Stagnant Government Funding Drives Patent Licensing

One of the biggest challenges facing the medical technology industry today is a lack of funding for research. National Institutes of Health (NIH) funding is the lifeline for basic and applied research that often leads to groundbreaking discoveries and revolutionary medical products. As part of January’s federal budget deal, Congress announced that NIH funding for FY2014 will increase only 3 percent compared with FY2013 levels to just less than $30 billion. The figure represents an almost $1 billion increase in NIH spending during the sequester-depressed 2013 fiscal year, and, unfortunately, roughly $930 million less than the NIH received in pre-sequester FY2012.

Limited NIH funding directly impacts medical technology innovation because many medical products include inventions that originated in university laboratories. Thus, stagnant NIH funding of basic and applied research threatens a critical innovation pipeline for medical technology companies.

History of Success
The medical technology industry has a long and successful history of turning university discoveries into blockbuster products. Magnetic resonance imaging machines originated in the laboratories of SUNY Downstate Medical Center; emboletomy catheters were invented at Stanford University; and the Massachusetts Institute of Technology is ushering in the bionic age with robotic prosthetics that mimic the functions of real limbs. The medical device and life-sciences industries remain dependent on universities as a source of innovation that feeds current and future products. The Biotechnology Industry Organization has estimated that as much as 75 percent of all university running royalties from licenses are from life-sciences companies. Unfortunately, limited research funding has placed this critical source of medtech innovation at risk.

Research Funding Shortfall Threatens Innovation
Stagnant to declining federal government funding continues the trend of the past decade, where in all but two years of the last 10, the NIH has seen declines in its real dollar appropriation. In fact, since 2005, NIH funding is down more than 20 percent in real dollar terms using the Biomedical Research and Development Price Index. The decline in research funding is particularly dramatic considering that the federal government provides 63 percent of the funding used by universities and research institutes for basic and applied research, and NIH funding represents more than half of the federal expenditure for basic and applied research.
Outside of the life sciences, the story regarding declining funding is scarily similar. National Science Foundation data shows that from FY2005 to FY2013 annual appropriations for basic and applied research in all academic disciplines fell at least 17.6 percent in real dollars.

Acknowledging the basic research funding problem, President Obama requested a 20 percent increase for all basic and applied research funding in FY2014 over sequester level spending of FY2013. The National Science Foundation has not compiled the FY2014 budget numbers for all research disciplines yet, but given that the NIH only received one third of its requested increase, it is unlikely that other disciplines will see anything close to a 20 percent increase. Regardless of how much funding universities and research institutes get in FY2014, they still will have to budget for the 2.7 percent cost increase that the NIH is forecasting for 2014 in the Biomedical Research and Development Price Index.

The New Normal
Universities and research institutes already have started to adapt to this “new” normal by looking under the couch cushions for additional revenue sources to fill the gaping hole the federal government has created on the top line of the group’s income statements. One area of particular interest to universities is the licensing or assignment of university-owned patents and other intellectual property. These deals increasingly are important to universities because they can provide up-front cash payments, and in some cases, continuing royalty streams of revenue after products are commercialized.

New “ready-to-sign” (RTS) university licensing programs provide an example of how serious universities are about licensing their patent portfolios. In July 2013, Auburn University joined Stanford University and Emory University by starting a RTS patent licensing program. RTS programs offer potential licensees the opportunity to license university inventions by signing a standardized contract in exchange for a fixed royalty. For instance, in Auburn’s RTS, anyone can gain non-exclusive licenses to 40 patented inventions in exchange for a $10,000 annual license fee on the first patent and $5,000 for each addition patent. While the particulars of each RTS program vary, the purpose is the same—to generate more funding for university research through easier and simpler collaborations with industry.

The increased licensing efforts of universities are starting to show up on the top line of their income statements. According to the Association of University Technology Managers, from FY2009 to FY2012, the running royalties received by universities from patent licenses increased by 19 percent to $1.9 billion, and total income increased 13 percent to $2.6 billion. The running royalty rates are an important indicator of university licensing efforts. First, running royalties tend to show less year-to-year variation than total royalties because they exclude the large peaks associated with one-time licensing payments for blockbuster inventions. Second, running royalties also are indicators of the utility of university research as running royalties tend to indicate the commercialization of university owned inventions. It is important to note that there is generally a delay between licensing and commercialization. As a result, the full strength of new university licensing efforts will not be fully known for a few years when the new products using university owned inventions finally hit the market.

Industry-University Partnerships
With funding pressures in mind, members of industry who are on the fence about reaching out to academia would be wise to do so now as universities and research institutes are more interested in striking licensing deals than ever before. A reflection of this is academia’s increasing flexibility regarding letting the licensee’s needs drive deal structure through smaller up-front license fees, delay of royalties until after commercialization, equity stakes, or a combination. There is a huge backlog of incredible academic inventions waiting for a commercialization partner from industry. Companies that move to license from universities quickly will enjoy the first mover advantages of earlier insight into cutting edge research and first crack at future innovations.

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Universities hope their licensing efforts will generate more licenses and greater revenue to fill the funding gap created by decreasing federal funding of research. The renewed push by universities to license their inventions should lead to new productive partnerships between industry and academia that ultimately result in groundbreaking product releases. The new products that result from licensing will help universities and research institutes build industry and consumer awareness for how basic and applied research drives product development and economic growth. The government, hopefully, will get this message and provide increased government funding for basic and applied research. 

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David J. Dykeman is co-chair of the Global Life Sciences & Medical Technology Group in the Boston, Mass., office of international law firm Greenberg Traurig LLP. A registered patent attorney with more than 17 years of experience in patents, intellectual property and licensing, David’s practice focuses on securing strategic worldwide intellectual property protection and related business strategy for high-tech clients, with particular expertise in medical devices, life sciences, biotechnology, and healthcare IT. David can be reached at (617) 310-6009 or [email protected].

Michael A. Cohen works at Greenberg Traurig’s Boston office and is a registered patent agent attending Northeastern University School of Law and the D’Amore-McKim School of Business.