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obtain rights to use and commercialize the invention by entering into a licensing agreement with the patent owner.

A license is a contract with binding commitments on each party, usually involving compensation (i.e. royalties, milestone payments, etc.). A license does not grant title, or ownership, to the invention. A license can be exclusive, when only one party is permitted to use or commercialize the technology; co-exclusive, when a limited number of parties have rights to use or commercialize the technology; or, non-exclusive, when more than one party is allowed to use or commercialize such rights.

agreements

Federally funded extramural laboratories establish their own licensing procedures and policies and obtain revenues from patent licensing with industrial developers, Universities also establish their own policies, in compliance with federal statute (Bayh-Dole and its regulations), for the distribution and of proceeds from academic license agreements. Typically, revenues are allocated to inventors as a incentive, and to laboratories, departments, and schools to research mission; however, the amounts provided to each are variable and subject to institutional policies.

reward or support the

use

Some measure of the financial returns associated with the Bayh-Dole Act may be gleaned from data that the Association of University Technology

latest

(AUTM) has collected from its constituency for the past nine available survey (FY1999) elicited responses from 190

Managers years. The

U.S. and Canadian universities, teaching hospitals, research institutes and patent commercialization companies. The AUTM institutions that

the survey FY 1999 (Appendix 1).

responded to

received 71 percent of NIH extramural dollars in

The survey includes information on patents and licenses in the fields of healthcare products, software programs, physics, copyrights and agricultural products as well as research reagents and tools used by industry and academia for various research, development and commercial purposes. However, it does not separate biomedical technologies from the whole, nor does it separate income from federally funded projects from

'Large and small businesses eligible for government-funded grants and contracts are subject to the Bayh-Dole Act. These entities typically commercialize technologies directly or through

6

other sources of support; therefore, it is possible to draw only general conclusions from it. Further, this annual survey is designed to examine how basic academic discovery drives economic development, as intended by Bayh-Dole, but is not designed with the intent of exploring the issue of financial return on research investment.

As noted in the AUTM survey, in FY 1999 the gross income received from all active licenses and options held by U.S. universities, hospitals, research institutes and other entities amounted to $935 million. Of this income, 83 percent was earned on royalties from product sales, and the remainder consisted of cashed-in equity, milestone payments, and other fees. The survey also reports a total sponsored research activity of $25.7 billion in FY 1999, $16.3 billion of which was federal support.2 If return on investment is presumed to be proportional, the AUTM data suggest a direct gross cash return on its federally funded research of approximately 5.5 percent annually. However, the AUTM survey collects very little data on the costs of the respondents' technology transfer programs. Therefore, it is not possible to determine from this information whether there is a "net profit" to the institution from technology transfer.

As a part of this report, NIH asked the Council on Governmental Relations
(COGR), the AUTM, the Association of American Universities (AAU)
and the Association of American Medical Colleges (AAMC) to provide
information from their members on their use of royalty income. University
officials consistently reported that the revenues derived from licensing
income and other equity are being used to defray the costs of patenting,
licensing and related legal and infrastructure expenses associated with
technology transfer. In addition, according to COGR, net revenue is
shared between the inventor and the university, and the inventors' share is
in the range, on average, of 30-35 percent of net income received.

If additional revenue is produced, it is used to fund new research programs, to
support biomedical science training, and to cover research expenses not provided
under capped overhead rates. However, most university technology transfer
⚫programs have very few, if any, products in the market. Given the investment in
patent prosecution costs, operating expenses, and revenue sharing with inventors
as provided by law, many universities operate their technology transfer programs
at a net loss. These organizations stress the fact that very few products are true
"blockbusters," and that a relatively small number of technologies provide most

2

Association of University Technology Managers, AUTM Licensing Survey, FY 1999, p. 34.

80-949 D-3

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of the licensing income they receive, since most of the technologies are very early stage and, consequently, often have little licensing appeal (see Appendix 2).

NIH does not have jurisdiction over the extramural technology transfer programs of academic institutions that use federal funds for inventive research. Indeed, the provisions of the Bayh-Dole Act do not give the funding agencies, including NIH, title to grants- and contracts-supported research discoveries, nor does it authorize the funding agency to dictate licensing and/or commercialization terms for these technologies.

b. Intramural Technology Transfer

As dictated by law, and under regulations from the Department of Commerce, NIH and other federal agencies carry out their technology transfer mandate by retaining title to the inventions developed internally by federal laboratories and licensing these inventions to ensure utilization, commercialization and public availability. As is the case with licensing programs in the extramural community, these technologies are negotiated on a case-by-case basis and in a manner consistent with rates and practices in private industry. For more details on NIH patenting and licensing policies and strategy, please see Appendix 3.

In FY2000, the NIH technology transfer program generated $52 million from its intramural licensing activity, in the past five years, license revenues have totaled approximately $200 million. In a 1999 study conducted by the General Accounting Office (GAO), NIH accounted for 95.1% of the royalty revenue received by the six agencies examined between 1996 and 1998, and was the most active program among the six.

NIH distributes the royalty income in accordance with federal law and
NIH policy. By law, federal inventors must receive the first $2,000 of
income received by the agency and at least 15 percent thereafter, up to a
maximum of $150,000 per year in royalties from all licensed technologies
in which they are inventors. The NIH formula modifies the amount of
sharing to modestly increase the inventors' share, by providing them with
25% of the income after $50,000 in royalties is attained, up to the statutory
maximum. In FY 2000 the inventors of NIH intramural technologies
received, as a group, 13.5 percent of total NIH royalty revenue, and 28
NIH inventors currently receive the maximum $150,000 annual royalty.

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The income remaining after the inventors' share goes to the Institute or Center within NIH in which the technology was developed. As provided by law, the funds are used for the following purposes:

to reward scientific, engineering, and technical employees of the
laboratory;

to further scientific exchange among the laboratories of the agency;
to educate and train employees consistent with the research and
development missions and objectives of the agency or laboratory,
to support other activities that increase the potential for transfer of the
technology of the laboratories of the agency;

to pay expenses incidental to the administration and licensing of
intellectual property by the agency or laboratory with respect to
inventions made at the laboratory, including the fees or other costs for
the services of other agencies, persons, or organizations for intellectual
property management and licensing services; or

to support scientific research and development consistent with the research and development missions and objectives of the laboratory.

3. The Nature of Federally Funded Technology

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The role of federally funded basic discovery and a fair rate of return on this investment must also be considered in the context of what occurs following the initial invention. In their paper Proofs and Prototypes for Sale: The Tale of University Licensing, Jensen and Thursby analyzed 62 of the top 135 U.S. universities to determine the impact of Bayh-Dole on the commercial application and diffusion of inventions from federally funded research. They found that most inventions came from research in the schools of science, engineering, medicine and nursing. They reported that research leading to 63 percent of all inventions was federally funded, while 17 percent was sponsored by industry and 18 percent was not sponsored. Of all inventions disclosed within these universities, fewer than half of the inventions were licensed. In what the authors of the study consider their most remarkable finding, they determined that over 75 percent of licensed inventions were no more than a proof of concept. Consequently, these inventions represented an extremely high-risk venture for those companies that did seek to develop the technologies.

3

Jensen and Thursby, Proofs and Prototypes for Sale: The Tale of University Licensing, p. 5.

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Jensen and Thursby further describe the difficulty of finding willing developers of such early stage technology. During the reporting period of the survey, an average of 1178 licenses were executed annually. Only 22 percent of executed licenses had multiple bidders. In addition, the top five inventions licensed in each university accounted for 78 percent of gross license revenue, demonstrating the high risk and variable commercial outcome of such early stage technologies.

4. The Road to Innovation

To determine the return on investment, it is critical to ascertain costs associated with the basic research and development that gave rise to a particular technology. However, the path that research takes is determined by the results of series of experiments, and the best science can veer dramatically from the plan. Therefore, the factors that make scientifically curious minds appropriately alter research plans also make determining a starting point for assigning costs to a particular technology difficult.

An inventive technology is most likely one piece of a very large research project; and, it may be tangential to the main focus as well. For example, technical obstacles are common impediments in biomedical research; they frustrate, but they also inspire. Overcoming the obstacle may lead an investigator to develop an alternative technology, which may or may not be a distinct piece of research. Rather, it may be a necessary sidestep within the larger project, and the costs of development are, for the most part, very difficult to isolate.

In addition, biomedical laboratories generally conduct their research with multiple complementary goals. Within an overarching research mission, a laboratory is typically divided into separate units, each of which is responsible for conducting research on a particular piece of a broad hypothesis, and each of which receives a variable piece of the laboratory budget as progress warrants. Some projects are designed to develop fundamental data or techniques that are necessary for a particular line of investigation; these techniques can be, and often are, useful for a number of unrelated studies.

Attempting to determine the costs of biomedical discovery is also complicated by the fact that new research almost always builds upon the work of predecessor scientists. Determining what part of a preceding budget or what