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Aug 11, 2011

Tech Transfer Bill in the House Would Rewrite Key Bayh-Dole Provisions

HR 2015 seeks to rejuvenate the manufacturing sector and STEM education by having the government collect royalties from academic research.

Tech Transfer Bill in the House Would Rewrite Key Bayh-Dole Provisions

One of the questions this bill expects to answer is how much of the money spent by Washington on R&D would come back to the federal government if there were a royalty system. [© kentoh - Fotolia.com]

  • The Bayh-Dole Act and the more than $2 billion-a-year industry it spawned through technology transfer from academia survived its strongest challenge in June when the U.S. Supreme Court decided the Stanford v. Roche case. It held, by a 7–2 vote, that Roche shares ownership with Stanford University in three U.S. patents for a PCR-based test kit to detect and quantify levels of HIV in the blood.

    Eleven days before that decision was rendered, a bill was introduced in the U.S. House of Representatives that would rewrite two of Bayh-Dole’s most important provisions. The aim of this bill is to revive the nation’s manufacturing sector and create a source of federal funds for science, technology, engineering, and math (STEM) education.

    Rep. Chakah Fattah (D-PA) introduced the measure, which would create a panel to recommend to Congress whatever changes they conclude are needed. The American Discoveries and American Jobs Commission Act of 2011 (HR 2015)—also named the Herb Vederman Commission on American Discoveries and American Jobs Act of 2011—tasks the panel with studying:

    • the possibilities for the federal government to collect royalties from early research that leads to the commercialization of a profitable product or technology;
    • the potential adverse consequences of such royalties on tech transfer, commercialization, and economic development; and
    • the potential benefits of reinvesting revenues from federal royalties into STEM education and seed funding federally funded research.

    “The idea behind the commission is that U.S. taxpayers, who fund the basic research that leads to these inventions, should have the opportunity to be involved in the manufacture of the commercialized products,” Fattah told GEN. “I don’t support the idea of publicly funded research going off-shore and creating jobs for taxpayers in other countries.”

  • Made in America

    While the language of the bill leaves the decision to collect royalties to the commission, Fattah has made clear his position that royalties should be collected. “If new or improved products are on the commercial market because of federal research dollars, then they should be stamped ‘Made in America,’” Fattah said in a press release.

    Bayh-Dole is somewhat similar to Fattah’s bill, however, in one respect: It includes a Made-in-America provision requiring that neither a contractor receiving federal funds toward research nor any assignees will grant exclusive rights to sell products in the U.S. unless they agree that products embodying or produced through a resulting invention will be manufactured “substantially” in the U.S.

    “However, in individual cases, the requirement for such an agreement may be waived by the Federal agency upon a showing by the contractor or its assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible,” Bayh-Dole states.

    Given U.S. manufacturing costs compared with most of the world, however, the feasibility clause explains why the Made-in-America preference language hasn’t translated into a wave of new domestic manufacturing jobs large enough to make up for those lost in the past three decades.

    Between 1980, when Bayh-Dole was signed into law, and 2009, the U.S. lost nearly half its manufacturing workforce; the number of jobs plunged from almost 20 million in 1978 to less than 12 million in 2009. More than 2 million of those jobs were lost since the official start of the recession in December 2007.

  • More Money for Washington

    The commission’s work, Fattah told GEN, would include addressing three key questions left open in the legislation: How much of the money spent by Washington on R&D—estimated at $147.4 billion, excluding funds in the $814 billion American Recovery and Reinvestment Act—would be expected to come back to the federal government? How much of a royalty would researchers be expected to pay? And how should that royalty be structured: case by case or through a flat set of percentages?

    “These kinds of questions should be answered with the involvement of the various stakeholders,” Fattah added. In a press release he stated, “Currently, royalties derived from intellectual property rights provide the academic community an alternative way to support further research and the business sector a means to obtain a return on its financial contribution. The federal government, according to Fattah, should be given the same consideration,” the release added.

    Such thinking aligns with the law governing tech transfer by federal agencies. The Stevenson-Wydler Technology Innovation Act of 1980 created a network of “centers for industrial technology”—later changed to “cooperative research centers”—for tech transfer by industry and academic professionals. Whatever their name, those centers were funded in part by industry and universities “through, among other means, fees, licenses, and royalties.”

    Bayh-Dole, however, rejects the idea that government should receive a share of the royalties generated by inventions. While that idea was debated, “it was rejected as an unnecessary obstacle, one which would be perceived as an additional burden to working with the government,” noted a 2007 report prepared for Congress that summarized the law’s history.

  • Likelihood of the Bill Passing

    Championing a bill that generates more money for Washington would be challenging to get through Congress at any time. It’s particularly tough now, when the federal government—bitterly divided along partisan lines—can barely agree on a spending plan for the fiscal year starting October 1.

    One point on which President Barack Obama, the Senate’s Democratic leaders, and the House’s Republican leaders all agree, however, is that some form of budget cutting will take place. In that atmosphere, it’s not surprising that the bill has yet to land a single co-sponsor. To be fair, however, this is not surprising also since Congress’ agenda has focused on the deficit-reduction debate in recent weeks.

    Beyond today’s political climate, the prospect of academic researchers coughing up a portion of their royalty payments to the federal government is unlikely to sit well with universities and institutions.

    “We think there’s a recognition that the reason the bill is probably not making a lot of progress is because there’s a recognition of the productive framework that Bayh-Dole provides for the relationship between business and the universities, and there’s no question that we need to continue to improve that process of tech transfer, something that universities are working on all the time,” Barry Toiv, a spokesman for the American Association of Universities, told GEN.

    The bill’s royalty provision “is kind of a disincentive to the inventor,” Robin L. Rasor, president of the Association of University Technology Managers (AUTM) and director of licensing for the University of Michigan’s Office of Technology Transfer, told GEN. “Those royalties are important to the universities. They share a very large portion of it with the inventor, but then they reinvest a portion of it back to that inventor’s lab for further research and then in other research areas.

     “From our perspective, taking a percentage of royalties back would be a drop in the bucket to federal funding, whereas we at a local university can really use that money directly to further the research and further incentivize the inventor that created the first product that created that revenue.”

  • Impact of Tech Transfer Thus Far

    On July 26, AUTM released some highlights of the AUTM Licensing Activity Survey Summary: FY2010, set to be published this fall. The 183 AUTM-member universities, colleges, hospitals, and research institutions that responded to the survey saw their “running” royalties earned on the sale of products drop 14.6% from last year to $1.4 billion. Total licensing income rose 3% from 2009 to reach $2.4 billion in 2010.

    To one tech transfer professional, the licensing numbers are a poor return on the $53.5 billion spent by Washington on university research. “If university research was a business, it would be bankrupt,” declared Vivek Wadhwa, senior research associate at Harvard Law School and director of research at Duke University’s Center for Entrepreneurship, in a June 10 Washington Post column. Rasor countered, “If universities were run like businesses, they would not perform basic research designed to push forward the frontiers of learning.”

    Interestingly, AUTM members are seeing sizeable gains in other, albeit much smaller sources of income: A 160% year-over-year jump in cashed-in equity from hospitals and research institutes to reach $63.4 million and a 25% annual gain to reach $452.3 million in all other sources of income including license issue fees, payments under options, termination payments, and annual minimums not supported by product sales.

    The royalty and income numbers would shrink if portions had to be diverted to Washington, and with them so would one of the nation’s few engines for economic growth in recent years. Rasor pointed to a 2009 study issued by the Biotechnology Industry Organization (BIO) to quantify the economic benefits of life science research.

    According to “The Economic Impact of Licensed Commercialized Inventions Originating in University Research, 1996–2007,” the contribution made to the U.S. GDP by university licensing based on product sales ballooned from $2.6 billion in 1996 to $16.8 billion in 2007 under the most conservative estimate, which assumes a 5% royalty rate.

    Under a 2% royalty rate—“less conservative but realistic,” according to BIO—those numbers zoomed from $5.9 billion in 1996 to more than $38.8 billion in 2007. Less realistic, by inference, under a 10% royalty rate the figure is projected to have risen from about $1.5 billion in 1996 to $9.4 billion in 2007.

  • Better Solutions Needed

    The higher the royalty rate, the less money gets pumped into the economy. That’s something Fattah, the commission he wants to create, and royalty proponents should keep in mind as they explore this issue.

    Perhaps more relevant, given Fattah’s goal of reviving domestic manufacturing, are figures from the report estimating the contribution to industry gross output due to university-licensed products. The 5% royalty rate yielded a jump from $6.3 billion in 1996 to $39.7 billion in 2007. The 2% royalty rate produces bigger numbers: $14.7 billion in ’96 to nearly $94.9 billion in ’07.

    Estimates of the share of royalties generated by life science invention have ranged in recent years from 60% to 75%. AUTM defines the life sciences pretty broadly by including not only all work derived from the obvious disciplines like biology, medicine, and pharmacy but also basic chemistry, human physiology and psychology, and discipline-related software and educational materials.

    Any effort to legislate away royalties from researchers, therefore, will most affect biotechnology investigators and their institutions. So even while the political climate makes this bill a tough sell, players in the life science technology transfer sphere shouldn’t just ignore the bill and the issues it raises but rather strive to address them.

    How can more treatments and devices be made in the U.S. at a time when jobs are sorely needed, given higher manufacturing costs? Some say that will be less of an issue in the next few years as wages in BRIC and developing countries rise, but wages will still be smaller than those of the U.S. And if the U.S. insists on shoring up manufacturing at the expense of life science and other tech inventors and their institutions through, in effect, a new tax, then it will be solving one problem by causing another.


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