FINDING THE ENDLESS FRONTIER: LESSONS FROM LIFE SCIENCES FOR

ENERGY INNOVATION

IAIN COCKBURN, BU AND NBERSCOTT STERN, NORTHWESTERN AND NBER

JACK ZAUSNER, MCKINSEY & CO

NBER ACCELERATING ENERGY INNOVATION CONFERENCE

WASHINGTON, DC OCTOBER 2009

The Nixon Innovation Agenda

“I will also ask for an appropriation of an extra $100 million to launch an intensive campaign to find a cure for cancer” (1971 SOTU)

The 1971 National Cancer Act provided budget for National Cancer Institute, ushering in a sustained and substantial Federal commitment to life sciences research

Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving… to spur energy research and development, we plan to spend $10 billion in Federal funds over the next 5 years. (1974 SOTU)

The War on Cancer Project Independence

During the 1970s, Federal programs directed significant attention and resources towards both energy and life sciences innovation….

Federal funding priorities

Why have the experiences of the life sciences and energy innovation systems been so different?

The Power of Life Sciences Innovation

Despite the complex nature of HIV/AIDS and high transmission potential, AIDS combination therapies developed in the early 1990s have dramatically reduced the AIDS death rate in the developed world

Drivers of the Life Sciences Innovation System

High and relatively stable public funding of basic research Long term development of a large, highly-skilled

specialized R&D workforce High willingness to pay for innovative and differentiated

new products, coupled with insurance-driven demand and stringent regulation of entry into the product market

Public funding focused on “bottom up” peer-reviewed, investigator-initiated projects

“Workable” IPRs, enabling innovators to capture value and supporting an extensive market for technology

Intense innovation-oriented competition throughout the value chain

Evolution of the Life Sciences Innovation System

Good Old Days

Public sector science

Big Pharma

Biology

Drugs

Big Pharma

CROs

The Present

Public sector science

Tool biotechs

Pro

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ct b

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chs

Evolution of the Life Sciences Innovation System

Revolutionary advances in basic science have generated radical shifts in the technology base of commercial activity: chemistry biology

Dis-integration of the industry into specialized layers

Emergence of new organizational forms (science-based entrepreneurship, AMCs), and supporting “infrastructure” (VCs, patent lawyers, university TLOs, etc.)

Adaptation of incumbent firms, federal agencies, universities

Creates a highly complex, interdependent (and hard-to-manage) innovation network

Powell et al. (2005)

LESSONS FOR A SCIENCE-BASED CLIMATE CHANGE INNOVATION SYSTEM

Lesson #1: Slow and Steady Takes decades to see results from investment Instability of funding very costly

Destroys career paths, strands other specialized investments, undermines accumulation and trajectories of inquiry

Public R&D funding “buffers” notoriously fickle private investment

Long-term funding commitment supports development of specialized human capital evolution of institutions that allow for effective

public-private interactionRome wasn’t built in a day—from an economic and innovation policy perspective, the lesson is that the design principles and technologies that comprised ancient Rome took centuries to develop.

Lesson #2: Bottom-up Agenda Resource allocation through robust, investigator-

initiated and peer-reviewed processes rather than top-down “command-and-control” approach

Academic freedom, entrepreneurship permit diversity of experimentation

“Blue sky” projects are complements to public health priorities and product market incentives

Bottom-up agenda directs a cumulative stream of innovation that delivers long-term breakthroughs

Attempts to significantly reduce the freedom of investigators and entrepreneurs rarely result in important breakthroughs precisely because they reduces the diversity of experimentation.

Lesson #3: Competition

Intense and pervasive competition focused on novelty and priority throughout the value chain Darwinian competition among PIs, labs,

universities for grants, prestige etc. 1000s of science-based entrepreneurs compete

in the “market for technology” for capital, human resources and opportunities to license/collaborate downstream

Fragmented product market, with Schumpeterian dynamic competition to introduce new molecules, and intense price/cost competition from generics within old molecules

Lack of competition within innovation results in both traditional static losses of monopoly pricing, and reduced diversity and experimentation within the research community itself

Lesson #4: Transparency, Openness

Innovation governed by “Mertonian” norms supports transparency, disclosure and cumulative advance Even in close-to-the-market commercialization

activity Open access resources (BRCs, GenBank,

scientific literature) provide system-wide benefits (So far) Open Science able to co-exist with

exclusion-based IP: institutions can balance competing imperatives Openness facilitates access to prior discoveries and provides incentives

for the disclosure of new discoveries—a powerful institutional framework for step-by-step scientific and technical progress.

Lesson #5: Rewarding Innovators Intrinsically high willingness-to-pay for

innovations Innovators are able to capture a significant share

of the value of new technology—at least for a while Strong IP, with (historically) broad consensus

on rules and norms for granting and enforcing patents and trademarks

Stringent FDA regulation of entry Hatch-Waxman Act provides explicit balancing

of incentives to innovate with access/pricing

Regulation governing product market access can play a crucial role in shaping innovation incentives; product market regulation and intellectual property rights policy can be powerful complements

Lesson #6: Diversity, adaptation Organizational experimentation: DBFs, TLOs,

CROs, non-profits Incumbent firms have adapted to changes in

industry structure, effectively accommodating new entrants and new technologies Big Pharma appears not to have suffered from the

structural rigidity and organizational inertia seen in other sectors

Commercialization grounded in flexible co-operative relationships across a wide variety of institutions The Innovation Network may have hidden costs, but

supports specialization, division of innovative labor, and exploitation of complementarities between public science, science-based entrepreneurship and traditional pharmaceutical companies

A tolerance for diversity and a willingness to adapt have been hallmarks of the life sciences innovation system. Effective institutions and infrastructure for life sciences research have emerged from an extraordinary amount of organizational and institutional experimentation—within which most initiatives fail.

Conclusion

Life Sciences innovation has distinct, perhaps unique features, that limit generalization

But this history suggests there is rarely a single “magic bullet” or “quantum leap” to address an issue as complex as climate change—innovation is a cumulative process and builds on multiple technologies and platforms

Faced with pressing social, human, and technological challenges the experience of the Life Sciences sector points to a powerful role for sustained public investments in general-purpose

platform technologies support for diversity, experimentation and competition

across a wide range of organizations and technologies