The document discusses lessons that can be learned from the life sciences innovation system and applied to energy innovation based on differences in the two sectors' experiences with federal funding and priorities. It outlines six key lessons: 1) innovation requires slow and steady funding over decades; 2) a bottom-up research agenda directed funding better than top-down priorities; 3) intense competition drove innovation; 4) transparency and openness advanced cumulative progress; 5) rewarding innovators supported progress; and 6) diversity, adaptation, and organizational experimentation strengthened the system. Overall, the life sciences experience highlights the importance of sustained, diverse public investments to address complex challenges like climate change through incremental technological advances.

1. FINDING THE ENDLESS FRONTIER: LESSONS FROM LIFE SCIENCES FOR ENERGY INNOVATION IAIN COCKBURN, BU AND NBER SCOTT STERN, NORTHWESTERN AND NBER JACK ZAUSNER, MCKINSEY & CO NBER ACCELERATING ENERGY INNOVATION CONFERENCE WASHINGTON, DC OCTOBER 2009

2. 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….

3. Federal funding priorities Why have the experiences of the life sciences and energy innovation systems been so different?

4. 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

5. 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

6. Evolution of the Life Sciences Innovation System Big Pharma CROs Good Old Days Public sector science Big Pharma Biology Drugs The Present Public sector science Tool biotechs Product biotechs

7. 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

8. Creates a highly complex, interdependent (and hard-to-manage) innovation network Powell et al. (2005)

9. LESSONS FOR A SCIENCE-BASED CLIMATE CHANGE INNOVATION SYSTEM

10. 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 interaction Rome 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.

11. 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.

12. 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

13. 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.

14. 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

15. 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.

16. 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