview with the BBC he explained that "it might be time to take science funding out of the DTI's hands". There was a need, he said, for "science to be handled and administered really quite distinctly and separately from the rest of government".

Out of sight, out of mind
The report on the BBC website described the general downward trend in scientific research funding in the EU. The editorial suggested that the cause of this was "the switch away from manufacturing [in Europe], the industrial sector that does the most R&D".

This is an insightful remark.

Has there really been a disruption in the natural flow of funds between the consumers of innovation, i.e. manufacturers, and the producers of innovation, researchers? Who could have predicted that relocating manufacturing outside of Europe could disrupt this flow?

Intensive Pharming

Drug companies are engaged in a relentless drive to improve the productivity of their research activities. Intent on simplifying organization structures and speeding up the decision making process, what kind of results can we expect from this more intensive approach to the cultivation of new medicines?

February has been eventful in the world of pharmaceutical research policy. Pfizer and Roche both made bold announcements about their future research strategies, promising a simplification of the way research activities will be organized. And both their strategies involve thinning out middle management so that strategic decisions can be taken faster.

Pfizer's 2005 research budget was the second highest corporate research spend ever and a full 20% larger than its nearest rival in the pharmaceutical sector. But that ranking is unlikely to survive the lab closures and cuts to research staff that are currently in the works.

Scientific domestication
Research at Pfizer will ultimately be concentrated at 3 global centres. The company will focus on just 10 diseases, directing individual research teams to focus exclusively on one disease. This reorganization will result in the weeding out of Pfizer's research centre in Ann Arbor, Michigan, the laboratory that discovered Pfizer's blockbuster cholesterol lowering drug Lipitor.

Commentators have cautioned against organizing drug research into individual diseases, arguing that this prevents valuable synergies between therapeutic areas. February's edition of the journal Nature echoed this sentiment with a quote from University of Michigan's Alan Saltiel saying "A lot of drug discovery is serendipity".

All this seems like a large number of scientists to shepherd along such a defined path. And given the intensity with which this path is being pursued, it could take a long time to turn back if anyone should discover that serendipity is needed after all.

Risky business

My google alerts recently unearthed a 2005 study by Tufts University on the efficiency of drug research and development. One of its findings was that economics considerations account for more than 35% of the attrition rate of drug candidates in development.



When a drug fails, the event makes news. We generally only hear about failures due to safety or efficacy concerns. Economic factors are rarely given as the reason for the failure.

The Tufts study explains that "rapidly rising R&D costs has led economics to gain ascendancy as a major reason for killing unpromising products in the R&D pipeline".

I find this explanation intriguing. The rising cost of development is not a new trend. Costs have been rising steadily, and returns falling steadily, for years. Does the Tufts study reveal the rise of a new cause of drug attrition in development or simply a fall in investor confidence and loyalty?