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Cambridge, Mass. -- Last January, a research team led by Dr. Christopher Neugard, a molecular biologist at the University of Texas Southwestern Medical Center in Dallas, created artificial pancreas cells in the laboratory through genetic engineering techniques. It was an important step that could lead to a new treatment for diabetes.

And Dr. Neugard had a partner. The university immediately patented the new cell line and began discussing which companies to sell rights to. If the technique proves out, Dr. Neugard will share the proceeds.

Until recently, discoveries based on publicly funded research were open to commercial development by all companies. But that system lacked the profit motive. After all, what company would pursue the development of a product without patent protection? Such protection was seen as the key to transforming basic research into products.

Then, in the early 1980s, the federal government started allowing universities to hold patents to their researchers' inventions. Companies could get patent protection; universities and their researchers could get royalties. The Bush administration is now crafting a National Technology Initiative meant to extend the university model to the nation's hundreds of research laboratories.

The university system has produced a number of successes, the most striking of which is the Cohen-Boyer gene-splicing patent, the basis of the biotechnology industry. That patent is expected to bring in more than $100 million in royalties over its lifetime and has made virtually every biotechnology company a licensee of Stanford University and the University of California.

Each year the government spends $12 billion to $14 billion on research at universities. Eager entrepreneurs believe that somewhere in those billions lie many embryonic technologies that could yield a new Genentech Inc.

Today, more than 100 universities have entered the marketplace. Powers such as the Johns Hopkins University, Harvard University and the University of Texas have formed, or invested in, for-profit venture capital companies to develop their researchers' work.

Some smaller colleges that have had limited success on their own are banding together with venture capital groups to form consortiums such as the Start Technology Partnership in Philadelphia.

In return for their research, many universities are now accepting stock in new companies instead of a licensing fee, hoping that by easing the burden on the cash-poor companies they will reap benefits when the company becomes successful. Faculty inventors can also share in the action via royalties, equity or becoming consultants.

Universities are also looking to licenses as a way to supplement government money. At the Johns Hopkins School of Medicine, for example, faculty inventors prefer to have a licensee plow money back into their labs in lieu of licensing fees, said Francis Meyer, assistant dean of technology licensing.

"It is becoming more popular for research faculty to want money from industry for their research," said Mr. Meyer. The medical school received $1.5 million last year in royalties from its licenses, and $2.5 million in grants and contracts from licensees that went to faculty inventors to pay for more research, he said.

The notion that academic researchers can work in laboratories supported by large federal grants and yet make a profit from the research raises troubling questions for the scientists and the universities.

"The extraordinary development of genetic engineering was the

fruit of 40 years of public investment in university research by the federal government," said Dr. Jonathan King, a biology professor at the Massachusetts Institute of Technology who is a vigorous critic of patent law. "The whole notion that you need the profit motive for scientific innovation is spurious. Biotechnology grew up without patenting and proprietary knowledge," Dr. King said.

For the most part, each university is grappling with potential conflicts of interest on its own. There are no national guidelines.

But the potential for corruption is far greater when clinical trials of a drug or a medical device are involved, observers say. Several publicized cases have highlighted the problem, including that of a Harvard Medical School researcher who was testing an experimental eye medicine for a company in which he had a financial stake. He sold that stake before releasing results that showed the medicine was ineffective.

The doctor, Scheffer C. G. Tseng, was a student of internationally known Hopkins eye specialist A. Edward Maumenee, who oversaw the clinical trials. Hopkins investigated the matter in 1989 and disciplined Dr. Maumenee for his role in the case. He was barred from directing research at Hopkins for two years.

Hopkins also admonished Dr. Tseng, who then moved to the University of Miami, for using a drug on patients that had been prepared for use in rabbits, for failing to retain his records and for "factual inconsistencies" in his testimony to the investigating university committee.

Hopkins set up new rules to prevent conflicts of interest as a result of the case.

Harvard and other universities now prevent researchers from owning equity in a company whose technology or products they are investigating in clinical trials.

One of the leading architects of technology transfer is MIT, which registers over 100 patents a year, more than any other university.

Under the leadership of John Preston, a physicist turned entrepreneur, some 40 companies based on MIT-licensed technology have been started. Today they have more than 1,000 employees.

Mr. Preston took over as head of the technology licensing office in 1986, when it was staffed mostly by patent lawyers. He gave the patent work to outside attorneys and hired a staff to drum up licensing deals.

The goal of technology transfer is to create jobs, and strengthen American competitiveness, said Mr. Preston. "If you just publish papers coming out of the labs, society doesn't benefit." Only 2 percent of MIT's patents have gone to Japanese companies, he said.

Mr. Preston's success is in the numbers. Fifty-three percent of the patents issued to MIT in 1991 were licensed within a year of being granted. "We are licensing most of our inventions before the patent is even granted," he said.

That is a batting average that would be the envy of most laboratories, where as few as 1 percent of patents are licensed.

Last year MIT brought in $5.5 million in cash from its licensing activities, excluding the stock that MIT owns in companies it licensed.

Unlike some institutions, which have set up venture capital funds of their own, MIT prefers to let the marketplace decide on the merits of a particular technology.

"There is plenty of money available outside; why bother doing it yourself? It is also nice to have a third-party endorsement, and it gets rid of all the conflicts of spinning off technology with your own money," Mr. Preston said.

One of the primary reasons MIT won't start its own venture capital fund is potential conflict of interest. The institution has some of the most stringent guidelines on technology transfer, hoping to avoid the kind of activity that would make it a development arm of a company.

MIT prohibits its licensees from funding any research at the university related to the technology or products they have licensed from MIT, and limits its own equity investment to under 20 percent.

One hotly debated topic in academic circles is a rule common at many universities that prohibits faculty members from spending more than one working day a week consulting for a company. What, in fact, constitutes 20 percent of a work week for an academic researcher?

"Professors don't punch time clocks," said one MIT professor. "Twenty percent is a guideline. I haven't heard of any enforcement. MIT is a big entrepreneurial organization. It isn't clear how many people are close to the margin or over it in terms of commitment to outside entities where they could make a lot of money."

Mr. Preston warns that universities should not count on getting rich from patent licenses. MIT, for example, earned net royalty income of only $500,000 last year because of the costs associated with filing patents. And for every successful new company, there are dozens of failures. Even so, MIT did distribute about $1 million in royalties to hundreds of scientists last year.

"Those schools that are planning to make royalty income a substantial part of their research income, and I have seen a few, just don't know what they are doing," said Lita Nelsen, associate director of the MIT licensing office. "Unrealistic expectations are going to kill this business," she said.

From Gown To Town

A partial list of startup companies coming from the MIT Technology Licensing Office since 1986.

Company.. .. .. .. .. .. ..Field.. .. .. .

American Superconductor .. Superconductors

Beyond .. .. .. .. .. .. ..Computer software

Enzytech.. .. .. .. .. .. .Drug delivery

Immunologic.. .. .. .. .. .Immunology

Lab Connections.. . .. .. .Chemical lab equipment

Matritech.. .. .. .. .. ...Cancer diagnostics

Micracor.. .. .. .. .. .. .Lasers

Oculon.. .. .. .. .. .. .. Anti-cataract drugs

Proteon.. .. .. .. .. .. ..Computer networks

.. .. .. .. .. .. ..Computer security

Thinking Machines.. .. .. .Parallel processing computers

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