The inventive alternative

It may be more profitable to commercialise Australia's new nano-technology overseas than at home claims Joshua Gans.
Last week we were greeted with the exciting news that Australian scientists had pioneered another breakthrough in biotechnology. Dr Bruce Cornell and his team at the CSIRO have produced a dream machine for medical diagnosis. Their nano-technology allows potentially for an instantaneous and highly reliable diagnosis of virtually all known viruses. If all works out as predicted, today's practices of pathology will become as outdated as leeches were in the face of modern medical science. While the commercial possibilities of such an invention are reasonably clear, the path to realising those possibilities is less so. As with all Australian inventions, this one was no different in one respect. Accompanying the announcement were calls from various quarters to keep production of the new devices within Australia and by Australians. Everyone, from Dr Cornell to Peter McGauran, the Minister for Science, and a dozen other analysts, seemed to agree that Australia would not receive economic benefits from this technology without keeping its production in the family. Self-production was lauded as the only route to high commercial returns. But looking at economic realities it is far from obvious that such a direction would be the best one available. It is true that such inventions should be exploited so as to yield the greatest return for their Australian backers. One doesn't have to be patriotic to understand that. But keeping commercialisation within Australia may not be the only route to high returns. The alternative is to license the patent to overseas manufacturers. This option potentially provides all the returns associated with selfproduction and more, while removing many of the uncertainties of product development. To see this, consider what might happen if the self-production route was followed. It was admitted that the Australian scientists were not alone in their pursuit of a breakthrough in medical diagnosis -- hence, the secrecy surrounding the project. It may not be long until another team, especially given that they know such devices are possible, makes their own breakthrough. And there are no guarantees the patent held by the Australian

scientists will protect against devices with a similar function but different technology. If that team is alligned with a large pharamaceutical company, they might have the edge in getting through the regulatory requirements of any invasive medical technology. So it is quite reasonable to suppose -especially given the obvious profits to be earned -- that the Australian company will not be alone in this market. Indeed, competition might be very intense, causing those potential returns to evaporate quickly. In contrast, the licensing route offers more. For one thing, by licensing to an existing large pharamaceutical company, the Australian firm gains access to the complementary assets of that company. That includes its regulatory expertise, its market networks and, most importantly, its brand image, so important in medical products. The Australian firm does not have to engage in the costly exercise of building up these things itself. But potentially more important are the competitive implications. If it chose the right company, the Australian firm might well avoid the competitive costs of self-production. A large incumbent with competing products in diagnosis might pay handsomely for the right to produce a new revolutionary device than see the value of its own assets diminished by competitive pressures. Licensing is in the competitive interests of both the Australian and overseas firm. Moreover, there could be more than one large firm interested, allowing the Australian firm to play one off against the other and appropriate a larger share still of the overall profits. Inventing to sell technology to others is not a radical idea. It is a sensible, prudent and potentially lucrative alternative. Indeed, most biotechnology start-ups in the world have as their goal, not to become a player in product market competition, but simply to invent products, or potential products, that they can sell to others appropriating a share of the economic returns without all the costs of generating those returns. There is no shame in not having a part in adding all value. It is just a recognition of the realities of the commercial environment in high technology industries. The point here is a simple but often forgotten one. Self-production and commercialisation of a new invention is one route to appropriate economic value. However, there are good reasons to believe it might not be the best alternative. The licensing alternative involves selling out at the right time. And now could be that time. The invention is patented and accredited through scientific peer review. Everyone understands its potential. By selling out now, the Australian firm avoids the costs of setting up production and of potentially runious competition with larger, more experienced rivals, while keeping a potentially large share of the economic value. But wait too long and the opportunity could be lost.

Joshua Gans is associate professor in Economics, Melbourne Business School, University of Melbourne and an Academic Associate, London Economics.

This article originally appeared in the Australian Financial Review, Thursday 12th June, 1997, p.19. To read more about the nanomachine see the web page of AMBRI. See a letter replying to the article by Bruce Connell, the director of the Cooperative Research Centre for Molecular Engineering and Technology, and Keith Daniel, CEO, AMBRI Pty Ltd entitled "Stop this backwater mentality," Australian Financial Review, Tuesday 17th June, 1997, p.18. My reply -- "It's all about producing ideas, not objects" -- to their letter was published in the Australian Financial Review, Thursday 19th June, 1997, p.20.