Stanford Today Edition: January/February, 1998 Section: Features WWW: The Matchmakers
By David Schrieberg
Forget the Millennium. For Stanford, the world changed at midnight on
Dec. 2, 1997.
At that moment, the university lost its exclusive patent for recombinant DNA, the 1973 discovery that launched the biotech industry. But this was more than a mere invention. It was Stanford's 800-pound gorilla, drawing $200 million-plus in royalties, split with the University of California-San Franciscohink of it this way: When Stanford's 17-year patent expired last month, revenues at the nation's second top royalty-earning school plunged from a record $50 million to about $15 million, the lowest level in nearly a decade. Stanford officials, peering over the edge, call it "The Cliff." Worse still, the DNA patent is non-renewable. Replacing it has become a kind of holy mission.
Enter the matchmakers. All over the Farm, from the computer music center to the medical school, from the engineering departments to the library, officials and faculty are engaged in an intense search for new money. While they have set their sights on corporate checkbooks, this is about more than money. At a time when corporate America is back on top of the world, Stanford wants to re-invent the traditional marriage of commerce and research. Even as they pursue commercial suitors who offer a hefty dowry, officials are deliberately opening up the university to industry ideas like never before.
Signs of romance are everywhere: At a high-profile press conference, university officials tout a new consumer product marketed by a Japanese corporation and based on Stanford discoveries. Stanford representatives canvass corporate CEOs for project ideas - and the money to entice faculty into making them happen. A presidential committee establishes a novel office aimed at cracking an untapped market for high-tech educational products. The medical school signs a groundbreaking contract with an international drug maker to finance research on areas of the company's specific interest. Taken together, these changes amount to a quiet revolution on campus, one closely watched by universities across the country.
"For the last 10 years, everybody's been saying: 'What are we going to do without DNA? We've got to find another source of revenue,' " says Katharine Ku, the crisp, business-suited director of the Office of Technology Licensing (OTL) and the university's most visible matchmaker. "Well, we've really been moving toward being more user-friendly to industry."
As a courtship it is a natural pairing, and one with a long history. Stanford pulls in massive amounts of money from technologies developed on campus and then licensed out to companies - more than $300 million over the past 27 years. To be sure, more than half came from the DNA patent, known as Cohen/Boyer after its inventors, geneticist Stanley Cohen of Stanford and Herbert Boyer of UCSF. This will be Stanford's most lucrative year in history - until the patent expires - on income earned from more than 260 ideas born on campus. OTL, which promotes such technologies for use off the Farm, has over its lifetime handled the flood of 3,200 "disclosures" of inventions and fields new ones at the rate of four a week.
But consider: Most of those inventions never get out of the lab. Further, of the 1,271 licenses Stanford has granted to companies for products based on on-campus inventions, only four have generated more than $5 million each. Another 14 earned more than $1 million apiece. Most of the money comes in far smaller amounts and takes time to start trickling in - usually about a decade between an idea's birth and its profitability. Then, after OTL takes 15 percent off the top to cover its costs, the earnings get split three ways among the inventor, his or her department and the parent school.
Picking the moneymakers is art, not science. Of the ideas filed, OTL has to guess which ones have the best shot at raking in serious money a decade later. Fewer than 15 percent of those ideas end up winning licenses. No wonder OTL staffers feel like glorified fortune tellers.
"There are market risks," says Ku. "There are technical risks. There's competition. We have an invention that we've made a judgment will be important in 10 years. A lot of things can change in 10 years. Other technologies bypass it, surpass it. Competing technologies win."
Ku's busy office, lined with boxes of reports and papers spilling off tables, is command central in the drive for corporate money. She is well equipped for the task. Nationally respected for her work at Stanford, Ku walks and talks at a fast pace - the only way to meet a schedule that won't quit. Like all Stanford's matchmakers, she bridges two worlds. A chemical engineer, she worked for several large companies and a small start-up before "growing up in technology licensing," as she puts it with a characteristic laugh.
As they sift through Cohen/Boyer wannabes, Ku and her OTL colleagues have settled on an unlikely group of Stanford grads as the heir apparent with the most potential. Until recently, Staccato Systems, Inc., ran its "worldwide headquarters" from a two-car garage in Mountain View, complete with a washer-dryer and cement floor carpeted by dust bunnies. A complicated array of desktop computers and electronic synthesizers was jammed into the center of the room and along the walls. If you looked carefully, you could see the garage door behind a pile of sound-absorbing sponge. Not long ago, they moved up to new space in Palo Alto - closer to food and Fry's Electronics, the mainstays of their frenetic days and nights.
Staccato is a classic Silicon Valley paradigm - a group of musicians, engineers, computer nerds and a director who left his full-time job at OTL to run them in this ordered chaos. So far, three years of back-breaking work could fit on one zip disk.
"There were periods when it was gloomy," concedes Scott Van Duyne, a pianist finishing his doctorate in computer music and now full-time technical director at Staccato. "There were an unbelievable amount of problems."
The worst is over - at least for a while. Under a recent license from Stanford and a $1 million infusion from Yamaha Corp., the company is developing computer music technology that Staccato and Stanford believe - not unrealistically - will become standard in every personal computer in the world.
"We think we understand how to do this better than anyone else," boasts Pat Scandalis, Staccato's chief engineer, barely turning from his monitor to chat briefly with a visitor. "Within two years, we'll know whether this flies or not. You should find our products in desktops and you'll see our stuff creeping into a lot of other machines."
Staccato springs from a joint venture called Sondius-XG, a trademark representing the unlikely union of two partners: Stanford and Yamaha. The alliance is based on melding 400 patents and Stanford's trademark (Sondius) with Yamaha's (XG). Its first commercial result is hardware that allows musicians to recreate extraordinarily realistic musical sound, and even to create fantasy instruments. Stanford and Yamaha both are counting on Staccato and other licensees to push the technology further into profitability.
The real breakthrough, though, is the partnership itself, the first time that Stanford - perhaps any U.S. university - has attached its name so closely to a consumer product. University officials openly hope that over time, Stanford will become as recognizable as Dolby as a sign of audio excellence in this new niche market. Other schools, which have long followed Stanford's novel approach to licensing, are keeping an eye on this one.
"We have not progressed beyond conventional technological licensing to partnerships such as Sondius," says Lita Nelsen, director of technology licensing at MIT. "It's creative, and I hope we would be open to such creative potential opportunities."
By tradition, companies provide money and universities do research. Or a company pays a university in exchange for a license. Sondius-XG expands traditional formulas.
"I can't think of a technology where a university has become as closely associated with the product as Stanford appears to be with this," says Marvin Guthrie, president of the Connecticut-based Association of University Technology Managers. "They had a special technology and they saw a way to build a relationship."
Stanford is pursuing other creative opportunities far beyond the obvious boundaries. Last fall, the Educational Ventures Office opened its doors. A kind of intellectual counterpart to OTL, its mission is to identify and encourage technology of all stripes - software, hardware and Internet-based subscriber services, for example - that could be used in Stanford classes, then transformed into marketable products (and, in the process, open entrepreneurial doors to more professors).
"Maybe a faculty member develops an educational technology that can be spun off into a separate company," says John Etchemendy, senior associate dean of humanities and sciences and chair of the commission that created the ventures office. "One of the things about these products is that a faculty member can't create it on his or her own. It's unlike a textbook, where, if you have your typewriter, you can do it."
Sound far-fetched? Etchemendy, as measured and thoughtful as you would expect from the philosopher that he is, has been inundated by calls from excited colleagues who are not your normal techies. Like the history professor who wants to develop a CD-ROM on Russian history. Or the anthropologist working on "virtual archaeology" software that allows students in their dorms to work with three-dimensional models of actual digs in Peru. Or the company that proposes to market the chemistry department's world-class standing in a joint software venture. "We would provide expertise, quality control and the reputation of our department," says Etchemendy. "They would provide the programming talent, the marketing expertise and the technical support." Then there is Etchemendy himself, who is writing a software program that could become standard in logic courses nationwide.
Why is all this so revolutionary at a school widely regarded as the birthplace of the high-tech industry? After all, if one is to believe the national media, Stanford is an entrepreneur's dream campus. Didn't Yahoo!, Sun Microsystems and dozens more spring from Stanford brains? "Stanford: Eggheads and Entrepreneurs - Its wizards keep the emphasis on how to market the bounty of knowledge," crows a Business Week title. "The Heart of Silicon Valley: Why Stanford - the nexus of capital, high technology, and brainpower - is the intellectual incubator of the digital age," echoes Fortune. Wouldn't you expect a natural synergy between such a school and industry?
Well, yes - and no. Scratch a little deeper and you find that Stanford has long been shunned by corporations that complain it is generally too bureaucratic, rigid and greedy in negotiations. Stanford's matchmakers find that they often must fight an institutional resistance to relationships that they say should be natural.
"We're like your typical big company," says Ku. "There are certain rules and regulations that the university wants to follow. So when an unusual situation comes up, that's where all the bottleneck happens. It often happens with industry because they want something that's not in the mainstream. Then we're not sure who makes the decision, how to handle it, what are the ramifications."
While this appears benign, the results can cause damage, and not just in the area of product patents. Companies would love to work with Stanford talent in developing new medical products and technology based on joint research. Yet, in 1995 a faculty committee issued a scathing report on the barriers between the medical school and industry - a situation marked most by "a growing mutual distrust" and "perceived differences in motives and mission that may not be based in fact."
The committee surveyed CEOs of California pharmaceutical companies who were virtually unanimous in their distaste for dealing with Stanford. "Stanford . . . is perceived as being one of the worst American universities to deal with, specifically on the topic of ownership/patent status of intellectual property that arises from a clinical research project," complained Alza Corp., a Palo Alto drug company. It "makes Alza very unwilling to pursue research with the institution."
Chris Scott understands that frustration. As director of corporate relations at the medical school, Scott serves as the school's "deal guy" with industry. Tall, thin and friendly, he looks as if he should be sitting in a lab - he was trained as a molecular biologist rather than courting company executives. A black bicycle rests against the wall of his small, neat office in the basement of Beckman Center. But don't be fooled - he knows the commercial side, having worked for years in the biotechnology industry and later running a group of health food businesses. Colleagues praise him as an effective and influential force for change within the university.
When he first arrived in 1989, Scott found what he calls "a misconception of the enterprise spirit." While Stanford gave considerable room to faculty to pursue their entrepreneurial projects, as an institution it seemed to mistrust the corporate world. "We see working with industry as somehow bad," he says. "Now that it's become OK to talk with them, we're finding that the enemy isn't them."
The enemy, if there is one, is a declining federal budget for research. Through the decade, science spending by the government declined by 9 percent and undoubtedly will fall still further. And Stanford's percentage of basic research funded by industry for years has hovered far below the national average. Meanwhile, companies are no longer as willing simply to donate money. Shareholders and boards of directors are demanding bang for their buck. "They're coming back to us and saying: 'Let's talk new ways to structure these arrangements for us to get rights to the technology,' " says Scott. "There's a wonderful opportunity to collaborate."
Scott has launched a campaign to move the medical school and hospital into a potential gold mine of profits. Stanford takes in about $6.5 million a year from corporate sponsors financing clinical drug trials. Scott hopes to quadruple that figure by 2002. The school has little choice. As a field, the clinical-trial market is exploding by as much as 40 percent per year. "The last four or five years show that budgets for basic research funding are harder and harder to finance," he warns. "We have 230 clinical faculty being squeezed to death by reductions in federal funding for research and by managed health care. Because of that danger, we really need to look at other ways to generate income to keep things going."
The administration is listening. Last summer, it signed a landmark deal with international pharmaceutical giant Rhône-Poulenc Rorer (RPR). Over five years, RPR will provide $5 million in grants to Stanford researchers in gene therapy and drug discovery. Researchers from a number of departments - outside the medical school as well will submit project proposals to RPR, which then will quickly approve those it finds intriguing. Stanford, in turn, will hold the rights to any new technologies developed from the projects and RPR can then license them.
It is a win-win for both sides. Usually, a researcher goes with hat out to a company or solicits federal money (and waits nine months for an answer - probably negative if the idea is cutting-edge). With RPR, the more imaginative the idea, the better.
"People can write down their hot ideas and get them funded for a couple years at a pretty good amount," says Helen Blau, who, as chair of the department of molecular pharmacology and director of gene therapy technology, serves as Stanford's liaison with RPR. "Everyone benefits from this arrangement. It's playing to the strength of Stanford, which is innovative technology."
No one is more excited than Thierry Soursac, RPR's vice president and the executive who negotiated the deal. He sees it as ideal for a company that wants to tap into Stanford's enormous potential. His enthusiasm alone is remarkable, considering that RPR had a long-standing relationship with the University of California-Berkeley while cold-shouldering Stanford. "Stanford will ask its scientists to create research programs that will match needs expressed by RPR," says Soursac. "It's designed for the collaboration to work from day one because of the very extreme input of our needs in the research program." As news spreads of the Stanford contract, Soursac has been besieged by offers to sign similar deals with "the most prestigious universities in the world." He expects the pact to trigger more RPR grant money for Stanford far beyond the first $5 million.
It is one of the hopeful answers to a question posed several years ago by President Gerhard Casper: Can the university rely on an industrial base to support research as government funding drops? James Gibbons, former dean of the engineering school, accepted the formal challenge of crafting a response when he became Casper's special counsel for industry relations. You can easily imagine Gibbons, an ebullient man, pumping his vast network of friends and contacts for ideas and projects. He spins off proposals for joint schemes as fast as they pop into his head: a center for engineering risk management that would help the insurance industry set rates for earthquake coverage; a center to study better hip replacements for elderly patients; a center to study pure math with still unknown commercial applications. All of these are in the works.
"My efforts are to create research partnerships and opportunities that are going to lead to new industries, improved industries and improved ways of doing things," he says. "I have to persuade industry that the kinds of things faculty naturally do is of interest to them. Here's the best test: If this works right, I should be out of a job in 18 months."
If so, it means that through his multiplying centers professors scattered throughout the university will be working together, with individual companies and with whole industries. And spinning off new centers of their own at a fast clip.
But even as the ice thaws, the relationship between Stanford and the corporate world is not always an easy sell. Part of the institutional resistance comes from professors leery that industry-sponsored research will compromise their academic freedom, or entice professors to abandon basic research in pursuit of industry dollars. "The university must be on its guard," warns Howard Schulman, chairman of the neurobiology department at the medical school. "Skewing comes if too much of the research becomes applied."
That danger, say staff in various departments, puts pressure on the university hierarchy to make sure the deals with industry ensure freedom for the faculty openly to discuss their findings and publish their results. Stanford officials say they accept that duty as part of the everyday challenge of keeping the school's long-range mission in sight.
Like any marriage, this one undoubtedly will have its uneasy moments. For now, though, the matchmakers can toast a relationship likely to get deeper - and richer - with time. ST
David Schrieberg, former South America bureau chief for Newsweek, is a California-based journalist.