Panel II: Program Objectives

Introduction

Henry Kelly

White House Office of Science and Technology Policy

This session is designed to talk about the operation and implementation of the Advanced Technology Program (ATP), which is, said Dr. Kelly, ''where the rubber hits the road'' for any program. The operation of the program has to reflect the original purposes of the ATP, and the clear goal of the ATP is to put public research and development (R&D) money in places in which the economy can benefit from the knowledge spillovers that R&D creates.

The Clinton Administration's Perspective

The Clinton administration remains very interested in the program because of the spillovers that it generates for the economy. It is an enormously complex task to maximize the spillovers from R&D investment, but it is worth undertaking because the spillovers benefit not only other firms in the sector in which an ATP recipient operates, but also firms in the entire economy. As an example, Dr. Kelly noted that it is probably fair to say that Wal-Mart has made more money off of the integrated circuit than its inventors.

There are social goals associated with R&D spillovers. Much of the research into new industrial processes—motivated initially by purely economic objectives—has subsequently made great contributions to environmental protection. This is because efficiency in production usually means minimization of waste.



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--> Panel II: Program Objectives Introduction Henry Kelly White House Office of Science and Technology Policy This session is designed to talk about the operation and implementation of the Advanced Technology Program (ATP), which is, said Dr. Kelly, ''where the rubber hits the road'' for any program. The operation of the program has to reflect the original purposes of the ATP, and the clear goal of the ATP is to put public research and development (R&D) money in places in which the economy can benefit from the knowledge spillovers that R&D creates. The Clinton Administration's Perspective The Clinton administration remains very interested in the program because of the spillovers that it generates for the economy. It is an enormously complex task to maximize the spillovers from R&D investment, but it is worth undertaking because the spillovers benefit not only other firms in the sector in which an ATP recipient operates, but also firms in the entire economy. As an example, Dr. Kelly noted that it is probably fair to say that Wal-Mart has made more money off of the integrated circuit than its inventors. There are social goals associated with R&D spillovers. Much of the research into new industrial processes—motivated initially by purely economic objectives—has subsequently made great contributions to environmental protection. This is because efficiency in production usually means minimization of waste.

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--> Finally, there is an educational and training aspect to spillovers: R&D, particularly when conducted jointly among companies and universities, builds the internal capacity of firms to be innovative. In the arena of human capital, these spillovers are huge and have fueled a great deal of this country's economic growth. The program has taken on a tough set of problems, Dr. Kelly continued, and although the problems are difficult, the administration believes that it is well worth the effort to have the ATP address them. For instance, some research problems cannot be assigned easily to mission agencies, such as the National Institutes of Health or the Department of Agriculture. Some technology initiatives extend across a number or fields, and the ATP has played an indispensable role in addressing such R&D problems. Moreover, in achieving a balanced portfolio of risks in R&D projects—from relatively risky university research at the frontiers of new knowledge to less risky advances in industrial process—the presence of the ATP has helped to spread that risk across agencies. Implementation The challenge, continued Dr. Kelly, is to take this complex set of objectives and make them operational. It has been said today that the ATP is an experiment and, as with any experiment, it is important to make adjustments along the way. From the perspective of an official at the White House Office of Technology Policy, Dr. Kelly said that he was very gratified that ATP management has made adjustments in the program in the past several years. Last year, for example, an evaluation yielded changes in how the ATP treats the participation of small businesses and states in the program. Evaluation of public R&D programs faces a unique challenge, in that federal support for research involves provision of public funds for projects whose outcomes are inherently uncertain. Dr. Kelly pointed to the Academy's recent publication Evaluating Federal Research Programs as a thoughtful examination of the issue. Plainly, you do not want to hand out public money without accountability, but specifying an evaluation program to ensure accountability when research outcomes are uncertain is a difficult task. Dr. Kelly noted that, in the Academy's study, a problem in the evaluation of basic research was identified: If you set the objectives too narrowly, you wind up characterizing an outcome very conservatively. That is, the evaluation criteria discourage the risk taking that the R&D program is supposed to foster. Dr. Kelly said that society must be prepared to tolerate some failure in R&D programs. In concluding, Dr. Kelly said that the panelists could provide "the gift of common sense" in providing their perspectives on how the ATP has operated and adapted to change over the past 10 years.

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--> Decision Making: The ATP Selection Process Lura Powell Advanced Technology Program/National Institute of Standards and Technology I am pleased to be here today to review the Advanced Technology Program. It is an exciting time for ATP—we are entering our tenth year and can say with confidence that the program is making a difference. Today, as you will hear in the following panels, we have significant evidence and real-world success stories to show this. This symposium here at the Academy is the perfect forum for discussing both the program's accomplishments and the challenges that lie ahead. I am looking forward to hearing the perspectives offered by all of today's participants and learning how we can improve the ATP as it enters its second decade. Today I want to share briefly some interesting facts about the program as well as our selection criteria and process. I also want to spend a few minutes, at the end of my talk, highlighting some of our successes. Competitive Landscape and the Need for Government-Industry Partnerships Let me start by reminding us all of why we have the program. The ATP was created to foster economic growth through the development of innovative technologies. As you know, advanced technology drives U.S. leadership in the global economy, accounting for over 50 percent of U.S. economic growth in the postwar era. Continued innovation in U.S. industry is crucial to sustaining our global competitiveness, and these technical innovations depend upon continued investment in long-term, high-risk research today. Unfortunately, private industry has been reluctant to fully fund this critical type of high-risk, enabling research. The reasons for this underinvestment are complex, but three explanations stand out: First, benefits from these long-term, high-risk innovations often are dispersed too widely for any one company to recover its investment at a sufficient profit. Second, global competition has forced industry to focus on bringing products to market rapidly. Third, many R&D challenges are so large or complex that no single company has the resources to address them alone. By stimulating industry investment in innovative technology with the potential for broad national benefit, government-industry partnerships, such as the ATP, address these sources of market failure.

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--> The ATP Selection Process I would argue that ATP's early-stage investment is accelerating the development of high-risk, broadly enabling technologies, helping to bridge the gap between the laboratory and the marketplace. Further, I believe that the program has been successful because we leverage private sector resources through cost-shared R&D partnerships that promote competitive advantage while delivering major national benefits. ATP projects are submitted by industry and undergo a rigorous, peer-reviewed competition before they are selected. Although the ATP funds all areas of technology, there is a special niche of technology projects that the ATP looks for. In the process of assessing each proposal, the ATP examines the innovations in the technology, the degree of technical risk, the feasibility, the quality of the R&D plan, pathways to economic benefits, and the need for ATP funding. Each proposal is evaluated by a selection board, comprising both technical and business experts. The selection board examines the scientific and technological merit of the proposal as well as its potential for broad-based economic benefits. The selection criteria are weighted equally between technology and economics, and within each there are "must have" elements that a proposal must address. To meet our technology criteria, a proposal must show that the proposed technology is innovative and currently faces high-risk technical barriers that, in light of current knowledge, possibly can be overcome. The proposal also must lay out a research plan that is credible, detailed, and includes measurable milestones. Last but not least, the proposal must show how the project will contribute to the U.S. technology knowledge base. On the economic side, the proposal must demonstrate the technology's potential for broad-based economic benefits, explain why ATP funding is necessary, and tell what difference ATP involvement is expected to make. Although commercialization, which is paid for by the company, occurs after ATP-funded R&D, a successful proposal must have a strong commercialization plan that demonstrates the potential for benefits beyond profits to the company. Successful commercialization of the technology is what links the R&D and the economic benefits. Questions have been raised as to whether ATP awards replace private capital. This is not the case—the ATP selection criteria are very different from those applied by the venture capital community. The venture capital community focuses on capturing the private benefits that go to the innovating company. The ATP looks for the broader perspective—selecting projects that have the potential for broad-based economic benefits, not just direct benefits to a single company. If a proposal addresses path-changing technology, has potential for broad economic benefit beyond the innovator, and shows good evidence of a strong need for ATP funding, it is a good candidate for an ATP award.

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--> ATP Is Making a Difference As alluded to in my opening comments, we are accumulating a wealth of successes associated with our funded projects that show that the program is making a difference. Many of our earliest projects are now commercializing products and realizing benefits. This is providing the program with the opportunity to examine critically the impact of those projects. In fact, as Ray Kammer announced earlier, we have just completed an analysis of the first 38 completed projects. As you might expect, out of those first 38 awards, not every project has been a smashing success. We have a handful of projects that would be considered hugely successful, a portion that must be designated failures, and a large group that are on the road to commercialization, but whose impact on the economy remains to be seen. We have had our share of R&D investments that did not deliver, of economic reverses, and of sudden changes in direction on the part of our private sector partners. In my view, we are about where we ought to be, that is, out toward the higher-risk end of the spectrum, encouraging industry to take on the tough challenges, with potentially broad-based benefits. However, it is clear already that the expected benefits from these projects far exceed their total costs. If we look across our entire portfolio of projects, some interesting facts emerge that underscore the value of the ATP and its contribution to the R&D enterprise. First, the ATP has been responsible for accelerating R&D and reducing the time to market. Second, our awardees have identified 37 percent of ATP technologies as "new-to-the-world" innovations. Third, ATP projects have identified 1,200 potential applications (an average of 4.5 per project) and produced over 100 new technologies that are now being commercialized as products, processes, or services. Fourth, we see substantial job growth in our companies—in the first 38 projects, almost all of the small, single applicant companies have at least doubled in size since they received their initial ATP award. To give you a flavor of the technical successes we are having, consider the following examples: Two small companies are developing miniaturized DNA analyzers that are greatly increasing the speed of research and medical testing for diseases such as HIV, strep infections, or cancer. Another small company improved the properties of carbon-and glass-reinforced polymer composites to design and manufacture bridge beams that are expected to outlast conventional steel and concrete. And, six top U.S. printed-wiring-board suppliers and users teamed to achieve literally dozens of technical advances that have been credited by the National Center for Manufacturing Sciences with saving the U.S. printed-wiring-board industry with its 200,000 jobs. By stimulating collaboration and investment in high-risk, path-changing, and broadly enabling R&D, the ATP is changing the nature of the R&D projects that

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--> companies undertake and encouraging the development of new technologies that will underpin U.S. economic growth in the next century. Thank you. Mission Synergies Jeffrey Schloss National Human Genome Research Institute National Institutes of Health I am here on behalf of Dr. Francis Collins, Director of the National Human Genome Research Institute (NHGRI) of the National Institutes of Health (NIH). Dr. Collins sends his best regards, and asked me to convey his regrets that his travel schedule precluded his participation in this important discussion. Dr. Collins also asked me to convey that successful achievement of the ambitious goals of the Human Genome Project (HGP) can be accomplished only by an effective partnership between the publicly funded effort and private enterprise. Development of new technologies is a particularly fertile area for such partnership efforts, and we have been delighted to work closely with NIST's Advanced Technology Program to help develop DNA Tools. This program has advanced several areas of technology, especially microelectromechanical systems, in ways that should substantially benefit the public over the long-term. Before I proceed with these remarks, let me say that I am well aware that the ATP addresses an array of goals and that commercialization of DNA and genomics tools is just part of that broader program. However, to focus my remarks on issues directly related to the Human Genome Institute, I will limit them to this area of the ATP, and you can decide whether our perspective has its parallels in other sectors. The Human Genome Project The Human Genome Project has been overwhelmingly successful in producing and bringing into the public domain vast amounts of data about the human genome and the genomes of several other organisms. It also is changing the way that biomedical research is done. Let me use positional cloning as an example. In these experiments, family members of individuals with hereditary diseases are studied in order to locate the genes responsible for their ailments. Just a few years ago, these experiments took tens of people several years of work. As a result of the human genetic and physical maps generated by the HGP, it has become possible for a small laboratory to map the susceptibility gene for Parkinson's disease in just nine days, and identify the specific mutation in just a few months. Similarly, DNA sequence data from model organisms and from expressed

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--> human sequences, produced through the efforts of the Human Genome Project and its partners, have dramatically accelerated our ability to understand the role of these genes in cells and in disease. These are just examples of some of the most obvious results of having available genome-wide data. In fact, using genomic data, it is now possible, and will become increasingly practical, for a wide variety of experiments to be designed in new and different ways, and potentially to be performed much more quickly and accurately, than would have been the case before genome data had been collected and genome approaches had been conceived. Developing New Tools for Genome Research To realize this potential, new lab methods and techniques need to be developed. NHGRI and other components of the NIH are actively supporting research to develop these new technologies. For example, we supported many of the initial studies from which have resulted the development of two major "flavors" of DNA array technology, sometimes known as "gene chips." These technologies can be used to assay changes in gene expression between different stages of embryonic development, in different kinds of tissue such as muscle or skin, in healthy or diseased tissue, and before and after drug treatment, to name just a few examples. Similarly, these chips can be used to rapidly screen for alleles of known mutations. This information in turn can be used to aid in gene discovery, to determine a patient's susceptibility to particular diseases, or to determine if a patient will likely respond to a particular drug or have an adverse reaction to a drug. We also are supporting technology research to understand the fundamentals of how to miniaturize important biological assays—such as polymerase chain reactions and DNA size separations—and accomplish them on microfabricated devices. Additional research is proceeding on how to integrate multiple assay steps on single devices so that many samples can be analyzed in parallel, and sequentially, to achieve the high-throughput, cost-effective capabilities that are needed to take full advantage of genomic data. Research Challenges for Genome Research This is indeed an exciting time. However, there are stumbling blocks that could hinder the achievement of this vision: Multiple Technologies: There are a number of different technologies that must be developed to achieve all of these goals. It is not clear at present which of them will be optimal for which assays. Some of the uncertainty lies at the level of basic science, some uncertainty is derived from operating the technology at large-scale, and some emerges at the level of com-

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--> mercialization. If we only explore those technologies that appear to be most promising in the near term, we may forfeit the potential to realize the truly novel approaches that are just beyond the horizon. Technological Complexity: These are very complex technologies to develop. Many of them require state-of-the-art analytical chemistry and molecular biology to be integrated with microfabrication, optics, and electronics. And, for the information they produce to be useful, their development has to be coupled with sophisticated mathematical and bioinformatic tools. This complexity and need for multidisciplinary participation increases the development costs and risks. I participated in a discussion recently in which a chemist and an engineer were discussing one of these projects. The engineer described a complex sequence of development benchmarks and concluded that the project was challenging, but was the sort of thing that his team had accomplished successfully in several previous projects. The chemist pointed out that those projects had all involved sophisticated electronic, optical, mechanical, and software engineering, but that this one added analytical chemistry. The engineer was silent for a moment and agreed that this factor added a completely new level of complexity. Higher Costs: The result of this complexity is that each of the technologies, and therefore the sum of the technologies, is expensive to develop. Conservative estimates by our advisors state that the development phase for these technologies costs at least 10 times as much as the initial research to show proof of principle. So, it is clearly beyond NIH's ability alone to fully develop these promising technologies. Synergies Between ATP and NIH NIH investments tend to be more toward generating and demonstrating new research ideas. However, the ATP is able to focus on stimulating specific sectors where there is particular potential to drive these new ideas toward realization as products that can be put in the hands of a much wider group of users, through commercialization. The ATP's choice of DNA Tools is an excellent example of selecting an area where the risks are such that, for reasons outlined above, investment by the private sector may be insufficient to fully realize the potential in a timeframe that would optimally deliver the technology. The result of ATP investment in DNA and genomics technologies has been to stimulate this sector, in order that a much wider array of ideas can much more rapidly be converted into methods, devices, and reagents that actually work. By stimulating a sector such as this, multiple begin companies working in competition, but also stimulate each other to produce these products more quickly. In addition, because a number of different approaches have the opportunity to develop, the market is much more likely to receive products that have the desired

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--> specificity and sensitivity. This might not occur if only a small number of technologies that appear to have the very highest chance of success, and therefore garner the limited amount of private funding that is available, were allowed to develop. Another advantage of running a program such as this in cooperation with the ATP, is that NIST already has experience with a wider range of cutting-edge technologies than does the NIH. For example, the synergies that can develop between microfabrication methods that have been developed for the electronics industry and that are showing such great potential when applied to miniaturized, high-throughput assays for genomics, may be better leveraged by an agency that has more experience interacting across these industries. This is not to say that NIH cannot partner with other agencies to develop such programs. But it is a good thing to take advantage of the variety of missions, perspectives, and experience that exist in our federal agencies, to support research and development in areas that are acknowledged to be of great importance. My discussion of the potential for partnership between agencies prompts me to make clear that this actually is happening. For example, staff of NHGRI have for the past several years been in active and frequent contact with staff of relevant programs in other agencies such as the Defense Advanced Research Projects Agency, the ATP, as well as the National Science Foundation. This helps staff to maintain awareness of each others' programs and to contribute when appropriate. In closing, I want to underscore that ATP activity in the area of DNA technologies has and will benefit not only the diagnostics communities, but also our programs at NIH, in important ways. First, the value of Genome Project products increases because more people will gain access to the tools that allow them to take advantage of those products. Also, as the companies that are developing these products gain experience and build their infrastructure, they can turn part of their attention to solving the problems that will allow our grantees to extract from biological systems the next generation of genomic data. Thus, just as the ATP leverages research supported by other agencies, those other agencies now can leverage of ATP investments. This continues to build strong synergy between agencies and advances all of our missions. I appreciate the opportunity to make these comments regarding the Advanced Technology Program. I would be pleased to answer questions that would clarify any of these points. Industry Perspectives I David Gibson X-Ray Optical Systems, Inc. Mr. Gibson said that he would try to offer a practical perspective on what the ATP has meant to his company and draw the attention toward program operation

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--> and away from what someone had called the "religious discussion" about the program. Mr. Gibson began by describing his company's technology as a means to better convey how the ATP grant helped X-Ray Optical Systems. X-Ray Optical System's Technology The technology that his company proposed to the ATP was designed to make optics that control x-rays. At the time that the technology was proposed, there existed no lenses that were able to control x-rays. Today, his company can make parallel beams and convergent beams, the applications of which are primarily in analytical instruments that allow users to understand the composition or the crystalline structure of a material. These techniques are used extensively in high-technology industries, especially semiconductors and pharmaceuticals, and for turbine blades. Other applications are found in the steel and construction industries in the analysis of steel or cement integrity. X-Ray Optical Systems was founded in 1990 on the basis of a technology whose basic research had been conducted in the former Soviet Union. At that point, there had never been an optic such as X-Ray Optical's manufactured in the United States; indeed, given the Soviet origins of the research, such an optical had never been in the United States. The company applied for ATP funding in 1990 and was turned down. This was appropriate, because X-Ray Optical had not done enough to convince ATP reviewers that the company had the team or business plan to develop the technology successfully. In 1991, the company submitted another application to the ATP and won an award in early 1992. X-Ray Optical had only two employees when it applied for the ATP grant, and only three when it received the grant. At the time the grant was given, the Soviet optics technology had been demonstrated as viable, but the technology had no practical uses. Although the technology developers believed that the technology had commercial potential, there were scientists who disagreed with that assessment. Some scientists thought the technology had practical application only in theory; none believed that theory could be reduced to practice. The ATP was capable of making its own judgment on the technology's practical and commercial potential and thought the technology was a risk worth pursuing. Today, X-Ray Optical Systems makes the optics it promised in wavelengths that are useful. The company has advanced to the point where it works with the "lead end user," such as academic and government scientists, as well as equipment manufacturers to install the optics. In the past year, the company has had its two equipment manufacturers sign contracts for volume orders, which moves the company away from "one off" products for specific users. The company currently has seven U.S. patents, as well as patents pending in 15 countries. X-Ray Optical Systems is, said Mr. Gibson, the world leader in the technology. However, there is a long lead-time to introduction. Once the company demonstrates the technology and its value in an application, there is typically a three-

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--> to five-year lag until the optic finds its way into use. An optic provides no value in itself; a host of other things, such as the proper x-ray source and software, must be developed before users can integrate it into a system. His company is at that point today, Mr. Gibson said, and it is also profitable. Role of the ATP in X-Ray Optical's Development At the outset, Mr. Gibson said that his firm searched for private financing for the company but was unable to procure any that would allow X-Ray Optical to be independent and to operate in the United States. Specifically, the company started with personal funding. As with most high-technology start-ups, the principals emptied bank accounts, cashed in liquid assets, sold the house, borrowed money from friends and parents, and even dipped into parents' pension funds. You have to ''dig pretty deep'' and these sources of funds were used up by the time the company received its ATP funds. The personal sources of funds came to $300,000 to $400,000. Loans were out of the question because they are based on assets, and the company had none that a bank could use as collateral. X-Ray Optical explored venture capital funding but, Mr. Gibson said, venture capitalists have a difficult time providing funds to young companies that have high technical risk. Venture capitalists also could see that they or the company were unlikely to capture the full benefit from X-Ray Optical's technology. The company looked to private sources of funds, which is generally a good avenue to pursue. However, private sources, that is, individual wealthy "angel" investors, usually find it hard to assess highly technical risks such as the one that X-Ray Optical Systems presented. Such private investors typically would turn to scientists but, as Mr. Gibson had mentioned before, many scientists had concerns about his company's technology. Other government policy measures, such as R&D tax credits were simply irrelevant to his company; tax credits provide no cash and they are useful only if a firm is profitable, something X-Ray Optical knew was not going to happen for several years. As for an initial public offering, that was not an option for a risky technology that was not going to yield a product for a number of years. Finally, strategic partnerships were explored, and X-Ray Optical System's principals had anticipated this to be an attractive source of funding prior to applying to the ATP. However, the company's risky technology and long lead time until a product was likely to be ready for the market caused potential partners to undervalue the technology. In the end, it appeared that selling the technology to Japanese investors was going to be the only option. This was not something the management of X-Ray Optical Systems wanted to do. However, the company was able to turn to the ATP for funds, and this allowed X-Ray Optical Systems to remain based in the United States. With ATP funding in hand, the company was able to bring in

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--> private funding from angel investors. These investors had committed to fund the company if the technology passed NIST's technical evaluation in the ATP grant process and the company was successful in obtaining an ATP grant. Today, X-Ray Optical Systems is at a stage where it can reasonably expect to gain additional funds from a venture capitalist. The company is looking at various options for procuring financing from venture capitalists. With respect to matching funds, Mr. Gibson said that government reporting requirements substantially understate the amount that private firms contribute. The government asks for information only on the amount of the matching funding during the time horizon of the ATP grants. This misses the resources contributed by private investors before the ATP grant and afterward. ATP's Contribution to the Economy One of the reasons that it is hard to obtain funding for a technology such as X-Ray Optical System's is that the firm captures only a small portion of the value it creates. An economist would say that X-Ray Optical creates spillovers or externalities as it develops technology. His company manufacturers an optic, which then is put into a system; the system then goes to a customer who is a manufacturer that uses the system to investigate the properties of a component it sells. The component is purchased by an end user. The optic's economic value as a fraction of total value declines along this chain; an optic sells for tens of thousands of dollars, and is used in a system that may sell for $250,000. That system is sold to a manufacturer who uses it, for example, to improve production yields whose value may be in the millions of dollars. For a single optic, X-Ray Optical System captures less than I percent of the total value that the optic creates. This is not a social good, Mr. Gibson pointed out; it is a private good for others, but not for X-Ray Optical Systems. ATP Funding Versus Other Government Sources Another helpful dimension that NIST brings to the ATP is its technical capabilities, Mr. Gibson said. The company used three different labs at NIST, and when a technical hurdle was encountered, the company was able to look to a variety of technical resources at NIST for advice. Without NIST's technical assistance, Mr. Gibson was unsure whether his firm would have been able to turn a profit. Although NIST's technical assistance would have been available without the ATP, Mr. Gibson said that he probably would not have turned to NIST in the absence of the ATP. In summary, Mr. Gibson said ATP funds made his company possible. Because the ATP allowed his company to remain in the control of U.S. investors, the United States went from not being a player in the field of x-ray optics to being the world leader. The return to the economy from ATP funds is many times the

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--> amount of the ATP grant. Finally, the technical resources at NIST were invaluable and helped to help the company grow. Industry Perspectives II Richard Ramseyer Honeywell Technology Center Mr. Ramseyer observed that he was one of the few participants in the discussion from a large corporation. Accordingly, he thought it would be useful to provide the perspective of a large high-technology corporation. He noted that one of the mantras of the Chairman of the Board of his company is: "Never take a profit tomorrow that you can take today." One might think that this flies in the face of making investments in long-term R&D, even when the cost is reduced via a program such as the ATP. At his company, however, it is the task of the Honeywell Technology Center to look beyond the existing business units to anticipate technology needs 3 to 10 years into the future. When a Honeywell business unit wants to move swiftly into a new market, the Technology Center is there to ensure that the company has the technological capability to do so. The ATP and Honeywell The Honeywell Technology Center uses the ATP as part of its strategy to scan the horizon for new technological opportunities. Mr. Ramseyer recalled the earlier so-called "religious discussion" of about whether the program should be funded at all or whether $200 million was the appropriate funding level. Whatever the merit of that discussion, Mr. Ramseyer said that it was important to look at the results of the ATP. It is important to "keep our eye on the ball" when talking about the ATP and, in his view, the taxpayer has been the real winner with the program. Mr. Ramseyer said that, even though an ATP grant of $2 million was an attractive prospect for a company, there are hidden costs to companies that participate in the program. It may cost half of a $2 million grant for a company to form and operate a consortium for an ATP grant, which often is the only way to undertake a sizeable ATP project. This suggests that there are reasons other than the award for being involved. Examples of ATP's Benefits to Honeywell One example of an ATP partnership for Honeywell is one in which Honeywell, SEMATECH, Advanced Micro Devices (AMD), and NIST collaborated on the Advanced Process Control Framework. Many in the computing and

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--> electronics industry are aware of Moore's law in which Intel cofounder Gordon Moore predicted that the number of transistors on an integrated circuit would double every 18 months; this has faithfully been the case over the past 30 years. Mr. Ramseyer raised what he called "Moore's lament" whereby the cost of fabrication facilities increases exponentially and the cycle time to build new semiconductor chips is growing longer. The Advanced Control Process Framework, funded by the ATP, has been an attempt to address these rapidly escalating costs. The framework has started to yield some successes: for example, AMD reported savings of $10 million in fabrication costs due to the ATP-funded initiative. The software that supports this initiative has been installed at other semiconductor firms, and the software is now a commercial product sold by a company named Quantum Space. Mr. Ramseyer noted that AMD's K6 processor is much cheaper than its Intel competition, which results in less expensive personal computers for consumers. Another ATP success for Honeywell from its participation in ATP is in Abnormal Situation Management. One of Honeywell's largest customers is the hydrocarbon business; 85 percent of the world's gasoline is refined using Honeywell controls. Honeywell is therefore always looking for ways to make refineries run more efficiently. A pervasive problem in the refinery industry is panic among operators when an alarm in the refinery is sounded. It is understandable, given the consequences of so-called "refinery upset," that operators tend to shut down the refinery completely until the problem is found. Because it is expensive to restart a refinery once it is shut down, the cost of these decisions are substantial—as much as $20 billion annually in the industry. Working with the ATP, Honeywell signed on every major refiner in the world to develop a system that would distinguish between problems that warrant a complete shutdown and problems that could be addressed without a costly shutdown. The system is proving to be effective and, Mr. Ramseyer added, will have applications in other industries. Chemical and paper plants will likely benefit, as well as airports. For the future, technologies for the elderly will take on greater importance. It costs the economy approximately $100 billion per year to care for the elderly in nursing homes or hospitals. Information technology can improve the efficiency and quality of health care delivery to the elderly and generate substantial savings. For Honeywell, each of the ATP projects in which it participated involved a great deal of technical risk. Each member of the consortium may have a piece of the solution, and may be confident that a solution is out there, but what the solution is and how it fits together is uncertain at the outset. In sum, Mr. Ramseyer said that, in Honeywell's experience, the ATP has stimulated innovation and commercialization of products to the benefit of a broad range of companies and the taxpayer.

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--> Discussants William Newall Axys Pharmaceuticals, Inc. Mr. Newall began his remarks by saying that Axys Pharmaceuticals has been a recipient of the ATP awards in the past, giving the company some perspective on how the ATP functions. Axys has found the ATP to be a valuable program and, even though Axys received its grant only last fall, the company believes that the program is meeting the objectives set forth in the legislation. Axys and the ATP Axys Pharmaceuticals is a biotechnology company that qualifies as a small business; its primary corporate mission is to discover and develop small-molecule therapeutics that can be taken orally to treat diseases. To do this, Axys uses a variety of extremely sophisticated technologies, one of which is microray technology. This technology is a tool used in the biotechnology business, and Axys normally would not develop it. Indeed, when faced with a "make versus buy" decision on such a technology, Axys normally would buy it. However, an Axys scientist came up with a revolutionary microray technology called "liquid arrays." This allows companies such as Axys to develop drugs of higher quality and in a less expensive and more timely way. As a small company with limited resources, development of such a tool ordinarily would not be a priority for Axys. The company's main business thrust is in discovery of new drugs, and the technology, although exciting, was too speculative in nature, too expensive for Axys to pursue by itself, and too tangential to its core business. With the widespread pullback of the U.S. venture capital community from the biotechnology industry, Axys knew it would be very difficult to obtain the financing to bring the technology to fruition. Without the ATP, Axys would have put this idea on the shelf and would not have pursued it. As a counterpoint to some of Claude Barfield's comments, Axys would not have moved forward with this technology development without the right to keep and commercialize the intellectual property rights created in the program. There would not have been the financial returns that Axys investors require without the right to retain the intellectual property created with the ATP grant. Observations on the Operations of ATP The fact that there are no funding caps placed on ATP grants is a valuable attribute of the program, Mr. Newall said, adding that this stands in contrast to the caps in the Small Business Innovation Research (SBIR) program that do not allow

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--> for multimillion dollar development projects. SBIR grants are useful, and Axys has benefited from them, but many new technologies, such as liquid arrays, are very expensive. The size of ATP grants permits such technologies to be developed fully, not just gotten off the ground. The cost-sharing feature of the ATP is a reasonable balance of risk between government and industry. Because a company will benefit from technology developed under the ATP, it is entirely appropriate that the company bear the risk. Putting a company's own funds at risk is a good way to ensure a company's commitment to completing technology development and commercializing. When companies have their own resources at risk, Mr. Newall said, they have incentive to work harder. Axys believes that an ATP grant is an important validation of new technology ideas, especially for high-risk enabling technologies. In addition to the technical risks, there is significant commercial risk in developing new technologies. Between these two kinds of risks, technology development is a high-stakes game, especially for small companies. However, the ATP process helps to lessen these risks because of the rigorous technical and business reviews that are part of the application process. The process means that ATP award recipients have had their technologies and business plans vetted by experts. Not all risk is removed through the process, of course, but companies take greater comfort in pursuing the technology given the technical and commercial review that goes with winning an ATP grant. To a manager trying to make a decision, the external validation provided by the ATP can make the difference between a "go or no-go decision." Suggestions for the Improvement Axys believes that the ATP application and timeline can be streamlined. Mr. Newall said that he did not want to overstate the point, because Axys received its ATP funding nine months after initiating the grant application process. Nonetheless, Axys believes that a review of the information requirements for the application would help to accelerate the decision-making process within the program. Particularly for small businesses, Mr. Newall said, the scope and detail of the information required in the application can be daunting. Axys also would like to see parity given to applications from single companies as compared to applications from joint ventures or consortia. Under the current ATP rules, a single company cannot obtain financing for indirect costs associated with the projects; joint ventures can. Because indirect costs can run as high as 70 percent of total costs, there is substantial disincentive for individual companies to apply to the ATP. The program does not take into account whether companies have "contractual rather than equity partners." In addition, there is a funding limit of $2 million over three years that does not apply to joint ventures. Axys believes that this provision should be reviewed. From his own experience, Mr. Newall said that he understood joint ventures to be

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--> challenging; some work well, others fail. When joint ventures fall apart, Axys believes that there are problems inherent in the ATP grant-making process that may make it difficult for the project to move forward should the partnership dissolve. In the case of liquid arrays, Axys ordinarily would not have moved forward with the technology through a joint venture, but rather through a contractual arrangement with another company. In most cases, Mr. Newall said, a small company probably would develop a technology jointly with another firm, even though the relationship may not be as formal as a consortium or joint venture. It is contractual partnering that allows the ATP's goals to be met. For example, if a single company takes the lead in development and forms contractual relationships with other companies to further the development process, it may make sense to allow the lead company to substitute another company in the development chain if one of the original firms fails to hold up its part of the development bargain. If ATP's rules preclude this kind of substitution, necessary flexibility among firms is constrained. In closing, Mr. Newall said that Axys believes that ATP represents a successful partnership between government and business. It provides a successful financial bridge to encourage the development of new technologies. By focusing on enabling technologies, the ATP leverages the government's investment many times, creating an economic ripple effect that creates more U.S. jobs and aids in keeping the United States the world leader in technology. Jeff Grove House Committee on Science Mr. Grove noted that he has just assumed the position of staff director of the House Committee on Science's Subcommittee on Technology and, as such, is benefiting from hearing the views of large and small business on the ATP. On the basis of his experience with the program, Mr. Grove said it was clear that grant recipients are pleased with the program and have received benefits. He noted that auditors and research done by several think tanks have raised questions about implementation of the program. For Congress, Mr. Grove said, there would be a clear benefit from hearing recommendations such as those from Mr. Newall on streamlining the application process. The debate over funding and scope of the program are largely off the table in that those questions would be settled on the basis of the overall budget for science and technology programs. Given his desire to learn more about the ATP, Mr. Grove said that his time might be better used by asking some questions. In that light, he asked Dr. Powell to comment on Mr. Newall's suggestions for improving ATP. In response, Dr. Powell said that ATP has made a number of efforts over the

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--> years to streamline the program through outreach to ATP grant winners and non-winners. It is an issue very much in ATP's sights, and Dr. Powell said that she would discuss in detail with Mr. Newall his suggestions. With respect to Mr. Newall's comments on the treatment of single-company applicants versus consortia, Dr. Powell said that this is another area for improvement that ATP is studying. This would require legislative changes to ATP's statute. Given that, Dr. Powell would welcome additional input from industry, as well as dialogue with legislators. Questions from the Audience Dr. William Long of Business Performance Research Associates commented on the ATP projects of Axys and X-Ray Optical Systems based on information from the ATP Web site. The difference between the joint venture and the single applicant approach showed up in only one place, Dr. Long said, and that is funding. There is a cap on the single applicant and not on the joint venture. Dr. Long did say that there appeared to be a lack of parity in treatment of joint ventures versus single applicants. He asked panelists to comment on the differences in making grants to single applicants versus joint ventures. Mr. Newall said that when Axys first considered the ATP for funding of its liquid-array technology, it quickly realized that it could not develop the technology on the $2 million limit imposed by the ATP on a single applicant. So, Axys did look for a partner to apply for the grant, and partnered with Luminex, in what has been a mutually beneficial arrangement. In effect, ATP rules required that Axys find a partner if the company was to pursue the liquid-array technology. If the necessary funds—on the order of $7 million to $8 million—had been available to Axys as a single company, Axys would have structured its application differently. Axys likely would have applied by itself to the ATP and entered into a subcontracting relationship with its partner. Mr. Gibson from X-Ray Optical Systems said that his company also considered the joint venture versus single applicant issue. When his company applied for its second round of ATP funds, the company knew that about 2.5 percent of single-company applicants that applied received funds, whereas that figure for joint venture applicants was approximately 12 percent. When X-Ray Optical gave its oral presentation to the ATP, a point in the application process at which roughly half the companies invited to give such presentations win funding, the company said that it was willing to go forward knowing that its chances of winning the award were lower as a single applicant. First, the $2 million funding cap was not a problem for X-Ray Optical Systems; that was sufficient funding for the project. Second, even though X-Ray Optical Systems had excellent relationships with university researchers and several other companies, it believed that structuring its application as a joint venture would impose burdens that would lower the probability of a successful technical outcome.

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--> Flexibility was the driver behind the decision against pursuing a joint venture. If a partner proved incapable of fulfilling its role, Mr. Gibson's company believed that it would be better able to jettison the partner and find a new one if X-Ray Optical Systems were the sole recipient of the ATP grant. It is possible to restructure participants in an ATP grant with a joint venture, but there are some costs. In summary, Mr. Gibson said that his company was willing to accept a lower probability of winning the award as a single-company applicant, because the company believed that it had a higher chance of technical and commercial success applying as a single company. The bias in the legislation toward encouraging collaboration among companies in the application process is well-intended, in that it is essential to have multiple skills from multiple organizations to be successful. However, the organizational bias toward the joint venture, reflected in the administration of ATP is a "very poor" way to accomplish this goal. Jon Baron, manager of the SBIR program in the Department of Defense, asked for an elaboration on how the ATP evaluates the commercial or spillover potential of applicants. Dr. Powell responded by saying that the ATP has a peer review process on the technical and business side for applications. The ATP gathers experts from the world of business and economics, as well as technologists, to scrutinize proposals. It is not difficult to find qualified technologists, but the ATP does face a scarcity of expertise among economists and business people. Often, therefore, the ATP draws on retired business people and the best available academicians to review business plans. The ATP also makes sure that its outside experts have no conflicts of interest because the review process involves the disclosure of proprietary information. Mr. Baron followed up by asking the two panelists from industry what they thought of the process. Mr. Gibson said that, when his company was turned down the first time, the ATP was "right on the money" because X-Ray Optical System's business plan was not well developed at that point. Mr. Gibson said that the oral presentation to the ATP panel and subsequent questions from panelists were of excellent quality and certainly found holes in X-Ray Optical's proposals where holes existed. The review panel was extremely well prepared and knew what it was doing.