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11 Successful Innovation Starting in an Academic Environment Richard K.Koehn1 Salus Therapeutics, Inc. My career for the past 25 years has been managing innovation of technology in universities and bringing it to commercial development, either by forming new companies or by making licensing deals. Managing innovation means managing the infrastructure that accelerates both the rate at which innovation or discovery may occur and the rate at which it may successfully flow into the private sector. I will focus on policies and infrastructure that can accelerate university discovery and innovation. Although I will not focus on the chemical sciences, everything I say is extremely relevant to the chemical sciences and to any science and engineering discipline. I am concerned with the factors that enhance the rate of discovery and the yield that we garner from the discovery process. We tend to think of this process in very simple terms: there is discovery, something happens, and it has economic impact. In fact, a lot of institutions are or have been of the opinion that if you pour more money in at the front end of the process, more comes out at the back end. No matter how inefficient the process may be, we know that is simply not the case, and that there is, in fact, a large series of events and activities that occur in the course of the transition of an invention, including technology transfer and corporate development to some form of economic impact. We tend to think about discovery and innovation in linear terms, but the process is completely nonlinear. There are all kinds of nonlinearities—for example, the technology transfer process of the feedback that is built into the culture of an institution, who gets rewarded for what behavior, and whether there is economic benefit to the individual participants in that process. The nonlinearity of innovation makes it interesting and difficult to manage while trying to enhance the efficiency of the process. The intermediate phase of the innovation process, where innovation is transformed into a product with an economic impact, is the stage at which action by an institution can enhance the economic impact of the discovery. Three factors significantly increase rates of innovation during this stage. The first is the 1 Richard Koehn is currently president and CEO of Salus Therapeutics, Inc., an emerging biotechnology company. Prior to holding that position, he was vice president for research at the University of Utah, professor of ecology and evolution and dean of biological sciences at the State University of New York at Stony Brook, and director of the Center for Advanced Biomedical Biotechnology for New York state.
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financial factor—how much investment is made in the discovery process? The second factor is administrative policies and practices of the university. These policies are usually a potential hindrance to the innovation process. The third factor that affects the rate of innovation is cultural. This of course is not entirely separate from the administrative factor, and it describes how the faculty (individually and collectively) and the corporate institutions see themselves as members of a larger community. There are four important sources of research support: private, governmental, intramural, and corporate. These funding sources decrease in flexibility of use in that order, with corporate funding being the least flexible. Intramural funding is monies mobilized, identified, and deployed by an institution for a specific purpose. It is the most significant type of funding within the institution’s control. Therefore, I will spend most of the talk on this intramural funding. What is it about intramural research programs that makes them important and successful? They increase an institution’s ability to leverage itself into more competitive positions, to more successfully garner federal research support, and to more successfully interact with corporate entities outside the university. Therefore, the way the institution mobilizes its own flexible internal resources to support faculty research is a decision made very carefully. To be successful, an intramural research program should be innovative. It should be feasible. It should be something that can be accomplished within the realm of possibility of the time and resources defined in the program. It should be timely and affordable and should create market demand. Universities are often very bad at identifying how well a particular proposed idea fits within the larger context of the private sector and whether it has any chance of being competitive, productive, or desirable in that arena. An intramural research program ought to ultimately generate some revenue for the institution, at least from increased research funding. In effect, these programs are local venture capital funds. The funds are invested in projects, which, if successful, will result in a technology that is either licensable to a specific market or that will provide a platform technology for a new start-up company. The investment of these funds is made by the same criteria that any private investor would make in a program. How much is it going to cost? How soon am I going to get a return on my investment and what sort of return on investment might I get? I would like to look at two of these programs. The first program is the Innovative Technology Development Program at the Center for Biotechnology at Stonybrook University, started in 1983, but unfortunately there has not been a thorough analysis of the program’s productivity. When I called Stonybrook to get some data on the program, I touched a raw nerve. There seems to be a reluctance, which is not unique to Stonybrook University, to look at these programs with a hard eye and to determine whether innovation programs are achieving the goals that institutions originally set forth. The programs are ongoing with available funds that are dispersed every year. Even so, it should be determined whether each program is competitive in the desired way. The Innovative Technology Development Program was intended to enhance corporate sponsorship for biotechnology research, and these funds were awarded to the institution out of the Science and Technology Office of New York state, which deals with economic development. These are outside funds that are specifically intended to enhance the interaction between the university and the corporate biotechnology community. Thus, the number and quality of interactions are the metric that should be used for measuring the success of this program. The Innovative Technology Development Program is an internal grant program focused on biotechnology with the intent of supporting projects that, if successful, will result in technological innovation of biotechnology and a leveraging of those funds by partnering with a biotechnology or pharmaceutical corporation. To date, the program has distributed about $8.5 million; each project can receive between $40,000 and $70,000 per year for multiple years.
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Of the 95 current license agreements that the university has, 66 of these (70 percent) were funded by this program. This is an impressive statistic. It has, therefore, generated 3.7 licenses per year and has produced about $2.5 million in royalty revenue. The program has cost $8.5 million so far, and it has generated $2.5 million in royalties. If the development of the pharmaceutical RealPro can be credited to this program, the royalty value is over $50 million. The lesson to be learned here is to structure an intramural funding program in a way that serves the fundamental goals of the program before the program succeeds, because once you do, everyone wants the money. If it is really a program to enhance innovation, it is important to generate revenue and invest that revenue back into innovation. The investment of intramural funds for a particular focused purpose has, in fact, had multiple effects in leveraging the return on investment of those funds, both from the corporate sector and from royalties. The leverage factor for the Stonybrook program has been significant in terms of both corporate support (the original, fairly narrow intention of this program) and a larger research support that has been derived from federal sources. Intramural programs have the ability to leverage a significant return on that investment if appropriately managed. The other program I’d like to speak about is the Technology Innovation Program that was started at the University of Utah in 1994. The investment so far has been $2.7 million and the annual awards for individual projects are $35,000 maximum for 2 years. There have been approximately a dozen projects per year funded since the beginning of the program. The productivity is all in the early years. That is, the only sales that are being made from this program are those from 1994. Thus, the average time between investment of a project and return on investment is 8 1/2 years, an important point for university administrators who seek a quick return on investment in intramural research. It is important to remember that technology innovation programs are not simply a quick way to make money, which many university presidents would love to believe. For investments generally and these intramural programs specifically, there is a significant time lag between the investment that you made and the return on that investment. This is a long-term program. The conclusions of these two case studies, which are similar to others I know about anecdotally, is that arguably all the cases represented here are above baseline innovation: the patents that have been filed, the companies that have started, and the licenses that have been negotiated are really metrics of productivity that would not have happened in the absence of these intramural programs. It is hard to tell whether the return on investment from federal funds exists or not. It is nevertheless unequivocal that both the rate of discovery and the rate of innovation at Stonybrook University and the University of Utah have been substantially affected by these two intramural programs. Intramural programs have increased discovery and impact. Fifty percent of these projects have generated patents or patent applications. That is much higher than typical university research projects sponsored by federal grants. There is a significant time lag, as I mentioned. The return on investment from royalties did not pay costs in either program, and yet there was an overall significant leveraging of funds of different kinds. I believe that the return on investment from royalties will pay the overall cost of this program eventually in both cases. The final conclusion about intramural programs is that more aggressive management accelerates innovation. There are ways in which institutions can manage these processes that make them more successful and productive. When projects are managed more aggressively (more closely), they are more often monitored by individuals capable of measuring the progress on these projects. This makes the projects more likely to achieve the milestones that were set. Thus, the three elements that I would like to mention that influence the rate of progress are technology transfer management, management and structure, and the university culture.
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Technology transfer management, which involves tracking intervention, produces more information on licensing leads. Closer tracking makes the licensing opportunities for that technology more obvious, and a closely tracked project is therefore more likely to meet the commercialization milestones and more likely to identify new factors to produce innovation. Typically, a faculty member sets out a line of investigation with specific milestones, but during the course of that investigation, discoveries are made that can be more important as an end point than the original end point. Project management is an important issue. For example, adequate budgeting to get patent disclosures and to process those patent claims is critical to the overall operation. Some institutions use faculty committees to vet inventions and progress, which is very inefficient and unproductive. Decisions about projects should be made by professionals who invest funds and seek a return from those investments. One of the characteristic differences in the evaluation process of these projects is that unlike general grants the evaluating panels argue from the private-sector perspective and will simply terminate a project when milestones have not been made. When a project is not successful and the return on investment is inadequate, the best decision by program managers is to terminate the project. Such a decision-making scheme, although generally uncharacteristic of university research, is critically important in the management of the funds invested in innovation development projects. These programs also need to be responsive to faculty needs and initiatives by encouraging partnerships between the investors and the scientists. Before the program begins, management must also decide between central and decentralized decision making and the subsidiary corporate structure for management of these projects. University culture is one of the more critical elements in managing the overall technology innovation process and the productivity of investment funds. In the early 1980s, when I first put the Center for Biotechnology together at Stonybrook and began to allocate funds for these projects, the faculty said that they did not do applied work because it was not very interesting: “I am a basic research scientist. I want to do exciting new innovative work.” Perhaps the response I am describing is more characteristic of the life sciences, rather than engineering or chemistry, but regardless, there has been a cultural evolution in the university since that time. Initially, there was a real distinction made in the minds of biologists between applied, commercially oriented work and exciting innovative basic research. Two things have happened that have accelerated the cultural evolution of attitudes away from that point. The first is that research faculty has found that it is possible to do exciting innovative life science research and have elements of that work that are extraordinarily important in terms of a variety of practical applications and commercial exploitation. Second, it has been helpful that a few professorships have been created this way. That is a nice role model that some faculty have seen. Consulting policies are not static and permanent, but are key and critical to the protection of ideas and the ultimate exploitation of those ideas. The policies that govern how faculty can interact with elements outside the university and share their ideas is important to the overall way in which technology is managed and captured within the institution. Whether faculty inventions are licensed to faculty entrepreneurs varies from institution to institution. In some places, if a faculty member has invented a core technology and wants to start his or her own company based on that technology, he or she has to do that outside the university, not as a faculty member. At other places a faculty member can start and run the company within the university so long as the chair is not disturbed by it and it will spin out eventually. When the distinction between the role of faculty and the role of the CEO of a company becomes blurred, it leads to all kinds of extraordinarily difficult management problems. Conflict of interest policies are also a problem for management.
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Equity-sharing policies must also be addressed. To what degree should faculty entrepreneurs be able to share in the equity of a start-up company? To what degree should each institution take equity in the start-up of its own technology? To what degree does that create a conflict of interest structure? Does having a patent hurt you? I have seen very successful faculty entrepreneurs devalued by the academic evaluation environment because of the idea that, if they are applying for patents, their work must not be scholarly. The extent to which we see success in technology innovation being a part and parcel of the overall institution is a cultural issue. Is innovation simply a means of generating revenue for the institution, or is innovation seen as a reflection of a real change in the corporate university, which requires a change in policy and procedure and, ultimately, culture? The university president can make a difference in the promotion of innovation, but the tone of the administration, the institution’s infrastructure, and its policies more heavily reflect the institution’s ability to promote innovation technology development. DISCUSSION Nancy L.Parenteau, Organogenesis, Inc.: I would like to ask you to elaborate a little bit more on the conflict of interest. Richard Koehn: Let me ask Francis to respond. Francis A.Via, Fairfield Resources, Inc.: Universities have been changing the general structure, purpose, and activities of research with respect to intellectual property, as you have clearly outlined. Recent legal rulings on biotechnology, high-throughput screening, and combinatorial chemistry patent law have focused on issues associated with the research or experimental use exemption for intellectual property.2 The most recent interpretations indicate that if you experimentally practice technology that is patented with the intent of expanding scientific knowledge or conducting curiosity-driven or basic science, you are free to do so. However, if you are conducting that research with a profit motive in mind, if your intention is to develop a product for commerce or intellectual property for license, you do not qualify for the research exemption and are subject to any patent covering the technology in question. I wonder how universities are beginning to address this issue because their research direction or intent has changed with the goal of gaining intellectual property coverage. Richard Koehn: I do not think the universities have any idea how intellectual property laws relate to the general research mission of the institution or its desire to exploit the fruits of that research through commercialization. It is completely different when you are doing research in chemistry on a particular area and you see some particular applications in mind, but you are actually utilizing patented procedures or processes in that research. Have you violated the patent? The question of a patent violation in research laboratories is extremely sophisticated, and most technology transfer offices at universities do not know that the issue exists or how to think about it. Now that the universities are thinking about exploiting the commercial value of a project, they need to ask what process was used to produce the fruits of that project. That is a different level of sophistication. 2 More information about the intellectual property exemption can be found in the National Research Council report Intellectual Property Rights and Research Tools in Molecular Biology (Washington, DC: National Academy Press, 1996). This is also available on the Internet at <http://www.nap.edu/readingroom/books/property/2.html#experimental>.
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One issue being considered in Congress is that public universities currently cannot be litigated against for certain kinds of patent violations because they are public institutions. There was a proposal to change that. One of the factors involved is that universities are evolving from an era when they had no interest or idea that their research was of commercial value to one in which they begin to make this realization. Some institutions became very sophisticated at the beginning because they recognized that these partnerships are a way to generate revenue. Many companies are at least aware of this intellectual property issue. For example, in my company I have paid for legal opinions on the freedom to operate, because I am concerned about this issue, but I do not know of any university that has ever done that. J.Stewart Witzeman, Eastman Chemical: It makes sense that you could define policies for what you called intramural work. That is seed money that the universities invested; the ownership is clear. Can you comment on corporate-sponsored work? There may be underpinning technology owned by the university and that is a real bone of contention. Richard Koehn: It is a strong bone of contention and the only way to practically think about the problem is to explicitly specify in the contract between the company and the university how this work will be done and what results are expected. The ownership, of course, will flow from that. I think it is very difficult to build a fence around a particular project within an institution and claim that all of the discovery that happened on the dollars provided by the industrial partner was within that fence. It is difficult to claim that there was no proprietary knowledge or knowledge owned by the university that impacted that discovery in some way because of the context within which the project occurred. It is not easily resolved, and the only way you can approach the problem is to try to delineate before the fact what it is you are going to do, what you expect to arise out of that, and what the relative corporate positions on ownership will be once that project is finished. J.Stewart Witzeman: One of the things we talked about yesterday was that often the faculty and the industrial folks can reach agreement, but it is often university administration that is perhaps not as sophisticated. Richard Koehn: That is because the faculty will often make an agreement with industry without considering anything beyond their own welfare. I used to spend most of my time trying to sort out such conflicts, but this has become less of an issue as faculty become more sophisticated and as institutions have become more knowledgeable. The major problem that I had as the vice president for research is that I often entered into a legal corporate agreement between, for example, the University of Utah Corporation and Eastman Kodak Corporation, for the performance of certain tasks and certain activities. These tasks were wholly dependent on the activities of the university faculty, in whose interest I was signing this contract. If that contract were not fulfilled, I had no recourse as a corporate officer in trying to resolve that difficulty with my faculty. I can send them to a faculty conflict of interest committee, where they will have a long discussion for 9 or 12 months and ultimately resolve that they do not understand these issues anyway. Truly, I think that the most significant management challenge at research universities today is this growing disparity between the emerging corporate university and the traditional university.
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Its employees are essentially free agents with tenure over which the university corporation has no real control. I am not suggesting that somehow there is something wrong with the faculty. I am simply saying there is something wrong with the structure. The question is what is the institution able to do if faculty do not fulfill their corporate contracts. There is no recourse. The universities are simply not inclined to fire tenured faculty for violations of that kind. In some cases the institution reimburses the corporation. In other cases the institution negotiates some exit strategy that both parties can live with. In some cases real legal recourse is taken. This is a major problem. Francis Via: I want to indicate, as Rick Gross of Dow pointed out yesterday, that many of these industry-university partnerships are based on choosing the right people and on trust. We have had more than a hundred programs with universities and have never encountered such problems. One item that demonstrates this trust was the agreement we had with the California Institute of Technology (Caltech). There professors do not sign the contract, but they are intimately involved in the negotiation and discussions. At one point, we wanted a statement that Caltech would not publish the results unless we had 6 months to review them and to secure the patents. Caltech would not agree to that because it valued the intellectual freedom of the professors. Instead, the professors agreed to send us manuscripts and to wait for our signal to publish over a handshake. It worked perfectly. It is a question of trust as well as association with all the legal ramifications. Richard Koehn: I couldn’t agree more that it is a question of trust. The problem is always when that trust breaks down. The real problem is the lack of recourse.
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