By Gerald Chan, cofounder, Morningside Group
Bill Wiesler has invited me more than once to come to this event, so I am pleased that I can finally make it today. While today’s event has the agenda of promoting innovation among the Yale students and faculty, I learned that the announcement of my talk has gone out to the alumni network. My friend was shocked when he saw my face on the front page of the Yale website. He thought it was a prank. Since a number of friends have said that they would come to this talk, I will try to make it relevant to a broader audience, fully cognizant of the risk that having something for everyone is to have not much for anyone.
I am also mindful of a luncheon that President Salovey hosted for me at his residence two months ago. We had a lively discussion with a group of faculty on the role of the research university in today’s society. I do want to pick up some of the points that we touched on that day and offer my further thoughts.
My primary mission today, as I understand it, is to nurture the impulse for innovation that is throbbing on college campuses everywhere. I want to make sure that by innovation, we mean more than just writing an app. By speaking on biotechnology, I hope to paint a picture of the complexities of the innovation process and the imperative of the university to be an integral player in the innovation economy.
I now work almost exclusively in biotechnology even though I have invested in internet and tech companies in times past. The difference between the characteristics of companies in these two industries cannot be more stark. Products of internet companies let us live better. We find it mind-boggling that we lived so long without Uber or Facebook or Twitter, but in reality, life was not so horrible back then. In contrast, we look back at how certain diseases were a sure death sentence in the past and are now curable, manageable or even preventable. If tech matters in how we live, biotech matters in whether we live. Knowing that what we are doing can mean life instead of death for some people is incredibly gratifying.
Countervailing this emotional gratification is the hardship that stems from biotech companies being both capital intensive and having long product development cycles. Biotech products are highly regulated by the FDA which constrains the development steps to be executed in series and not in parallel. For the investors, this means liquidity events are a long time coming and the lid on the magnitude of payoff relative to capital consumed is hard to shatter.
With respect to market penetration, products of internet companies can spread virally and at the end, the winner takes all. Speed to market is of the essence. Products that are platforms for exchanges - be they exchanges of commerce or of social interaction - are particularly difficult to unseat once they achieve market leadership. For biotech products, the winner-take-all characteristic is not impossible, but it rests on totally different premises. The exclusion of competition may come from patent protection, or on market exclusivity granted by the regulatory agency, or simply the time and cost of developing competing products. Patents and regulatory exclusivity have expiration dates. Speed of development is therefore of no less importance even though the long development cycle can dull one’s sense of urgency.
The riskiness of investing in biotech also comes from the outcome being binary. If a company runs out of money before its product gets regulatory approval, or if the product fails to secure regulatory approval at the end of its clinical trial, there is little salvage value to the enterprise. This is not to say that once a product secures regulatory approval, it is smooth sailing thereafter. The financial performance of the product is subject to price negotiations with third party payers under a public sentiment that is ever more unfavorable to the rich pricing of drugs.
Notwithstanding such difficulties, the biotech industry is still in a good position. Compared to earlier generations of biotech companies, the industry has matured enough as to have its own norms, good practices and a pool of experienced operators such that it can attract institutional capital to invest in it. But most fundamentally, the rise of the biotech industry follows from the rise of modern life science much like the boom of the semiconductor industry in the second half of the twentieth century followed from the groundbreaking discoveries in physics in the first half of that century. In turn, the explosive growth of life science that we are seeing today is not a result of anyone’s choice nor even a result of government funding priorities per se. It is a consequence that follows from the evolution of knowledge in human civilization.
Clark Kerr, one of the giants in higher education in the twentieth century, had this to say in 1962 about life science. I want to read this paragraph to you both because of its eloquence and its prescience.
The fastest-growing intellectual field today is biology. Here there is a veritable revolution where the doctrine of evolution once reigned supreme. To the classifying efforts of the past are being added the new analytical methods of the present, often drawn from chemistry and physics. There are levels of complexity to be explored in all living structures. The “code of life” can now be read; soon it will be understood, and soon after that, used. It is an intellectual discovery of unique and staggering proportions. The secrets of the atom, much as they have changed and are changing human activity on this planet, may hold no greater significance than the secrets still hidden in the genetic code. If the first half of the twentieth century may be said to have belonged to the physical sciences, the second half may well belong to the biological. Resources within the universities will be poured into the new biology and into the resulting new medicine and agriculture, well supported though medicine and agriculture already are.
The most monumental example of the analytical methods Clark Kerr talked about has got to be X-ray diffraction which elucidated the double helix structure of DNA in 1953. Ever since then, both the endless intrigues of how life functions and the potential impact of applying such knowledge to improving human health have proven to be irresistible in attracting intellectual energy from all fields of science into biology and medicine. In a conversation I had with the President of MIT last year, he told me that two-thirds of the research across all the faculty of the Institute has something to do with life science.
Today’s flourishing biotechnology industry is a prime example of how university research has become the economic engine in the knowledge economy. It used to be that university research ended in papers published in prestigious journals. That all changed in 1980. By the passage of the Bayh-Dole Act, Congress gave the intellectual property right of any invention arising from federally supported research to the cognate university. The intent of Congress was indeed that the scientific discoveries made in universities would find a better way of being pushed out to industry where commercial development can follow from the academic research. Either intended or unintended, Bayh-Dole has created an economic incentive that changed the behavior of universities. Putting it crudely, universities are now in both the business of creating knowledge and monetizing knowledge. I do not say this with any pejorative overtone. Rather, I celebrate the translation of research output into commercialization as a public good.
Life science is now exerting a powerful pull for universities to engage with the biotech industry. Such a rapprochement raises all kinds of issues for the university which historically has always been guarded in getting mixed up with business. This is not only because no university wants to run afoul of the IRS, it is part and parcel to the university’s struggle for its own identity. One conception has it that the university should be aloof and disinterested from commercial interests lest they compromise the university’s moral authority to be the conscience of society. Abraham Flexner, on the other hand, suggested that the modern university, like all human institutions, “is not outside but inside the general social fabric of a given era. It is not something apart, something historic, something that yields as little as possible to forces and influences that are more or less new……science, democracy, and other forces steadily increasing in intensity are creating a different world of which universities must take account.” It is to this perennial and unresolved struggle for self-identity that life science has come along to offer a new deal.
I hark back to my earlier comment that if tech matters in how we live, biotech matters in whether we live. Because biotech can save lives, it is therefore thought to be less burdensome for universities to engage with this industry. Such engagements do not violate the university’s self-conscious mandate to be a force of good in society. I cannot imagine that it would be nearly as acceptable by the constituents of the university or the outside public if the engagement was with the military-industrial complex. Of course, it would be disingenuous to say that the prospect for financial gain through royalties is not an inducement for the university to welcome this engagement. The relationship between the university and the biotech industry has now progressed from rapprochement to symbiosis.
I don’t suppose that the American public will find this engagement to be offensive. In supporting their universities, the American people, with their pragmatic, utilitarian and anti-intellectual character, have always demanded that the public good they derive from their universities be tangible and material benefits. That the university should serve society is a characteristic of American universities seen as early as the founding of Harvard University in the colonial days. The historian Henry Steele Commager considered this as a major departure of American universities from their European forebears and that the Americans were the first people to use their schools and universities for non-academic social purposes. The founding of the land grant universities, a monumental development in higher education that is quintessentially American, had as its premise that the universities should serve society by improving agriculture and the mechanical arts. The idea of the university as an ivory tower, a cloistered precinct for scholars to luxuriate in a high culture that is detached from society has never occupied the commanding heights in American higher education as Oxford and Cambridge had for centuries in England.
History has shown that the American universities have not disappointed the American public. The current boom in life science research in American universities may well deliver a dividend more lucrative than what the American public has ever received from supporting their universities.
To be sure, the engagement of the university with the biotech industry is fraught with pitfalls and will place new burdens on the university. Safeguarding academic freedom must be fortified if the perceived near-term commercializability of a research project is not to take precedence over the university’s commitment to a disinterested pursuit of the truth. History has shown that some of the most impactful discoveries were never thought to be useful from the outset. Deans and department chairs must not inadvertently become venture capitalists. Similarly, the open exchange of information among scientists must not be impeded. Churlish players from industry will make inappropriate demands. It is up to the university to stand its ground and defend the academic tradition. If the university became a handmaiden to industry, it will be a lose lose situation for both. The value of the university to industry depends vitally on its independence.
As more and more faculty members become interested in spinning out their research into commercial development, the university is now expected to provide support such as guidance in patent strategy, fees for patent filing, sourcing financial investors and making connections to potential industry partners. The quality of such support services together with the financial arrangements between the university and the faculty member have become a factor in faculty recruitment and retention. In a time when universities are locked in an arms race for talented professors, this factor cannot be ignored.
Let me return to the relationship between university life science and the biotech industry. It is a curious fact that whereas there are universities with excellent life science research in many parts of this country, the biotech industry is heavily concentrated in two areas — Boston and the Bay Area. Using real estate space for biotech R&D as a surrogate metric, Boston and Bay Area together accounts for more than half of the country’s stock. Whether a university can become the engine for a vibrant biotech industry in its region depends on many factors some of which the university can change and some of which are beyond its control. With due respect to idiosyncratic nuances and constraints, I like to suggest five areas that the university together with other stakeholders of a biotech ecosystem around the university can work on.
First, I want to talk about university research in life science. Research is the basis for translation. For this, both the quantity and quality of a university’s research matter. There is no getting around the fact that scientific research is a journey into the unknown. Luck, or unplanned outcomes, is always a factor. As long as luck or probability is involved, a large base improves the odds. A large research base also makes for a richer intellectual environment with more opportunities for cross-fertilization of ideas. When it comes to quality, the commercializable science is not necessarily the breakthroughs that end up on the cover of Science or Nature. Novel science may have too much white space that needs to be filled in before it is ready for translation. Deep science which comes from patient and tedious work can be very fruitful.
A number of publications have come out in recent years to show that more than half of the discoveries published in reputable academic journals by academic researchers are not repeatable when pharmaceutical companies try to replicate the data. I don’t think it is the case that so many of the academic scientists are crooks who fabricate data, at least not in this country. The self-censorship within the scientific community to insure data integrity is still functional. The difference is that scientists in industry conduct their experiments with the view of developing a drug that can gain FDA approval. The incentive for academic scientists, on the other hand, is to generate data that are publishable. Experimental conditions are therefore often manipulated until an efficacy signal is shown. As an academic exercise, journal reviewers have no reason to be wary about those experimental conditions. Drug developers, on the other hand, would be concerned whether those experimental conditions would be acceptable to the FDA or whether they bear sufficient semblance to the human pathology for which the drug would have to address. The use of tumor xenografts in immunodeficient mice is a prime example of the latter. It has been said that cancer has been cured in mice many times over.
Compared to their counterparts in industry, the academic scientists are often severely resource constrained. When it comes to animal models, chemical purity or good practice in process, it is unrealistic to expect that academic scientists can measure up to FDA standards. Still, it would be productive if academic scientists can have more of a grasp of how a drug developer thinks. For this, the boundary between academic science and industry should become more porous in terms of information and personnel exchange. There is no reason why personnel movement should be a one-way flow from academia to industry and not the other way around. One mechanism for bringing people from industry back to academia is to create positions of “Professor of the Practice.” These need not be life-long tenured positions. In fact, by making these appointments to be of a finite term, it becomes easier to attract people from industry for a stint in academia. Such exchanges will be mutually beneficial for both academia and industry.
For any university with a sizable volume of biomedical research, it makes sense for there to be courses that expose the scientists to the drug development process. These can be in the format of professional development courses taught by industry veterans rather than formal academic courses. Case studies would be useful for this. For trainees such as graduate students and post-doctoral fellows, the prospect of securing an academic position is not as bright today as in years past whereas the number of jobs in the biotech industry is still growing. Having this kind of educational exposure would make them more desirable candidates in a competitive job market.
Two technological developments in recent years have encouraged a convergence between IT and biotech, i.e., the explosive growth in computational power and in genomic sequencing power. This convergence has received considerable impetus from IT technologists and investors who, with the thinning of investment opportunities in the IT space, have migrated to investing in biotech. I see this in China as I do in America. They invariably bring with them the mindset and their tools that have served them well in the IT space. Most prominent is the notion that Big Data will solve all the biological problems.
I do want to sound a note of caution against this simplistic thinking. I refer to the age-old conundrum of epidemiology which is that population statistics can show association but not causality. The associations can be causal or they can be spurious. Once in a while, the association can be so tight that one feels safe to take the leap of ascribing causality in the absence of mechanistic elucidation. The epidemiology for cigarette smoking and lung cancer done by Sir Richard Doll in the early 1950s is a classic example. My personal scientific sensibilities confine me to the skepticism that any association unearthed from population data can at best be an hypothesis. Big Data is therefore useful in hypothesis generation. It is a powerful alternative or adjunct to bottom-up scientific inquiry. Powerful as this new epistemology may be, the hypotheses must still be subject to the same experimental verification and ultimately human clinical trial. Therein come the long time and the high cost. Andy Grove of Intel had once raised the prospect of a Moore’s Law for life science. While such geometric growth may be possible for acquisition of genomic information, it is not possible for biotech products being developed.
Second, the interface between university and industry needs to work more productively. By this, I mean primarily the tech transfer function. Other than adequate staffing in order to be responsive, I do not think it productive for universities to run tech transfer like a for-profit operation. Too much unproductive energy is spent on haggling over minutiae of licensing terms. A number of universities have gone to standardized licensing terms. The North Carolina Plan is a notable example.
Ultimately, the university has to see the licensee from industry as a partner and not as a villain who comes to rip off the university’s crown jewel. Both sides will have to bear some risk as it is not possible that all the risks be anticipated.
Third, most university research output that is ready for publication is not ready for attracting venture capital. There is the need for further development variously known as providing proof-of-concept or derisking. It is incumbent upon the university to enable this work. This includes providing wet lab space as well as funding either from the university’s internal resources or raised from external sources be they philanthropic or for-profit in nature. One way some universities have addressed this funding need is by tapping into their donor base and offering this as an opportunity for venture capital investment or venture philanthropy.
Let me say a few words about venture capital. For me, the term venture capital carries two meanings. Capital seeks financial return. Venture, on the other hand, connotes taking risk and doing something that has not been done before. Venture implies a recognition of certain deficiencies in the present and an attempt to remedy that deficiency by innovation. In other words, venture capital is about taking financial risk in an attempt to create a better future.
In the investment world, there is the tendency to treat venture capital simply as another asset class no different from stocks, bonds, real estate, hedge fund or private equity. Take the historical return profile of each asset class and calculate the efficient frontier and one gets an optimal portfolio. For capital that only seeks a financial return, this is a valid view that is unassailable. By highlighting the non-financial aspect of venture capital, my hope is that capital that is not tethered to seeking only a financial return would invest in biotech ventures. This includes personal wealth for which the owner has absolute sway over its disposition and philanthropy.
By definition, the financial return expectation of philanthropy is zero. It counts returns in terms of lives saved or knowledge advanced rather than dollars of profits made. Such capital is sorely needed at the interface between late-stage academic research and early-stage biotech. The financial risk of investing in this interface is high. Some years ago, the folks at UCSF formed a fund to support faculty research that needs bridging to venture funding readiness. I participated but told them to consider my participation as philanthropy. In other words, my return expectation for that investment is zero.
If one can do well by doing good, that would be the best of both worlds. Hence, there is now the hybrid model of venture philanthropy. The poster child of successful venture philanthropy in biotech has got to be the Cystic Fibrosis Foundation which, working with the pharmaceutical company Vertex, developed the drug Kalydeco. For the first time, there is a cure for CF patients whose disease is caused by a certain mutation in the CFTR gene. The Foundation held the royalty for the drug which it then monetized in a $3 billion deal. With that cash, the Foundation can fund genetic characterization of every CF patient in this country as well as the development of drugs that address CF patients with other mutations. There is now a real possibility that over 90% of all CF patients will have a cure in the foreseeable future.
Fourth, for a geographical region to develop its biotech industry, there must be an adequate pool of venture capital. I can point to a number of regions around the world where there is great science being done but suffer from the lack of financial capital to back the start-ups. The San Diego area with UCSD, Scripps, Salk and Sanford Burnham is a massive research base with world-class science, but there is virtually no locally based venture capital. The same is true for much of British science. One attempt now to jump-start a solution to this problem is for local private wealth to take the lead. Wealthy families such as the MacDonald and Danforth families of St. Louis are creating funds to support the translation of research output from their local universities. In many cities in the UK, there are networks of angel investors which serve to aggregate smaller amounts of venture capital. Still, if a region is to develop a biotech industry, institutional venture capital is indispensable.
Where there is no institutional venture capital to support the creation of a biotech industry, I have seen governments stepping in. Most Western European countries and some countries of the British Commonwealth have government schemes for supporting biotech start-ups. Besides making outright grants or equity investments, one common model of support is to refund what the biotech company has spent on hiring people in that country. For example, some American biotech companies have set up a Canadian subsidiary in order to access subsidy from the Canadian government through the SR&ED scheme. The Canadian government will refund up to 35 cents on every dollar that the company spends hiring people in Canada or outsourcing work to Canadian CROs.
The most aggressive government subsidy schemes nowadays are probably found in China. These schemes are offered by local governments rather than the central government. Their play is to use tax receipts gathered from local, low value-added industries to subsidize an upgrading to a high value-added industrial base. Take a place like Suzhou. By aggressively courting biotech companies to set up there through financial subsidies and investments, the Suzhou BioBay today is a robust hub of biotech companies whereas there was hardly any biotech there ten years ago.
Here in the States, both the states of California and Texas have had aggressive subsidy schemes. It is problematic when the state government acts more to drive out businesses than to attract them. It is a problem that this university has to contend with. I don’t need to say more.
Fifth, and perhaps the most important factor for a biotech hub is talent. For a biotech company to develop, there must be expertise covering many functional areas. The emergence of highly competent contract research organizations, or CROs, many of them located in China and India, has eliminated the need for a biotech start-up to have all functional expertise in-house. Nevertheless, experienced people are needed for managing the company’s development programs. For this, it is important to have people that have seen the evolution of biotech companies from inception to exit or to drug approval and therefore know how to steer the company along the journey of product development.
The history of Silicon Valley shows that much of its initial growth came from people who had worked in Hewlett-Packard. Having a success case not only does wonders in encouraging an entrepreneurial culture, it is also a source of financial capital and of experienced personnel for the next generation of start-ups. Success begets success and so goes the virtuous cycle. The end is a cluster of biotech companies forming a local biotech industry. A recent blog published by Bruce Booth shows that biotech companies existing within such a cluster perform better than companies that are geographically isolated.
I dare say that it is very much in keeping with a university like Yale to have the ambition to make New Haven a biotech hub. It is in the best interest of the university to do so. A biotech hub in New Haven will go a long way in creating a healthy local economy around the campus. Yale already has many of the necessary ingredients. If the University’s leadership would have the commitment to do so, I think it is doable. Even though I live in Cambridge, Massachusetts and enjoy the benefits of being located in one of the world’s most vibrant biotech hubs, I want to see other regions of the country succeed. It is not heathy for the country if prosperity is highly concentrated. Too much of the nation’s future is at stake.
Let me now turn to the topic of education which is after all the primary function of a university. We see today many students, upon graduation, or even before graduation, getting involved in start-ups. Young people nowadays are simply more precocious, more impatient, more activist, more creative, more enterprising and more daring. The American culture has valorized entrepreneurs and portrayed the start-up culture as exhilarating and even intoxicating.
I do not believe that the university should remake itself according to the temperament of each generation of students, but I do want to ask this question. Can the experience of doing a start-up be a legitimate part of the educational experience of a college student today? The conventional thinking is that start-ups belong to the domain of business and therefore involve skills to be acquired in business school. I submit that the educational experience that comes from doing a start-up is of sufficient generality that it should be reconsidered in the light of a liberal arts education.
The process of doing a start-up begins with ideation. Ideas come from an active, creative mind which examines its surroundings and looks for deficiencies that can be remedied by something that has not been done before. The spotting of deficiencies may come from one’s book learning, or it may come from reflecting on one’s own experiences, or observation of others’ behaviors. In any case, ideation is the product of an active mind. A passive mind that just absorbs information generates no original ideas.
Any idea will have to be evaluated along multiple dimensions. Besides the conventional business value propositions, there are other dimensions such as social impact, environmental impact, culture, ethics and conflicts. It is not as simple as merely checking a list of boxes. Ideas need to be developed, pruned, synthesized, or remade. Inevitably, trade-offs will have to be made.
After an idea takes form, it still has to be objectively analyzed and validated. This may involve gathering of data, reading of published papers, and synthesis of data and ideas. It may involve polling or interviewing others, techniques often used in social science research. Any business propositions will have to be defensible against skeptics who will try to shoot holes in the proposition. The process forges a more robust intellect through debate and argumentation.
A plan of action will have to be devised with budgets and time lines, in other words, the idea has to be reduced to practice. All this work will have to coalesce into a cogent business plan that is in print, given as an oral presentation or as an elevator pitch. Such presentations have to move others to vote with their capital. In the old days, all college students had to take a course in rhetoric - the art of presenting an argument. The presentation of a business plan is in essence an exercise in rhetoric.
Whether in the formulation of the business plan or in its execution, more than likely, teamwork will be required among people with diverse outlooks and skills. The ability to understand diverse views and to craft working compromises to bring out the best of each team member, the ability to empathize and to cooperate are invaluable mental habits and skills.
It seems to me that if we remove the lens that automatically equates a start-up with the financial profit motive and look at the skills involved in each aspect of the start-up process, it is in fact the putting into practice of what a liberal arts education is trying to develop. I propose that we look afresh at business, especially start-ups, through the lens of a liberal arts education. In contemporary culture, business can be thought of as a language, just as Greek or Latin, having its own vocabulary, syntax and logic and giving expression to ideas and thoughts. Business can also be thought of as an art form as much as music or poetry that gives expression to creativity. Business can also be thought of as a science as having its own methods and generating its own world view. It is in this light that I would like to throw out the idea that a business plan can be an alternative to a thesis or a capstone project for some college seniors. This idea is not as crazy as it sounds at first blush.
Needless to say, what I have in mind here is not something as perfunctory as writing an app. When President Drew Faust started the President’s Innovation Challenge at Harvard, it was essentially a social enterprise business plan competition. The description on the webpage reads, “The President’s Innovation Challenge prompts the Harvard student body to engage with issues facing the world and to discover ways to make the world work better. We challenge you to solve social issues (equitability, sustainability, safety), respond to the need for innovation within the health and science industry, and other areas that transcend categories.” Having observed and judged some of the projects presented in the President’s Challenge, I consider the good ones to be splendid combinations of scholarship and practice. The intellectual content and the amount of effort that go into such a project is no less than what goes into preparing a senior thesis. Reimagined, the business plan can be a tool for executing the objectives of a liberal arts education.
I am aware that Yale is a bastion of the classical liberal arts tradition. In suggesting a business plan in lieu of a thesis for some students, certainly not for all students, I know I am at risk of being run out of town as a heretic or worse yet, a lunatic. In anticipation of this fate, I did check my sanity by re-reading the 1828 document Reports on the Course of Instruction in Yale College. This historic document, written by a committee of the Yale corporation and faculty, is the result of a thoughtful exercise which attempted to define what a liberal arts education should be. It profoundly impacted the direction of higher education in America for many decades. The views expressed in this document are very much of its time, but the intent of the writers behind the writing of this document still bears our taking note today. In particular, I note the admonition that the college “ought not to be stationary, but continually advancing” and that “changes may, from time to time be made with advantage, to meet the varying demands of the community, to accommodate the course of instruction to the rapid advance of the country in population, refinement, and opulence.”
While the goals of education are timeless, the tools for achieving those goals will, of necessity, change from time to time. A classical liberal arts education exposes the student to ideas that are timeless as indeed, the bases for moral choices are timeless. A liberal arts education also enables the student to fuse these timeless ideas with the timely skills that he has acquired through his education. We want our students to be of their time, perhaps even ahead of their time if they are to be the future leaders, and yet embody the character and mental habits that are tested by time and proven to be timeless. The challenge to every generation of educators is how best to achieve these noble goals.
In this light, I applaud the addition of the Yale Innovation Summit to the Yale community. It will bring benefits to the students and to the University in untold ways. I send you all my best wishes for continuing success and thank you again for including me in today’s proceedings.
This keynote was presented by Gerald Chan at the 2017 Yale Innovation Summit and is reprinted here with permission.