GOVERNMENT
http://www.fortune.com/fortune/fortune75/articles/0,15114,1101810-2,00.html
The Law of Unintended
Consequences
Twenty-five years ago a law known as Bayh-Dole
spawned the biotech industry. It made lots of
university scientists fabulously rich. It was
also supposed to usher in a new era of
innovation.
So why are medical miracles in such short
supply?
Wednesday, September 7, 2005
By Clifton Leaf
Even in the mute efficiency of international
wire transfers, $540 million makes a noise
when it lands in your bank account. To Kent
Alexander, that sound was a thud-and in this
case "not one single thud, but a lot of
different thuds." All afternoon on July 21,
2005, Alexander, who is Emory University's
general counsel, president Jim Wagner, and
other senior members of the school's
administration were receiving e-mailed reports
from the finance department: "121 million just
hit!" And then, 50 minutes later, "183 million
just hit!" Half an hour after that, an even
richer stash arrived. Thud. "It was an
out-of-body experience," says Alexander, 46.
"By any definition, it's a huge deal. As one
of our trustees was saying, 'It doesn't get
any bigger than this on Wall Street.' "
The deal in question had closed only days
earlier, when a pair of biotech companies,
Gilead Sciences of Foster City, Calif., and
Royalty Pharma of New York City, outbid
several other parties for Emory's roughly 20%
stake in the powerful anti-retroviral drug
Emtriva, which is used to treat HIV. The drug
was developed more than 15 years ago by three
of the university's scientists, working on
federal research grants, but received FDA
approval only in July 2003. Now, however,
Emtriva (a modest seller in its own right) was
being married to another antiviral in a single
pill. The combination drug, called Truvada,
was expected to have a worldwide market of
nearly $1 billion in 2006. Emtriva was
becoming a blockbuster. Citigroup set up the
auction and hammered out the terms with
bankers from Lazard. A white-shoe law firm,
Covington & Burling, calculated the drug's
projected royalty streams through the year
2021, when the patent life was scheduled to
end.
The hard work was over, and now it was time
for a champagne toast and a brief "end-zone
dance," as president Wagner described it. In a
short while they could start thinking about
how to reinvest their windfall—around $320
million after fees and the 40% cut that
belonged to the three Emory inventors. The
cash would enhance Emory's leadership in
AIDS-vaccine research—and help Wagner's plan
to turn the university into a top-tier
"destination" school. "This is just such a
win-win-win story," Wagner says jubilantly.
"We have an invention here that addresses a
real international scourge, and we are now
taking these resources and reinvesting them in
American research and education. It's a pretty
happy story."
Well, not entirely.
The Emtriva case may sound like yet another
innovation in an unending stream of medical
miracles, from "smart drugs" to gene therapy.
But believe it or not, it's an example of a
profound system failure. For a century or
more, the white-hot core of American
innovation has been basic science. And the
foundation of basic science has been the fluid
exchange of ideas at the nation's research
universities. It has always been a
surprisingly simple equation: Let scientists
do their thing and share their work—and
industry picks up the spoils. Academics win
awards, companies make products, Americans
benefit from an ever-rising standard of
living.
That equation still holds, with the
conspicuous exception of medical research. In
this one area, something alarming has been
happening over the past 25 years: Universities
have evolved from public trusts into something
closer to venture capital firms. What used to
be a scientific community of free and open
debate now often seems like a litigious scrum
of data-hoarding and suspicion. And what's
more, Americans are paying for it through the
nose. Let's go back to Emtriva for a moment.
Raymond Schinazi, a virus specialist at Emory,
got the idea for the drug after hearing a
lecture by a Canadian researcher, Bernard
Belleau, at a 1989 AIDS conference in
Montreal. Belleau had discovered a compound
that helped shut down the virus's genetic
machinery, and Schinazi soon realized that
with some chemical wizardry, the substance
could be transformed into something far more
potent. Thanks to a bit of "serendipity,"
Schinazi says, he and two Emory colleagues
were able to do just that: create a compound
that may be orders of magnitude more active
than Belleau's. In the end, the difference
between the two substances came down to one
atom of fluorine. It's a perfect example of
how one inspiration can build on another.
This combination of open exchange and fervent
competition between great researchers helps
bring about scientific advances. And when the
system works, the sum of each contribution is
greater than the whole. But what happened next
in the Emtriva saga was a race to the patent
office. Emory
got there - a week.
That filing in 1990 triggered a morass of
lawsuits over Emtriva and a related compound.
Belleau's biotech employer sued; so did
pharmaceutical giant Glaxo Wellcome (now
GlaxoSmithKline), which had licensed what it
thought was Belleau's discovery. Emory found
itself embroiled in litigation that a veteran
patent attorney called the most complex he'd
ever seen. (One federal case had 36 individual
"lead attorneys.") Emory's squadron of lawyers
not only had to fight through those cases but
also skirmish through four long challenges at
the U.S. Patent & Trademark Office (USPTO) and
repeat those battles in Europe, Australia,
Japan, South Korea, and Canada. All told, the
disputants wrangled on for nearly a decade and
a half and consumed millions of dollars in
attorney's fees.
And that's just for one dispute. From 1992 to
September 2003, pharmaceutical companies tied
up the federal courts with 494 patent suits.
That's more than the number filed in the
computer hardware, aerospace, defense, and
chemical industries combined. Those legal
expenses are part of a giant, hidden "drug
tax"— a tax that has to be paid by someone.
And that someone, as you'll see below, is you.
You don't get the tab all at once, of course.
It shows up in higher drug costs, higher
tuition bills, higher taxes—and tragically,
fewer medical miracles.
So how did we get to this sorry place? It was
one piece of federal legislation that you've
probably never heard of—a 1980 tweak to the
U.S. patent and trademark law known as the
Bayh-Dole Act. That single law, named for its
sponsors, Senators Birch Bayh and Bob Dole, in
essence transferred the title of all
discoveries made with the help of federal
research grants to the universities and small
businesses where they were made.
Prior to the law's enactment, inventors could
always petition the government for the patent
rights to their own work, though the rules
were different at each federal agency; some 20
different statutes governed patent policy. The
law simplified the "technology transfer"
process and, more important, changed the legal
presumption about who ought to own and develop
new ideas-private enterprise as opposed to
Uncle Sam. The new provisions encouraged
academic institutions to seek out the clever
ideas hiding in the backs of their research
cupboards and to pursue licenses with
business. And it told them to share some of
the take with the actual inventors.
On the face of it, Bayh-Dole makes sense.
Indeed, supporters say the law helped create
the $43-billion-a-year biotech industry and
has brought valuable drugs to market that
otherwise would never have seen the light of
day. What's more, say many scholars, the law
has created megaclusters of entrepreneurial
companies—each an engine for high-paying,
high-skilled jobs—all across the land.
That all sounds wonderful. Except that Bayh-Dole's
impact wasn't so much in the industry it
helped create, but rather in its unintended
consequence—a legal frenzy that's diverting
scientists from doing science.
Birch Bayh is likable—eminently
so. He has a kind face, easy laugh, and enough
self-deprecating charm to get a proud liberal
Democrat elected (and reelected twice) in
Indiana—a state as Republican red as Birch
Bayh is, well, likable. That was a wonderful
gift to have in the U.S. Senate, and it no
doubt partly accounted for the fact that his
patent bill overcame tremendous suspicion (as
being "anti small business"), opposition by
President Carter, and the Reagan Revolution,
which cost Bayh his Senate seat in 1980.
At the time, the gospel of the U.S.
government, or at least of the longtime
Democratic majority in Congress, was that if
the government paid for it, the taxpayers
owned it. That was the thinking that drove
some of the nation's proudest achievements—the
splitting of the atom, the development of
antibiotics, the moon shot, and the nuclear
Navy.
Bayh sought to turn that policy on its head,
essentially giving away all this taxpayer
property for free—and, some worried, creating
potentially thousands of new private
monopolies in the process. It was a heretical
view (for a liberal, no less), but Bayh was
convinced that government ownership was
squashing innovation and the nation's
productivity. The stagflation of the 1970s was
already clouding the new decade of the '80s;
America's economic engine seemed to be
choking; and the domestic automobile, steel,
and electronics industries were fast losing
their global dominance. There seemed to be a
productivity malaise descending on the
homeland—and some kind of catalyst for change
was needed.
It was a report by the Comptroller General of
the U.S. that offered, if not the remedy, one
culprit for the national gloom: unlicensed
patents. A 1979 audit of government-held
patents showed that fewer than 5% of some
28,000 discoveries—all of them made with the
help of taxpayer money—had been developed,
because no company was willing to risk the
capital to commercialize them without owning
title. "Discoveries were lying there,
gathering dust," says Bayh today, from his
office at the Washington law firm Venable LLP.
"So the taxpayers weren't being protected.
We'd spent $30 billion in research for ideas
that weren't helping anybody."
When the bill was finally passed, against all
odds, on the last possible day of a lame-duck
session of Congress, it didn't make a whiff of
news beyond the Beltway. Even Bayh had no clue
what effect the new amendments would have. "I
don't think anybody could have reasonably
anticipated the enormity of the chain reaction
that followed," says Bayh today.
A dozen schools-notably MIT, Stanford, the
University of California, Johns Hopkins, and
the University of Wisconsin-already had campus
offices to work out licensing arrangements
with government agencies and industry. But
within a few years Technology Licensing
Offices (or TLOs) were sprouting up
everywhere. In 1979, American universities
received 264 patents. By 1991, when a new
organization, the Association of University
Technology Managers, began compiling data,
North American institutions (including
colleges, research institutes, and hospitals)
had filed 1,584 new U.S. patent applications
and negotiated 1,229 licenses with
industry—netting $218 million in royalties. By
2003 such institutions had filed five times as
many new patent applications; they'd done
4,516 licensing deals and raked in over $1.3
billion in income. And on top of all that, 374
brand-new companies had sprouted from the
wells of university research. That meant jobs
pouring back into the community.
A modern alchemy was at work: Ivory towers
were being turned into gold, and society was
benefiting from hundreds of novel treatments
introduced for a host of diseases. After years
of intense study and living grant to mouth,
investigators at the University of California
at San Francisco, for example, had come up
with a treatment for infants with respiratory
distress syndrome, an ailment that affects
some 25,000 babies a year. A startup by
University of Florida researchers got $15
million from some VCs in Menlo Park last year
to develop a gene therapy for a type of
emphysema called Alpha-1. Physicists at the
University of Wisconsin in Madison figured out
a way to turn static MRI views of blood
vessels into videocamera-like images.
The anecdotal reports, fun "discovery stories"
in alumni magazines, and numbers from the
yearly AUTM surveys suggested that the
academic productivity marvel had spread far
and wide. But that's hardly the case. Roughly
a third of the new discoveries and more than
half of all university licensing income in
2003 derived from just ten schools-MIT,
Stanford, the usual suspects. They are, for
the most part, the institutions that were
pursuing "technology transfer" long before
Bayh-Dole.
Even so, every school labors under the fantasy
that it's going to find the next Emtriva—or
Gatorade, a huge success that came out of the
University of Florida. The jackpot is too rich
not to go for it.
In 2001, economists
Richard Jensen from Notre Dame and Marie
Thursby of the Georgia Institute of Technology
published a survey of university licensing
activity over a five-year period in the 1990s.
They asked administrators and faculty
researchers at 62 universities, "What's the
most important outcome of technology
transfer?" The top answer by far given by
university officials was "revenue." Yes, it
was nice to see important discoveries
commercialized and the knowledge disseminated
as widely as possible. But hey, we're in this
for the money.
That certainly seemed to be the message in a
recent court case involving Columbia
University. Last year Columbia threatened to
revoke the licenses of several leading biotech
and pharmaceutical companies for the use of a
critically important process in drug discovery
and development called co-transformation. (The
companies sued, and the cases ended up in a
federal court in Massachusetts.) In the late
1970s three Columbia researchers, Richard
Axel, Michael Wigler, and Saul Silverstein,
all working with funding from the NIH, figured
out a way to vastly improve the efficiency of
a technique used in genetic engineering. They
filed for patents in February 1980—prior to
Bayh-Dole. But the NIH assigned the title to
Columbia once the university promised to "use
all reasonable effort to bring the [Axel
patents ] to the commercial market through
licensing on a non-exclusive, royalty-free, or
reasonable royalty basis." The federal agency
even admonished Columbia not to engage in
"repressive" licensing practices.
The Axel patents were amazingly huge
moneymakers for Columbia (and yes, the three
inventors got rich too), bringing in a total
haul of about $600 million during their
20-year patent life. The university had
licensed co-transformation to 11 drugmakers
and collected royalties on 19 different drugs
for various diseases. Amgen had used the Axel
technology while making its bestselling anemia
drug, Epogen; Bayer and Wyeth each made
hemophilia drugs; Genentech used it in making
its blockbuster breast-cancer drug, Herceptin.
But when the patent life ran out, Columbia
announced that—surprise—it had secured a new
patent, issued in 2002, that won't expire
until 2019. (The patent application was filed
in secret in 1995.) And the invention, as it
turns out, comes out of the original
taxpayer-funded work done by Axel, Wigler, and
Silverstein long ago (and somehow not included
in the three patents Columbia had already
received). University lawyers had pulled off
the trick by filing a secret "continuation"
application (which keeps an original patent
disclosure alive for possible new claims to be
added) and then abandoning it—repeating this
procedure again and again until the clock was
about to run out. So the patent granted in
2002, noted federal district court Judge Mark
Wolf, "relates back to its
great-great-great-great-great-great-grandparent
application" in 1980. The aim of this new
"submarine" patent, says Boston attorney
Donald Ware, who represented several of the
plaintiffs, was to enable Columbia to surface
with a claim "covering new advances the
biotechnology industry had made during the
intervening years." By delaying their filing
as long as possible, they could get many more
years of patent protection. And revenue, of
course.
U.S. patent laws were amended in 1995
precisely to prevent this method of gaming the
system. (Patents now expire 20 years after the
original filing, or "priority date," rather
than 17 years after the issue date, as they
used to.) But Columbia managed to file two
final applications on June 7, 1995-the day
before the new law was to go into effect. When
Judge Wolf indicated he was inclined to rule
in favor of the plaintiffs, Columbia promised
it would no longer attempt to charge the
companies a licensing fee. (The case was then
dismissed.)
No one at Columbia University would speak on
the record about the Axel patents. The
university's outside counsel, David Gindler,
of the Los Angeles firm Irell & Manella,
insists the school did nothing improper. "I
don't think Columbia had a strategy to do
anything other than get the full patent
protection to which it's entitled," he says.
"Universities should be able to get the same
thing that companies get." Gindler elaborates:
"It's perfectly proper for Columbia to do what
any of the other biotech companies would do—to
request companies take licenses to the patent
and pay a reasonable royalty."
And later Gindler elaborates further:
"Columbia acted no differently than the rest
of the business community in the United
States."
Columbia is hardly the only academic center to
fancy itself a hard-charging corporation.
Court dockets are now clogged with university
patent claims. In 2002, North American
academic institutions spent over $200 million
in litigation (though some of that was
returned in judgments)-more than five times
the amount spent in 1991. Stanford Law School
professor emeritus John Barton notes, in a
2000 study published in Science, that
the indicator that correlates most perfectly
with the rise in university patents is the
number of intellectual-property lawyers.
(Universities also spent $142 million on
lobbying over the past six years.) Attorney
Gindler defends the legal wrangling as part of
a global good: "The money that comes into
universities like Columbia for licensing is
plowed back into the mission of the university
to conduct more research," he says. "It's not
used to pay shareholders or to fill corporate
coffers. It's used for a really noble
purpose."
So what do universities do with all their
cash? That depends. Apart from the general
guidelines provided by Bayh-Dole, which
indicate the proceeds must be used for
"scientific research or education," there are
no instructions. "These are unrestricted
dollars that they can use, and so they're
worth a lot more than other dollars," says
University of Michigan law professor Rebecca
Eisenberg, who has written extensively about
the legislation. The one thing no school seems
to use the money for is tuition—which
apparently has little to do with "scientific
research or education." Meanwhile, the cost of
university tuition has soared at a rate more
than twice as high as inflation from 1980 to
2005.
The enormous investment by tuition-paying
students, parents, and taxpayers of all ages
might be worth it if the university research
was paying off huge dividends. But here's the
hard, surprising truth: In one crucial area of
science-productivity, which Bayh-Dole was
intended to supercharge—it isn't.
Measuring productivity,
in general, is a difficult thing. In science
it is nigh impossible. How can you tell
whether an idle experiment in a basement lab
somewhere is going to pay off one day with a
cure for Parkinson's disease or ALS? You
can't. And yet scientists try to measure their
own scientific "output" all the time, and the
unit of measurement is the number of papers
that run in top-tier journals. Publish a lot
in, say, Nature or Cell, and chances
are you'll get your grant or tenure. It's a
crude measure, but one that's quietly accepted
in academic circles.
Each year, the National Science Foundation
calculates which countries are contributing to
the global knowledge pool by tallying up the
number of their researchers' published papers
in key journals all over the world. The U.S.
traditionally holds an edge, not least because
the vast majority of influential academic
journals are published in English (and often
edited and "peer-reviewed" by American
scientists).
Trouble is, even with that advantage, the U.S.
contribution to global knowledge has been
stagnating. While the number of journal
articles produced by American researchers has
risen slightly since 1988, the rest of the
world has raced ahead (see chart).
Or you could forget such squishy "knowledge
indicators" and go to the hard stuff: drugs.
FDA scientists have an entire vocabulary for
describing new compounds that come into its
office. When something is considered truly
novel and innovative, the FDA calls it a new
molecular entity, or NME. Many of the other
drugs regulators see are reformulations, old
compounds with new indications for use, or "me
too" drugs that are similar to several on the
shelf. But even the label NME doesn't mean a
drug necessarily fills a critical gap in
health care.
When regulators see promising clinical data
for a drug that really is needed by patients
right now-as with the HIV drug Emtriva in
2003—it gives the drug a "priority review."
The idea is to get it out to doctors as
quickly as possible. So those who want to
measure the performance of the world's drug
manufacturers should look not only at the
total number of FDA-approved compounds and
biologics in a current year, but also at how
many priority NMEs are making it through. By
both measures, the productivity picture is
much worse than it was in 1996 (although 2004
seems to have had a bumper crop). From 2000
through the end of 2003, the average number of
priority NMEs each year was eight; in the
previous four years, it was twice that.
For a number of common diseases, it seems that
progress has stalled. Since the advent of
genetically engineered human insulin in 1977,
there has been relatively little new help for
diabetics. Age-adjusted death rates for those
with the disease have gotten worse, not
better, during the past 25 years. Patients
with Parkinson's, Alzheimer's, and multiple
sclerosis have waited anxiously for anything
promising to appear in the pipeline. And in
cancer, one remarkable study led by the FDA's
cancer czar, Richard Pazdur, seems to say it
all: A full three-quarters of the 71 cancer
drugs approved by the agency from 1990 through
2002 did not show any survival benefit over
the old, standard care.
What about the explosion in the biotech
industry over the past 25 years—aren't those
firms churning out innovative products? Here
again, the numbers suggest otherwise. Consider
the Nasdaq biotech index, which is a fair
proxy for the industry. The combined market
cap of its 157 companies is around $319
billion. This huge stake held by public
shareholders is the direct result of Bayh-Dole,
which gave these brave new firms something of
value-intellectual property-to take to the
market. The legislation also made it possible
for venture capitalists to bring companies
public quickly and thus see a return on their
initial investment.
What the law didn't do was give the companies
something worthwhile to sell. Only 36 of the
157 companies on the index are profitable. And
judging by the cold, hard measure of revenues,
it's clear that few have produced drugs that
doctors view worthy enough to prescribe. Forty
percent of Nasdaq's bio-wonders had sales
under $20 million in the past 12 months; 22%
had less than $5 million. For every Genentech
success story, there are dozens of teetering
failures, with laser-fast burn rates and very
little to show the buy-and-hold believers who
purchased shares on the open market. Indeed,
the industry as a whole has lost more than $45
billion since birth.
How could a law,
with so much intuitive promise to liberate
research and boost productivity have the
opposite effect? You can put part of the blame
on the nation's patent policies—which began
their own strange evolution at the same time
as—you guessed it—Bayh-Dole. The Supreme
Court's decision in 1980 to allow for the
patenting of living organisms opened the
spigots to individual claims of ownership over
everything from genes and protein receptors to
biochemical pathways and processes. Soon,
research scientists were swooping into patent
offices around the world with "invention"
disclosures that weren't so much products or
processes as they were simply knowledge—or
research tools to further knowledge.
The problem is, once it became clear that
individuals could own little parcels of
biology or chemistry, the common domain of
scientific exchange—that dynamic place where
theories are introduced, then challenged, and
ultimately improved—begins to shrink. What's
more, as the number of claims grows, so do the
overlapping claims and legal challenges. This
isn't merely a hypothetical situation, a
"worst-case scenario" painted by academic
hand-wringers. It has already happened, as two
professors at the University of Michigan Law
School, Michael Heller and Rebecca Eisenberg,
observed in a seminal 1998 article in
Science magazine.
Now technology-transfer offices instruct
faculty to go over the most embryonic of
discoveries "in-house," to see if there is
anything potentially marketable in the work
before they talk to colleagues. Researchers
are told, always, to file provisional patent
applications before publishing a paper or
speaking at a conference. (Such public
disclosures, according to European patent
laws, immediately nix any chance to patent the
finding overseas, where much of the licensing
market is.) Before sharing resources like cell
lines, reagents, tissue specimens, gene
expression data, or knockout mice (those bred
without certain genes to simulate a disease
process), researchers at different
universities are now asked to sign a "material
transfer agreement," or MTA, and that means
first having to run the contract by one's
department head or a university lawyer. Then
there is the most vexing of all patent-law
confections: the "reach-through licensing
agreement," or RTLA. These contracts grant the
owner of a patented biomedical tool the right
to a royalty on any compound that's ultimately
discovered through its use. Imagine a
carpenter having to pay Black & Decker a
percentage of every kitchen he rebuilds.
Heller and Eisenberg dubbed this new dismal
state of affairs the "Tragedy of the
Anticommons." And that's what it is—a tragedy
that's still in the making.
In October 1990
a researcher named Mary-Claire King at the
University of California at Berkeley told the
world that there was a breast-cancer
susceptibility gene—and that it was on
chromosome 17. Several other groups, sifting
through 30 million base pairs of nucleotides
to find the precise location of the gene,
helped narrow the search with each new
discovery. Then, in the spring of 1994, a team
led by Mark Skolnick at the University of Utah
beat everyone to the punch—identifying a gene
with 5,592 base pairs and codes for a protein
that was nearly 1,900 amino acids long.
Skolnick's team rushed to file a patent
application and was issued title to the
discovery three years later.
By all accounts the science was a collective
effort. The NIH had funded scores of
investigative teams around the country and
given nearly 1,200 separate research grants to
learn everything there was to learn about the
genetics of breast cancer.
The patent, however, is licensed to one
company—Skolnick's. Myriad Genetics, a company
the researcher founded in 1991, now insists on
doing all U.S. testing for the presence of
unknown mutation in the two related genes,
BRCA1 and BRCA2. Those who have a mutation in
either gene have as high as an 86% chance of
getting cancer, say experts. The cost for the
complete two-gene analysis: $2,975.
Critics say that Myriad's ultrarestrictive
licensing of the technology—one funded not
only by federal dollars but also aided by the
prior discoveries of hundreds of other
scientists—is keeping the price of the test
artificially high. Skolnick, 59, claims that
the price is justified by his company's
careful analysis of thousands of base pairs of
DNA, each of which is prone to a mutation or
deletion, and by its educational outreach
programs.
Whatever the answer, it's clear who pays for
it. You do. You pay in the form of vastly
higher drug prices and health-care insurance.
Americans spent $179 billion on prescription
drugs in 2003. That's up from ... wait for it
... $12 billion in 1980. That's a 13% hike,
year after year, for two decades. Of course,
what you don't pay as a patient you pay as a
taxpayer. The U.S. government picks up the tab
for one in three Americans by way of Medicare,
Medicaid, the military, and other programs.
According to the provisions of Bayh-Dole, the
government gets a royalty-free use, forever,
of its funded inventions. It has never tried
to collect. You might say the taxpayers pay
for the hat—and have it handed to them.
What might progress have looked like without
the law? No one can answer that for sure. But
one possible scenario is what happened to that
other high-technology, university-incubated
industry: the computer business.
Intellectual property was and is important in
information technology. But very few
electronic hardware, software, or
Internet-related inventions are licensed
through university intermediaries. Even
companies that swear blood oaths against each
other don't tie themselves into knots
licensing bits and pieces of their
technologies in airtight, exclusive deals.
Rather, they broadly license their entire
patent portfolios. In a piece of hardware that
may straddle technology covered in a hundred
patent claims, the strategic value of a single
patent is low, says David Mowery, a professor
at the Haas School of Business at UC-Berkeley.
"One reason you see these big cross-licensing
deals is because the effort required to
determine the value of every patent in Sun's
pile as opposed to IBM's as opposed to HP's is
so great relative to the likely value of any
single patent. So they come in with their
proud stack and they just say, 'We'll let you
have access to ours if you let us have yours.'
"
This necessary sharing of resources has
created giant new businesses and business
models. And the effusive crosstalk between
rivals is one driver in the lowering of prices
for technology components (see chart).
Semiconductor prices have fallen by an
astounding 28% a year since 1974, in near
synchronicity with Moore's law, coined way
back in 1965. Meanwhile, the American consumer
has benefited from one paradigm shift in
technology after another.
Universities believe, however, that biomedical
discoveries—which account for more than half
their invention disclosures and most of their
licensing revenue—are simply a riskier
proposition than computers. Not only are the
failure rates sky high, there's also the FDA
to worry about. No company would invest the
huge capital to turn what was essentially a
theory into a compound if it knew that rivals
could come along later, after the hard work
was done, and sell the same pill. Besides,
exclusive deals let the schools offload their
patent costs—often as much as $25,000 for the
first filing—right away.
Those fears aside, the truth is that even if
some skittish VCs stay home, the science will
get done. In other words, Bayh-Dole has served
mostly as a nervous mother for a science that
never needed one. New biomedical discoveries
are now coddled and kept out of the rain—and
it's hurting progress.
The NIH recently said it thinks research tools
should be freely licensed, for example, but
there are no teeth in its policy. According to
the provisions of Bayh-Dole, federal agencies
do have the power to "march in" when necessary
technology is not being disseminated into the
public domain. In 25 years, however, the NIH
has never used that power.
A better solution is simply to amend the law.
The right to make a profit from a
taxpayer-funded discovery should come with an
explicit demand: The patent holder has to
license the invention as broadly as
possible—which would make exclusive deals the
rare exception, not the rule. The fact is, the
right people will always find a way to turn a
good idea into something tangible. If you have
any doubt, spend an afternoon in Cambridge,
Mass.
"There are doughnuts
in the conference room this morning," says
John Preston. "A Saudi crown prince is coming
for a visit." Preston, a senior lecturer at
MIT's Entrepreneurship Center, former head of
the university's technology licensing office,
and a true pioneer in tech transfer, isn't the
least bit excited about the prominent guest.
It is hard to tell—but he may be excited about
the doughnuts.
Here in his ground-floor office in the Muckley
Building, next door to Kendall Square,
Preston, 55, is drinking from a mug that's
marked nerd prize. It's a pet name for the
Entrepreneurship Center's now somewhat famous
"$50K Competition"—in which students and even
faculty researchers vie for seed money based
on the quality of their business plans. The
contest, now in its 16th year, has showcased
some notable winners—and losers. (The top
prize in 1998 went to Internet search engine
Direct Hit, which was later sold to Ask Jeeves
for $447 million; the loser, Akamai, now has a
market cap of $1.9 billion.)
The "$50K" is just one of scads of MIT
projects to bring out the inner entrepreneur
in campus denizens. At MIT, the discourse
between university and industry isn't merely
pervasive, it's a central feature of the
culture. Every student has to do research;
every faculty member gets a day off a week to
consult for industry.
A 1997 BankBoston (now Bank of America) study
tried to trace the effects of MIT's commitment
to "useful knowledge," as the school's founder
put it in 1861—tallying up all the companies
founded by at least one MIT alum or faculty
member, in addition to those spun off from an
MIT lab. The study identified 4,000 companies,
employing 1.1 million people, which together
have $232 billion in annual worldwide sales.
Among the bounty: blue-chip names like
Hewlett-Packard (co-founder Bill Hewlett,
class of 1936), Raytheon (Vannevar Bush, class
of 1916), Intel (Robert Noyce, '53), Gillette,
Tyco International, Digital Equipment Corp.,
and Campbell Soup. All these big companies
formed way before Bayh-Dole.
Many of the companies (and jobs) remain in the
Boston area, attracting more talent, venture
funding, and commercial investment—which, in
turn, creates new companies. The loop feeds on
itself, and a "cluster," that El Dorado of
economic development, is born.
MIT understood that dynamic before anybody
else. Forty years before Bayh-Dole, in fact,
it set up a university office to license
home-grown discoveries. By the mid-1980s—in
part, thanks to a national attitude shift
after the law's enactment—MIT wasn't merely
granting rights to its technology, says
Preston, but also aggressively taking equity
positions in startups and doing its best to
nurture young companies with money, management
help, and the advice of seasoned MIT
entrepreneurs. Even Preston—a big fan of Bayh-Dole-admits
that the science would have probably come
anyway.
Later, tooling around in Preston's Saab 9-5,
the evidence of past economic booms and
boomlets is unearthed like an archeological
dig. History seems to fold upon itself in the
redbrick building at 700 Main Street (what
used to be called 28 Osborn). This is the
place to which Alexander Graham Bell made his
first long-distance phone call in 1876. Later,
in another flush time, the building was used
to make railroad cars, then Federal-style
furniture for the Brahmins across the River
Charles. The faded white lettering from the
factory still calls out from the façade. The
building was then rented by Edwin Land in the
1930s to house a research facility for what
would one day be a newfangled camera called
Polaroid. And then, at the turn of the
millennium, it became the home of
Transkaryotic Therapies, a homegrown biotech
that was acquired in July by British company
Shire Pharmaceuticals.
American ingenuity, it seems, never needs much
of a jump start. Just a good sign painter.
Research AssociateDoris Burke
Feedback
cleaf@fortunemail.com
