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strategy and business
 / Winter 2003 / Issue 33(originally published by Booz & Company)


The New Architecture of Biomedical Research

“A number of years ago, 18 or so, there was not a great deal of interest on the part of scientists here in biotech startups or commercializing their discoveries,” says G. Morgan Browne, chief financial officer of the Cold Spring Harbor Laboratory. “That certainly has changed.”

In the early years, scientists at Cold Spring questioned whether it was appropriate for institutions to make money on discoveries made via public money. To mollify them, the Cold Spring board created a science fund to plow the royalties back into research.

The science fund “acts as a sort of endowment at the laboratory, and each year our revenues go back into funding science,” says Mr. Browne. “That changed the thinking of a lot of our scientists, who have become really quite active in the area. Today there are about 15 biotech companies, more than half of them public, founded in part or in whole on science done here. Our policy was always that we didn’t invest any money in these startups, but we were willing to exchange intellectual property for equity, from 1 or 2 percent up to 35 percent. This has built a nice chunk of money in our science fund — $20 or $30 million.”

Licensing revenues help offset the decline in philanthropy that has accompanied the long slump in the U.S. economy. Although corporate spending has remained roughly constant, and NIH funding has actually increased in recent years (and will increase further if the BioShield bill passes), donations have fallen significantly.

“Funding from foundations has been seriously affected, and that applies to private individuals as well,” Mr. Browne says. “The days when we got small blocks of shares as year-end gifts, those are over.”

One way the Salk has balanced freedom and responsibility is by making all salaries dependent on so-called soft money, funding that is attached to specific research grants, typically from the NIH. The Salk receives about 66 percent of its funding from NIH grants, with the balance coming from philanthropy, private funding agencies like the American Cancer Society, and an endowment. Scientists are responsible for raising the money that pays their own salaries and funds the research in their particular labs.

“It’s a lot of pressure,” says Dr. Murphy. “We do supplement their incomes above the level NIH sets, and nobody has ever been fired for not bringing in their own salary. But it keeps people lean and hungry.”

Historically, income from Salk Institute discoveries licensed to biotech or pharmaceutical companies has been a small part of the revenue mix, but in today’s climate there is pressure to rebalance the ratio, because this money can be used for administration, equipment, and sundry other expenses explicitly not covered by grants.

In a scholarly culture that prizes independence and intellectual purity, the management challenge in goading scientists toward an increased market focus is profound. Polly Murphy, director of the Salk’s Office of Technology Management (and no relation to Richard Murphy), likens it to “the worst nightmare of a biotech company,” where the scientists get the chance to tell investors and management, “We don’t care what the market is, we work on what we want to work on.’”

Underlying the enhanced commercial focus at the private institutes is the Patent and Trademark Law Amendments Act, more commonly known as the Bayh-Dole Act. Passed by Congress in 1980, Bayh-Dole gave universities and nonprofit institutions control of the inventions that arise from research supported by federal funding, providing the basis for current technology transfer practices at the Salk and elsewhere.

Prior to Bayh-Dole, the transfer of new technologies from universities to corporations was a haphazard, low-priority function at most schools. But in the past two decades, the independent labs and universities each have become far more assertive and entrepreneurial in marketing their discoveries. Stanford University, long considered a leader in promoting and profiting from its intellectual property, earned more than $52 million in royalties in 2002.

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  1. Lawrence M. Fisher, “How Strategic Alliances Work in Biotech,” s+b, First Quarter 1996; Click here.
  2. Lawrence M. Fisher, “Post-Merger Integration: How Novartis Became No. 1,” s+b, Second Quarter 1998; Click here.
  3. Lawrence M. Fisher, “The Rocky Road from Startup to Big-Time Player: Biogen’s Triumph Against the Odds,” s+b, Third Quarter 1997; Click here.
  4. Cold Spring Harbor Laboratory:
  5. The Salk Institute for Biological Studies:
  6. Whitehead Institute for Biomedical Research:
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