Patented Medicine: Universities Are Receiving Patent Royalties, but Where Does the Money Go?

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The day when universities operated in an ivory tower, focused only on scholarship, and left profit-making endeavors to companies, has clearly faded. Patent development has become prevalent at numerous research universities. In fact, the Association of University Technology Managers reported that in 2014, universities were issued 6,300 patents, produced 965 new products, and collected nearly $2 billion in licensing fees based on $28 billion in net sales.

Yet, while some universities reap a windfall from blockbuster pharmaceutical patents, many fail to bring in revenues large enough to finance their research labs and staffs. The Association of American Universities (AAU) enumerates many reasons why institutions of higher education engage in patent pursuits: identifying new technologies, gaining recognition for discoveries produced at their institution, forming commercialization strategies, and creating new startup companies based on these technologies.

Jessica Sebeok, associate vice president for policy at AAU, explains that “patents are the fulcrums that allow tech transfers to happen. Without the exclusivity a patent provides, there is [no] incentive on the part of pharmaceutical [companies] to invest in these university ideas.”

But most institutions don’t gain much monetarily from this research, Sebeok says. “These blockbusters are extremely rare, and any money that comes back to universities in terms of royalties is plowed back into research,” she adds.

Walter Valdivia
Walter Valdivia

In his 2013 report University Start-Ups: Critical for Improving Technology Transfer, Walter Valdivia, a nonresident fellow at the Brookings Institution, concluded that “university technology transfer has been largely dominated by a business model of licensing university patents to the highest bidder.” This model, he adds, “is unprofitable for most universities and sometimes even risks alienating the private sector.”

In fact, Valdivia cited only a select few institutions that generate high incomes from patents. In a study of 206 universities, eight yielded 50 percent of the total licensing fees of those surveyed, while 16 produced 70 percent of the total income. And 130 universities didn’t sustain enough licensing income in 2012 to cover the costs of their technology-transfer staff. These staff members are typically responsible for the development, dissemination, transfer, licensing, and commercialization of technology, inventions, and patents developed by members of the university community.

In most cases, universities receive only one-third of the licensing revenues raised by patent development “but shoulder all of its operating costs,” Valdivia says, while investors reap most of the profits. “Not only do most universities fail to generate significant licensing income,” he says, “but they also use a third of it to support technology-transfer operations.”

Despite the fact that many universities don’t generate enough income from these endeavors, Valdivia says there are some colleges that have reaped bonanzas from patents. Two stand out: The Cohen-Bayer patents for gene splicing produced $255 million for Stanford University and the University of California, San Francisco, and the Axel patents for co-transformation, a method to insert DNA into cells, generated $790 million for Columbia University.

Additionally, for the period from 2003 to 2012, the top five universities in terms of gross income from patent licensing were New York University, Columbia University, Massachusetts Institute of Technology, Princeton University, and Northwestern University.

Judith Cone, the vice chancellor for innovation, entrepreneurship, and economic development at the University of North Carolina at Chapel Hill (UNC), says the ultimate goal for universities in using intellectual property is to better society. “For example,” she says, “if it’s a clean energy solution, such as liquid batteries, it [provides] a new, revolutionary way to store energy.”

Indeed, at most universities, patent research isn’t about generating a profit, but about professors extending their research, graduate students refining their research skills, and undergraduates having the opportunity to do research. Therefore, these endeavors serve many purposes while aiding universities in their mission to extend knowledge.

At UNC, Cone says that royalties from any patents are split between departments (40 percent), investors (40 percent), and the Office of Commercialization and Economic Development (20 percent). The office uses this funding to cover operating costs, and most departments reinvest this money into research.

Examples of patents at UNC include a recent partnership with Abeona Therapeutics to develop therapies for rare, life-threatening genetic diseases and a project led by UNC eye researcher Steven Gray, in partnership with the nonprofit Hannah’s Hope Fund, to identify cures for a fatal nerve disorder.

Despite the lack of income from patents being diverted to minority faculty recruitment, having these research programs in place enables top universities to attract and retain the best faculty, who are often diverse, at a time when colleges are in global competition for top talent. And Cone is sanguine about the effect patent money has.

“If 60 percent is going back into a research institution,” she says, that enables more experimentation to take place and has a direct impact on learning.

Augustine Cheng, who serves as CEO of Arizona Technology Enterprises (AzTe) at Arizona State University (ASU), makes a clear distinction between university research and what for-profit companies do. Universities are dedicated to “transferring knowledge to students and creating new knowledge through research,” he says.

“[ASU is committed to] making a difference in people’s lives. We do that by commercializing or moving intellectual property into the marketplace, which makes investments in these early-stage inventions and technologies and develops them into products and services that improve people’s lives and create jobs,” Cheng says.

To accomplish those goals, AzTe ensures that professors maintain their independence and are not told how to operate by for-profit companies. “ASU has conflict of interest policies in place,” says Cheng. “What you don’t want is to have a pharmaceutical company dictate the conduct of the research.”

When royalties accrue, investors receive 40 percent, and the remainder is split 50-50 between ASU and the lab. In 2015, ASU generated $12 million in royalties. This income is then directed back into scientific research.

Becoming profitable isn’t the metric ASU focuses on. “We try,” Cheng says, “to have some real-world impact from the research generated at ASU, through translation of research into products and services that benefit people.”●

Gary M. Stern is a contributing writer for INSIGHT Into Diversity.