Written by Johnathon Anderson, Ph.D., a research scientist, Associate Professor & Program Officer at the University of California Davis School of Medicine, and CEO of Peptide Systems
Published by: Peptide Systems
Executive Summary
The "Industrial Math": As Senator Susan Collins warned, such a cap would be "devastating," creating a $5 billion annual deficit that would force universities to tax startups via higher IP licensing fees.
The Geopolitical Reality: While China is subsidizing lab infrastructure (effectively offering 0% overhead), the US proposal would have defunded ours, handing a strategic advantage to competitors.
The Verdict: The court saved the ecosystem this week, but the fragility of our funding model remains a strategic vulnerability.
On Monday, federal appeals court judges in Boston upheld a ruling preventing the National Institutes of Health (NIH) from capping "indirect cost" payments to universities at 15%.
To the general public, this sounds like a dry accounting dispute between bureaucrats. To those of us building the US biotech pipeline, it was a near-miss with catastrophe.
If the administration’s plan (Notice NOT-OD-25-068) had succeeded, it would have fundamentally broken the unit economics of early-stage drug discovery in the United States. As Senator Susan Collins noted during the hearings, "There is no investment that pays greater dividends to American families than our investment in biomedical research," and capping these costs would have "stopped vital biomedical research" in its tracks.
Here is the "Industrial Math" of why this ruling matters, not just for university provosts, but for every biotech entrepreneur and investor.
The Misunderstood Math of "Overhead"
The core of the dispute is the Facilities and Administrative (F&A) rate. Critics argue that taxpayer money should go to "Direct Costs" (reagents, salaries) rather than "Indirect Costs" (administration).
This represents a dangerous misunderstanding of the laboratory P&L. "Direct Costs" buy the car. "Indirect Costs" build the road.
At major research institutions (like UC Davis, MIT, or UCSF), the federally negotiated F&A rate often sits between 52% and 60%. This is not profit; it is cost recovery. As L. Rafael Reif, former President of MIT, wrote in the Wall Street Journal:
"We must rebuild another kind of infrastructure now eroding, by renewing our national commitment to fundamental science... for the nation's long-term security, prosperity, competitiveness and health."
That 52% pays for the invisible infrastructure that makes safe science possible: electricity for -80°C freezers, hazardous waste disposal, and the ethical review boards (IRBs) that ensure safety.
When the 15% cap was first proposed, former NIH Director Francis Collins was blunt in his assessment to Senate appropriators:
"It is a thoroughly awful idea, bad policy. It would not do what I know the president wants to do... it would be less research, not more."
The "Tax" on Startups: A Flow-Down Effect
This is where the ruling saves the biotech industry from a self-inflicted wound. If universities lose their ability to recover infrastructure costs from federal grants, they must plug that hole via Tech Transfer.
Peter Kolchinsky, Managing Partner at RA Capital, has long argued for the "Biotech Social Contract", the idea that high initial prices fund the innovation that eventually becomes generic. But if we break the university funding model, we break the start of that chain.
"High-priced branded drugs power this entire biopharmaceutical ecosystem. Drug price controls [or funding cuts] would imperil it, signaling that some or even all the people involved should do something else for society." - Peter Kolchinsky
If the cap had passed, Tech Transfer Offices would have been forced to become aggressive profit centers, raising Licensing Fees and Equity Demands for new startups. We effectively avoided a scenario where the "Cost of Goods Sold" for acquiring a new molecule became prohibitive for VCs.
The Geopolitical Context: China Is Watching
This legal battle is even more critical when viewed against the backdrop of my recent analysis on China’s "Evolutionary Biotech Explosion" in biotech.
Brad Loncar, a leading investor in the China biotech sector, has pointed out the stark difference in momentum:
"You cannot prohibit global access to Chinese innovation... discovery work and smaller biotech companies are in big trouble if this trend continues."
In China, the state acts as the landlord, heavily subsidizing the physical plant of bio-parks (effectively 0% overhead). In the US, the university is the landlord. If we had capped F&A at 15%, we would have been defunding our infrastructure at the exact moment China is subsidizing theirs.
Federal Courts Block NIH Cap: Conclusion
When federal courts block NIH Cap, they saved the machinery of discovery for now. But the fact that this attack happened at all proves that the industry has failed to explain its own value chain.
We cannot take the "infrastructure of serendipity" for granted. If we starve the universities today, we starve the biotech pipelines of tomorrow. Don't let bad funding ruin your lab. Ensure your inputs are valid. [See our Quality Standards]
Recommended Viewing
For a deeper dive into the specific dynamics of China's biotech investment landscape, watch this discussion:
