Measuring the Returns to NASA Life Sciences Research and Development

Dr. Henry R. Hertzfeld

Measuring the Returns To NASA Life Sciences Research and Development

George Washington University

Washington, DC 20052

(202) 994-6628

hrh@gwu.edu

September 30, 1998

Table of Contents

Summary of Results.......................................................................................................................................... 4

Introduction.......................................................................................................................................................... 8

Returns to government investment................................................................................................. 8

Mission objectives........................................................................................................................................... 8

Economic Effects of Government Programs in Life Sciences Research and Development 8

Measuring Economic Benefits of Life Sciences R&D................................................................. 8

NASA Benefits: Methodological Approach to Measurement........................................ 8

Methodology..................................................................................................................................................... 8

Firms in Study: The Sample.......................................................................................................................... 8

The Interview Process.................................................................................................................................... 8

Data Methodology............................................................................................................................................ 8

Background......................................................................................................................................................... 8

G.W. Interview Data......................................................................................................................................... 8

Results .................................................................................................................................................................... 8

Evidence of social benefits...................................................................................................................... 8

The Portfolio of Investments: Returns from the Three Top Performers.............. 8

Summary Of Results From Other Firms............................................................................................ 8

General Observations.................................................................................................................................. 8

Recommendations............................................................................................................................................... 8

Appendix 1:

Data Requested From Firms........................................................................................................ 8

APPENDIX 2:

Selected Case Studies..................................................................................................................... 8

3-M Company: Food Warming Device................................................................................................ 8

Bio-Merrieux-Vitek: Automated Microbial Assay System..................................................... 8

Cox Rapid Heat-Transfer Sterilizer................................................................................................. 8

Diatek: Infrared Ear Thermometer................................................................................................ 8

EDL: BaroCuff.............................................................................................................................................. 8

Human Technologies: Temperature Pill....................................................................................... 8

ILC: Cool Suits............................................................................................................................................. 8

Microsensor Technology: Gas Chromatograph..................................................................... 8

Orbitron: Exercise/Amusement Machine....................................................................................... 8

Synthecon: Bioreactor......................................................................................................................... 8

Tempur-Pedic: Foam Support Surfaces........................................................................................... 8

Umqua: Water Purification Device.................................................................................................. 8

Appendix 3:

MeasuremenT TECHNIQUES IN NIH ECONOMIC STUDIES................................................. 8

Summary of Results

A survey of forty-one companies that reported prior commercial success in transforming NASA R&D investments in the life sciences into marketable goods and services was conducted in late 1997 by the Space Policy Institute, George Washington University.[1] Fifteen of these firms provided useful data for this study. These firms alone have cumulatively contributed over $1.5 billion in value added to the economy over the past twenty-five years. The cumulative NASA R&D investment in the technologies represented by the products of these firms was approximately $64 million. An additional $200 million in private R&D from those companies was stimulated by the NASA investment. This additional R&D was necessary for the production, development, and marketing of the commercial products and represents the positive leverage of NASA life sciences investments.

These are conservative estimates because they only measure the impact of NASA R&D on the companies that produce and market the products. The results from personal interviews conducted for this study also show that there are very large benefits that accrue to the purchasers and users of the life sciences products produced and sold by these companies. These social benefits range from cost savings through the use of more efficient medical and research equipment to non-quantifiable benefits such as the substitution of non-invasive procedures for surgery. These societal and downstream impacts and benefits are documented and described in this study, but are not included in the summary statistics.

Within NASA’s mission of conducting civilian space activities for the United States Government, the life sciences activities have a primary goal of keeping human beings alive and healthy in the adverse environment of outer space. Economic benefits are important, but are secondary to the primary mission.

The findings of this pilot study are:

· over $1.5 billion in value added can be attributed to the investment in life sciences from NASA in these fifteen firms alone,

· the benefits are purposely understated by not quantifying social benefits (even when they have been identified),

· other firms are known to have claimed successful commercial applications from NASA Life Sciences R&D,

· there are many documented examples of social benefits from space life sciences research that are not associated with commercial products,

· NASA’s life sciences total expenditures over the past 40 years has amounted to approximately $3.7 billion (which includes many mission related projects that have made it possible for NASA to engage in manned space flight and for which there have been with no expected commercial benefits).

On the basis of these conservative estimates taken with mission success of the life sciences effort and ample evidence of other social benefits from the descriptions provided by the users of many specific life sciences spinoff applications, it can be concluded that NASA Life Sciences investments have more than “paid for themselves.”

Figure 1, below, illustrates that the economic analysis performed for this report is only a brief snapshot in time. It builds on the descriptions of spinoff technologies that can be found in NASA and other documentation by adding an economic quantification based on interviews with the firms. The economy is a dynamic engine, constantly changing. So, too, is technology. Most NASA documentation on technologies with commercial potential focuses on cutting-edge research that is underway or recently completed. Commercial products often follow years later. Some never fulfill their market potential.

Figure 1: Tracking Commercial Spinoffs

Therefore, by looking at the cumulative effects of life sciences at any given point in time (in this case, late 1997) an indication of what has occurred “after NASA” is presented. This type of study should be repeated periodically, as the results will be different each time. More than likely, the economic and social impacts will become larger with the passing years, since each new technology builds on the last, and each new commercial product stimulates improvements and advances not previously imagined.

The contributions of this study are:

1. measuring a limited subset of economic benefits from NASA Life Sciences Program using a methodology that permits combining the cumulative benefits from different companies into an aggregate measure of economic impact;

2. documenting that these measures clearly show that the private sector realizes substantial leverage from the initial NASA R&D investment;

3. documenting these quantitative measures as accurately as possible because they are based on data obtained from the companies themselves;

4. providing evidence of large social benefits (both measurable and descriptive), which are so varied that they do not lend themselves to aggregate values;

5. analyzing economic benefits from an historical perspective which clearly demonstrates that the NASA influence continues well beyond the cessation of the NASA project or the NASA R&D funding;

6. revealing that there is a role for NASA technology transfer activities to continue to have an influence on benefits throughout the life cycle of a product.

The recommendations from this study are:

1. NASA continuously monitor the economic impact of spinoff technologies.

· the economic components of successfully marketed technologies have not been well documented

· each year new products enter the market-place and older products may have reached the end of their life cycle

2. NASA develop an institutional capability to establish a continuing relationship with firms that no longer are performing R&D for NASA, but have taken NASA-stimulated technologies into the market-place.

· these firms often have commercial products that have use in future NASA or other government endeavors, thus providing benefits back to the government,

· these firms are often small and have limited financial and marketing skills, and therefore can benefit from having continued access to NASA technical expertise as well as the positive advertising and promotional benefits from being identified with NASA, and

· NASA can act as a broker and matchmaker to develop partnerships between these firms and government agencies or larger private sector companies. Such partnerships can help small firms overcome financing and distribution hurdles and enable more rapid growth of sales.

3. In the life sciences and medical fields, NASA can offer assistance in the following ways:

· provide opportunities for additional testing of devices that can aid a firm in acquiring approvals from regulatory agencies such as the Food and Drug Administration,

· provide an interface with other government agencies that may offer markets for products (e.g. the Veterans Administration hospitals, or the National Institutes of Health),

· provide technical advice and other assistance to firms with federal and state agencies that set regulations for Medicaid and other related programs.

4. NASA should implement these suggestions as components of its on-going and existing programs. The establishment of a new bureaucracy or new NASA programs to implement the recommendations should not be necessary.

The initiative for requesting government assistance to industry should come from industry itself. A specific NASA program to “help” industry will not be as effective as an on-going cooperative relationship between NASA and the firms. Government assistance should come from a natural and comfortable evolution of mutual trust and benefit between the government and the private sector.

Introduction

Returns to government investment

There are definite and measurable returns to government investments. The problem is that the standard framework for economic analysis is based on a private enterprise that is in existence to make a profit. An investment’s contribution to the bottom-line profit is its rate of return as measured by its percentage yield compared to its cost, over a period of time and in relation to “average” returns in the economy for similar investments. The government, however, does not exist for the purpose of making, let alone maximizing, profits. The government does not even have a capital account. And, by convention, the U.S. government does not consider any expenditure an investment.[2] Therefore, any comparison between industry return on investment (ROI) and government rates of return must be very carefully analyzed. They are not the same, and there is no reason they should be the same. Therefore, the methodology used for calculating returns to government R&D expenditures should be different from the metrics that are used by corporate R&D efforts. The focus for measuring government returns to its expenditures on R&D should be on the impacts on the beneficiaries of government R&D (firms and the economy in general) rather than solely on the benefits that flow back to the particular government agency.[3]

Mission objectives

Government missions in science and technology rarely are designed for maximizing economic impacts. They are either optimized for a mission such as national security or, as in the case of fundamental research, for generating knowledge. Only those specific programs oriented toward the transfer of technology may qualify as having a mission that dictates a direct economic impact. Of course, when the government expends funds, income and jobs are created in the private sector. However, those short-term spending impacts only last as long as the funds continue to be expended. The economic benefits from the transfer of technology may be more delayed, but will have much longer lasting effects on sales, productivity, profits, and international competitiveness of the private sector.

Capturing all of the broad objectives of various mission-oriented federal R&D programs in simple economic measures is not possible. Because of the complexity and vast differences in the missions of the agencies, any economic measure is only a very partial accounting of the impacts of any program. And, since most technology transfer activities involve pushing the results of federally-sponsored technology into other uses, many of the measures and models ignore larger aspects of economic impacts in favor of trying to understand how better to manage and sell transfer programs. In addition, economic externalities (impacts beyond the firm or industry that can be measured by standard microeconomic techniques) are often ignored. These externalities can have positive and negative impacts on sectors of the economy.

Many federally-sponsored R&D programs have resulted in major economic changes. Examples include: the NACA in developing aircraft technology; the Department of Agriculture in creating the extension service to disseminate research results on better farming techniques; the NIH R&D efforts that led to the creation of the biotechnology and bioengineering industries; the Department of Defense support of electronics, computers, and software which, in combination with the miniaturization needed for the space program has played a large role in making the United States a world leader in the computer industry; and the NASA R&D that provided access to space for satellite communications. Although it is possible to measure the sales and growth of these industries, it is virtually impossible to calculate in economic terms the improvements and changes in the quality of life and the way we live as a result of the contribution of federal R&D programs.

Figure 2 illustrates the types of outcomes that are possible to measure and document. Other than the direct job creation from any government spending or investment program, most of the impacts are somewhat removed from the mission objectives of the programs. This is particularly true of R&D programs such as NASA’s Life Sciences.

Economic Effects of Government Programs in Life Sciences Research and Development

Life sciences and biomedical research and development in the Federal Government is a $13 billion per year investment (FASEB 1996). The National Institutes of Health account for over 70% of the total, with most of the rest of the expenditures spread across the Departments of Defense, Agriculture, Energy, and Veterans Affairs, as well as the Environmental Protection Agency, and the National Science Foundation.[4]

The NASA investment in life sciences and biomedical research and development is about $50 million per year, less than .05% of the total of Federal life sciences R&D. Even though this NASA investment is only a very tiny part of federal life sciences R&D, it involves access to and research in the microgravity environment of space, an endeavor very unlike that of other Federal agencies. As described in more detail below, one of NASA’s main life sciences missions is to keep healthy people alive in an hostile environment. Most other federal life sciences R&D is oriented toward identifying and treating diseases that have made people ill. This difference is fundamental to understanding the different approaches to measuring the economic impacts and benefits of R&D programs in life sciences.

Figure 3, illustrates the similar but very different flows of NASA and NIH economic impacts. The primary difference is reflected by the different missions of the two agencies. NASA considers non-space applications as spinoffs while NIH considers only non-medical/life sciences applications as spinoffs.

Measuring Economic Benefits of Life Sciences R&D

The NIH has created a model of the biomedical and life sciences R&D environment that is based on direct impacts on human beings. Their literature, mission statements, and outcome measures are described in human terms--identifying, diagnosing, and treating human diseases and measuring success through increases in human life span, number of patients treated, and increases in the quality of medical services delivered (NIH 1990). The economic models they use to measure quantifiable impacts are labor-oriented models that primarily measure the gains in productivity from people working as opposed to not working because of illness or diseases (NIH 1993). And, for the treatment of diseases, the economic impact models center on the economic savings to patients or society from the use of new medical tests, procedures, or instruments (NIH 1993 and Raiten 1983).

The mission goals of the National Aeronautics and Space Administration’s life and biomedical science division are very different from the research objectives of the NIH. NASA is a government agency devoted to solving engineering and science problems in aeronautics and space. The Life Sciences at NASA primarily are oriented toward supporting human activity in space. Zero gravity, extreme heat and cold, exposure to radiation and other space environments that do not exist on earth, and other pre- and post-mission medical problems are those that concern the research NASA supports. The measures of success are more like other engineering projects: instruments, equipment, and medicine to both monitor the condition of astronauts and keep healthy astronauts alive in alien and different conditions. Applications of space medicine and equipment to specific diseases and common afflictions of the general population are considered spinoffs of the research rather than direct mission requirements as with NIH-type medical research. Microgravity also creates a unique and interesting environment for experimental research in the life sciences (and other fields as well).

The NASA mission objectives lean far more toward the applied and development end of the spectrum than toward fundamental research (NASA 1997). The hardware needed in space is complex and expensive. NASA often contracts with private industry to perform the R&D. The actual research sponsored in life sciences is awarded through a peer review system, which is similar to the way other agencies, including the NIH, make awards.

The economic component of the NASA R&D is much more a capital model than a labor model. Outcomes are measured by the success of the space mission, and by the performance of the instruments and equipment (NASA 1987). Industrial spinoffs and the impacts of new technology are expected and important elements of the NASA program (NASA 1997). Whereas NIH regards spinoffs to be applications that are non-life sciences related (since life sciences are the mission focus), NASA defines spinoffs as any non-space use of the research or technology, including other medical applications (NASA 1995). Measurements such as sales and jobs created through innovations from technological spinoffs, productivity gains through new capital equipment, and consumer’s surplus created by lower prices through innovations related to NASA technology have often been applied to space-related technological impacts. Such measures would be commercial “benefits” or spinoffs to only the small sub-set of NIH’s portfolio of technologies that are used in non-medical applications.

It is quite interesting to note how two agencies investing in very similar areas can differ in approaches and in outcomes. Disregarding the huge variance in the size of the life sciences investments by NIH and NASA as well as many NASA and NIH programs that overlap, one can summarize the essence of the differences as a labor approach and model of the economy for NIH and a capital approach and model of the economy for NASA.[5]

NASA Benefits: Methodological Approach to Measurement

This pilot study was designed to show that significant economic benefits can be measured from past investments originating in the NASA Life Sciences program (as well as selected examples of benefits from general NASA R&D that have been incorporated into life sciences applications). Measurable benefits can be found by analyzing the impact of the NASA R&D investments on the industrial firms that have received grants or contracts from NASA to perform R&D as well as firms that have licensed, adopted, or developed modifications of the existing body of knowledge that NASA has generated in the life sciences.[6]

Thus, for purposes of this study, firms that have acknowledged successful sales of products that can be traced to NASA R&D investments were selected for analysis.[7] Calculating the benefits that can be traced and allocated to past NASA investments in an orderly and consistent way for each firm, discounting the stream of those benefits over time, and combining the data into a summary set of measures provides an indication of the type of leverage from government investments that has occurred in the past and which can be expected to continue into the future.

Not all sales attributed to these firms can be counted as NASA benefits, since NASA technology usually is only an initial starting point for the firm. Government-developed technology is frequently mission specific, and requires substantial technical modifications before a commercial product can be produced. In order to put a product on the market successfully, a company must also invest in advertising, distribution and quality control, all of which may cost far more than the R&D investment. NASA “benefits” should be considered as the leverage of government funds—an initial infusion of R&D that then stimulates additional company investments toward a commercial product.

Furthermore, the issue of the alternative investments of the firm must be taken into consideration. Would the firm have followed the same R&D or marketing path without NASA investment and stimulation? If so, then did the NASA work benefit the firm by providing the incentive to speed-up the production and introduction of the new technology? If not, then did the government investment alter their business plan, and would the alternative uses of the funds have provided more leverage elsewhere (i.e. a “negative benefit” from the firm’s perspective, but quite possibly a positive from society’s viewpoint)?

Methodology

Following a methodology successfully used in Europe to measure the benefits of the European Space Program (Bach 1992), four types of benefits are recognized in this study: 1) development and sales of products based on NASA R&D; 2) commercial benefits resulting from increased sales due to the high-tech reputation of doing space research, and commercial benefits from joint ventures brokered by the space agency; 3) new methods of organization and management from large scale space assignments applied to the commercial sector; and 4) the development of a critical mass of labor skilled in the particular demands of space R&D within the firm (and industry) so as to provide efficient production, continued successful space R&D, or increased productivity to the firm.[8]

Various types of measures are developed for each category, but most can be summarized and reported as an allocation of the value added in the firm’s production function. Value added is defined as sales attributable to the product less the cost of material inputs. The benefits are historical. Future benefits can be estimated by the firm, but are not reliable measures due to the cyclical nature of the economy and the unforeseen markets and risks facing all firms. In addition, firms also provided additional information about the benefits to the users (purchasers) of their products. These benefits were very diverse, ranging from cost savings to improvements in the quality of care (e.g. the development of non-invasive procedures to replace current surgery).

For purposes of this study, the value added type benefits could be aggregated across firms since this was a common denominator among all companies.[9] Downstream social benefits are listed separately for each firm that reported them, but they are not included in the aggregate summary results because doing so would be combining estimates of numbers that mathematically cannot accurately be added.

Some of the methodologies used by the NIH economic models that measure the quality of life and delivery of health care services might be used to broaden the scope of the downstream benefits calculated in this study, since they frequently emphasize the potential longer-term future impacts on the quality of life and/or productivity of workers. However, many of those studies have focused on only one disease or treatment and have not produced measures that can be added together over many different sectors. Therefore, attempting to fit the information collected from this limited survey into a methodological framework similar to those used in various NIH studies would be difficult.

This study focuses on economic impacts and on the leveraging of government funds.[10] This study is not a benefit/cost analysis. The decision not to perform a benefit/cost analysis was made for two reasons: 1) the benefit/cost methodology is very closely related to the return on investment framework which, as described above, is not easily applied to government R&D investments, and 2) the definitions and practical measurement of both benefits and costs requires making many additional assumptions which could result in misleading findings.[11]

Also, bearing on this analysis is the selection of firms that have been successful. More appropriate for an all-inclusive measure of returns would be a portfolio of firms and projects that study failures as well as successes. The failures should be both technological and commercial in order to present a balanced study. However, this is virtually impossible because the universe in this study includes not only examples from life sciences funding, but also examples from overall NASA funding that have found applications in the life sciences. The only possible way to have an unbiased set of cases would be to randomly select from all NASA R&D since 1958. That would be a very expensive and formidable task, well beyond the boundaries of this pilot project.

Firms in Study: The Sample

The objective of this pilot study was to obtain data from 20 firms that have been successful with a commercial product that could be traced to NASA Life Sciences R&D. The relatively small number of firms contacted is a function only of the time and expense required to perform personal interviews. The small number of firms in no way is meant to suggest that there are only a small number of successes that can be attributed to NASA Life Sciences.

Because it may take anywhere from five to twenty or more years for a research product to become a commercial product (let alone a successful commercial product), we focused on identifying firms from the reports of successful R&D from historical documents. It is even more important to allow sufficient time from research to commercialization in the life sciences field, since many medical products need to go through the lengthy process of U.S. government approvals (most often the Food and Drug Administration of the Department of Health and Human Services) before a company is allowed to market it.

Starting with NASA’s Spinoff and technology transfer publications, we then also scanned on-line searches and prior studies of NASA benefits for leads to existing companies. Interviews with current NASA personnel led to other companies and contacts. Unfortunately, most of the suggestions from the NASA research offices reflected on-going R&D efforts, that, although exciting and having great commercial potential, are still in the research stage and therefore are not good candidates for this study.

The literature search produced 41 companies that would be possible candidates for this study. The companies included not only those that received life sciences R&D awards, but also companies that had performed other NASA research which found applications in NASA life sciences work or even in life sciences applications in the commercial sector. There were companies that used NASA information and then developed different products, and there also were companies for which NASA tested and used existing products. In almost all cases, the companies received added benefits through advertising and marketing by using NASA for its name recognition and cutting-edge, high-tech image.

Firms can be classified a number of ways. For this study, two major systems were chosen.

First, was a categorization based on the degree of contact the firm had with NASA.

1. Firms that owe their existence to NASA & NASA technology

2. Firms that have a NASA spinoff as an important, but minor part of sales

3. Firms that used the NASA technology transfer programs

4. Firms that have adopted NASA technology without formal ties to NASA

Second, was a categorization based on the source of the innovation.

1. Innovations from NASA University R&D grants

2. Innovations from former NASA employees

3. Innovations from NASA contractors

4. Innovations with no direct NASA R&D Investment

Not all of these categories are mutually exclusive, and there are many other ways of categorizing the firms and innovations in this study. However, for purposes of measuring the impact of NASA Life Sciences R&D on the economy, and for suggesting policy improvements that might make technology transfer at NASA more efficient and effective, these categories are useful.

As detailed below, most of the forty-one firms that were contacted provided some information. Fifteen firms were able to provide usable quantitative economic data; others provided either qualitative judgments and/or partial quantitative data. We were not able to locate five, and thirteen others declined to participate either because they were “too busy” or they had corporate policies not to disclose information. No attempt was made to select the firms on geography, size, or major industry. The firms were located in all regions of the nation. Most were small companies but several were larger firms. And, as would be expected, the firms generally were in the medical instrumentation or aerospace sectors of the economy.

The following fifteen firms (listed alphabetically with a short description of the product) provided usable quantitative data for this study: