LESSONS LEARNED AND NEXT STEPS

Moderator:
Michael Borrus
X/Seed Capital Management

   Michael Borrus of X/Seed Capital asked the speakers in the previous panel how they set priorities in health and energy and how the Chinese government selects sectors to support.

In medical research, U.S. funding decisions are “still driven by the quality of science being done by individual investigators and teams of investigators,” Dr. Barker replied. Institutions such as the Massachusetts Institute of Technology, and many others, encourage the translation of basic science into new commercial enterprises that are funded by the private sector, she added. “Our priorities in medical research are focused on research and development funded by organizations like the National Institutes of Health, which invests approximately $27 billion in medical research each year,” she said. “We invest that across a whole range of medical research, from basic research to translational research to clinical research. In the U.S. technology moves out of the laboratory into translation.” Technology and intellectual property are transferred to companies that are primarily funded through venture capital. “But we still set our priorities based on the quality and importance of the science,” Dr. Barker said.

To summarize, Mr. Bonvillian said, life sciences research is driven by a basic research agency, and basic research drives what follows. He asked how this works in energy research.

Dr. Newmark of NREL said energy “is further along the continuum” that Dr. Barker outlined for medical research. “Energy research now is driven more by national priorities, both for the development of new options for traditional fossil and nuclear energy and for the development and commercialization of renewable energy and energy efficiency technologies,” she said.



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LESSONS LEARNED AND NEXT STEPS Moderator: Michael Borrus X/Seed Capital Management Michael Borrus of X/Seed Capital asked the speakers in the previous panel how they set priorities in health and energy and how the Chinese government selects sectors to support. In medical research, U.S. funding decisions are “still driven by the quality of science being done by individual investigators and teams of investigators,” Dr. Barker replied. Institutions such as the Massachusetts Institute of Technology, and many others, encourage the translation of basic science into new commercial enterprises that are funded by the private sector, she added. “Our priorities in medical research are focused on research and development funded by organizations like the National Institutes of Health, which invests approximately $27 billion in medical research each year,” she said. “We invest that across a whole range of medical research, from basic research to translational research to clinical research. In the U.S. technology moves out of the laboratory into translation.” Technology and intellectual property are transferred to companies that are primarily funded through venture capital. “But we still set our priorities based on the quality and importance of the science,” Dr. Barker said. To summarize, Mr. Bonvillian said, life sciences research is driven by a basic research agency, and basic research drives what follows. He asked how this works in energy research. Dr. Newmark of NREL said energy “is further along the continuum” that Dr. Barker outlined for medical research. “Energy research now is driven more by national priorities, both for the development of new options for traditional fossil and nuclear energy and for the development and commercialization of renewable energy and energy efficiency technologies,” she said. 119

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120 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Discussions are underway over how to achieve the goals and benchmarks Energy Under Secretary Johnson explained, such as clean energy attaining a certain percentage of energy usage by a certain date, Dr. Newmark said. “The national priorities drive investment that span all the way from basic to applied research to commercial scale deployment,” she said. “That said, the innovations depend on venture capital to get to commercial implementation.” The U.S. government focuses on everything from very basic research in materials and separation science to very large-scale, public-private investments for deployment of some of these novel technologies.” Of course, the market ultimately will determine which energy technologies succeed, Dr. Newark noted. “In the energy sector, innovation requires that market finance and risk be addressed.” But public financial support is required because new energy technologies require large-scale deployment to study and certify their performance, she said. Mr. Bonvillian noted that the energy sector represents a different model of government involvement, one that mixes public and private roles “and is more bottom-up rather than top-down. And it is driven by a societal mission.” Cathy Swain, assistant vice-chancellor for commercial development at the University of Texas System, commented that there are a range of public investment activities in Texas. She noted that the state legislature set up a Cancer Prevention Research Fund several years ago. The $3 billion fund invests $300 million in cancer research each year. Texas also has the Emerging Technology Fund, which does not distinguish among industrial clusters, Ms. Swain explained. It focuses on early-stage investment for commercialization opportunities, before companies seek venture capital. The Fund also takes equity in start-ups. Two other programs are part of the Emerging Technology Fund, Ms. Swain added. One is the Research Superiority Fund, which establishes centers of excellence at universities. The other is the Research Matching Fund. The state is looking to turn that fund into a source of micro- lending to support development of proofs of concept. Texas’ activities highlight another feature of the U.S. public funding model, Mr. Bonvillian noted. “There is a growing role by our states in sponsoring innovation,” he said. “That has been nascent for a long time but is starting to grow.” He asked how Chinese institutions make decisions on what to fund. The United States and China share many similarities, Mr. Yang said. “We also have a competitive method,” he said. Recipients of funding go

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121 LESSONS LEARNED AND NEXT STEPS through a “very careful and dedicated evaluation process. No single individual or group can have a say.” Various experts assess the merits of projects seeking funding. Xu Bin, deputy division director of the high technology department of the National Development and Reform Commission, noted that the government provides very small funding, and wants more venture capital to come into to the country to make investments. Lou Jing of the Ministry of Education explained that a number of national innovation policies are being developed. They include short-, medium-, and long-term goals. The government has identified priority industries that meet national priorities. There also are incubator activities in industries with great growth potential. These strategies are developed by commissions composed of experts from different areas, Ms. Lou said. They include personnel from the Chinese Academy of Engineering, the Institute of Social Scientists, and the Chinese Academy of Science. Government institutions evaluate the process. “We will listen to advice from the local level, and then evaluate whether it is in line with the nation’s long, mid- and short-term objectives to determine what kind of deployment timeline is needed,” she said. “It is very comprehensive. Right now, we think our measures are very systematic and scientific.” Dr. Breznitz of Georgia Tech asked about China’s approach to “investing in what society and the state see as critical infrastructure.” He noted that the United States sees broadband as critical infrastructure for many reasons. “While we have let the private market do the heavy lifting, many rural communities have problems getting access,” he said. “That is where government steps in, to allow every citizen in the U.S. to have access to this critical infrastructure.” Wang Xue, deputy head of the Chengdu High-Tech Zone, asked about America’s health care reform. He said it seems that the reforms are built on a solid foundation, and that China may be able to benefit from the U.S. example. She also asked Dr. Barker to share some of her insights on China’s experience with cancer. He noted that the National Cancer Institute has a great deal of knowledge about different cases of diseases in different areas. Mr. Wang pointed out that in Sichuan Province lung cancer is the No. 1 problem. However, half of these cancer patients do not smoke. “I wonder if you have been following up and know what the situation is in Sichuan,” he said.

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122 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION Mr. Wang also asked her opinion on drug costs. If a truck manufacturer produces higher quantities of trucks, he observed, their costs go down. “How do you make drugs more affordable?” “I feel like I am sitting before Congress,” Dr. Barker quipped. “I have to answer the same questions there.” Health care is a critical issue because its share of the U.S. economy is nearly 18 percent and rising, she noted. “I would like to say we have reformed our health care system, but we have just begun. The health care reforms address some of the issues but not all,” she said. The reform will provide coverage for some, but not all, of the 40 million people who are uninsured, she explained. Regarding China’s situation, Dr. Barker noted that migration from rural areas to cities will create greater health-care issues. She observed that most advanced treatments for cancer are performed in cities. In rural areas, traditional Eastern medicine still is widely used. Urbanization, therefore, will drive up health-care costs. “Cancer is a particular problem because it is extraordinarily expensive to treat,” she said. “It also is an area where an enormous amount of discovery is going on.” Drug discovery also is very costly. Pharmaceutical companies invest $1 billion on average for each new drug that actually gets to the market, and the process can take around 15 years. “That is something that has to change,” Dr. Barker said. The high cost of research in the West, however, means there is opportunity for substantial collaboration with China. “From what I see occurring in China, I think you will have an opportunity to change this with us or even before us,” she said. “You have not built yet built infrastructure built that is driving costs. We are seeing a lot of your enterprises develop very quickly now in health care. I think some of your approaches have an opportunity to inform us here and result in very dynamic partnerships. I think we will learn a lot from each other.” The United States is struggling with the cost of drugs, Dr. Barker noted. She said she favors the concept of formulary, in which health care providers specify what they will pay for prescriptions in order to control costs. It may be difficult for the United States to adopt such an approach to public health care in “our free-market system,” she said, although the formulary approach is starting to be used in health care for the elderly. The government must take into account the financial requirements of pharmaceutical makers, Dr. Barker suggested. “It is very difficult to incentivize drug companies without a very substantial profit motive because they have to invest a lot of money to develop a drug,” she said. “So I think we are all in this together.”

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123 LESSONS LEARNED AND NEXT STEPS Regarding the question about cancer in China, Dr. Barker said she is familiar with the problem but “that nobody actually knows the answer.” She noted that not everyone who smokes develops cancer, due to genetic differences. “However, we think there is something more going on there,” she said. “Some of our scientists are working with your scientists so we can better understand this complex outcome.” Dr. Wessner offered some observations regarding venture capital. Often, too much credit in the United States is given to the role of venture capital in the innovation system. He held up a Blackberry and noted that the company that developed it never received venture capital. Lithium- ion battery maker A123, based in Watertown, Massachusetts, funded its research with funds from the National Science Foundation and the Department of Energy. It also received Small Business Innovation Research loans to develop commercial products. The company received venture capital after it already had developed its products. “It is claimed to be a venture capital success,” he said. Recently, Dr. Wessner added, A123 received $200 million from the U.S. government to build a production facility. “So we have a free market economy that is not always so free and not always so market,” he said. “It also is not driven by the venture industry. There are many sectors where venture companies just don’t go.” A good example is medical research. If a company discovers an interesting molecule, “they ask you to come back after you have finished Phase I trials,” he said. “If you tell them you need money for the Phase I trials, they tell you to come back when you have completed the Phase I trials.” Dr. Wessner said he thinks there is an “obsession” with venture funding. “It is a much more complex mosaic than that.” Michael Borrus concluded the session by noting that he was struck at how much China and the United States have in common, “whether it be reducing dependence on fossil fuels or the fact we face rising cancer rates.” Based on the three decades of cooperation in health care between the two countries, Mr. Borrus suggested three principles on what makes collaboration successful. One is that “if cooperation is to work, it much be based on an equal exchange,” Mr. Borrus said. “Each side must give as well as get.” The second principle is that conflicts, misunderstandings, and sensitive issues are inevitable. “But we need goodwill on both sides to work through those problems in order to maintain progress toward building a cooperative relationship.” The third point is that “the only way to cooperate is to cooperate,” Mr. Borrus said. To borrow a Chinese proverb, “We need to cross the river between our countries by feeling for he stones,” he said. “We need

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124 BUILDING THE 21ST CENTURY: U.S.-CHINA COOPERATION to try some things together, demonstrate mutual gain, and then turn those smaller-scale collaborations into larger collaborations.”