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The following is a transcript of a speech delivered by Michael L. Riordan, M.D.

,
the founder and Chief Executive Officer of Gilead Sciences, Inc., at the Technology
Transfer Conference sponsored by the National Institutes of Health and the
Pharmaceutical Manufacturers Association, held at Georgetown University on
March 2, 1990 in Washington, DC.

TECHNOLOGY TRANSFER AND U.S. BIOTECHNOLOGY:

THE GRACE PERIOD IS OVER

Dr. Michael L. Riordan

I would like to thank the National Institutes of Health and the Pharmaceutical
Manufacturers Association for sponsoring this valuable and timely conference. Our
company, Gilead Sciences, owes special gratitude to the NIH, which has served as the
engine of biotechnology and provided the foundation for much of Gilead’s R & D
program.

There are four things I would like to accomplish today. First, I will give you some
background on Gilead Sciences, since this session is meant to be a case study, and
since you should know my biases—and I do have them. Second, I will make a few
observations on the special licensing circumstances of a young biotechnology
company, particularly regarding sublicensing provisions in license agreements, and
international patent filings in the pharmaceutical arena. Third, I want to stress the
critical and unique role of universities and research institutions in the U.S.—they
are a grossly under-appreciated asset of our country. And finally, I intend to draw a
direct link between technology licensing, early-stage biotechnology companies, and
capital gains taxation, a crucial issue before the federal government at present.

Gilead Sciences was founded just over two and a half years ago by myself with the
vital assistance of our core research advisors at Cal Tech, Harvard, and the
Hutchinson Cancer Research Center. We are developing a new class of human
therapeutics that act by recognizing specific sequences of the genetic code of a virus
or a cancer cell. These new agents can selectively inhibit a viral gene or cancer gene
in vitro, or in cell culture, and we are working to apply this versatile technique to the
development of a new wave of pharmaceuticals that work in vivo.

The fundamental science underlying this new approach, which we call genetic
targeting, has been carried out in numerous university labs in the U.S., and at the
National Institutes of Health. Our approach directly builds upon the explosion of
understanding in molecular genetics and biochemistry that has been driven by NIH
and NSF funding over the past three decades.
We have 35 full-time staff, almost all of whom are in the laboratory, as well as a
number of advisors from academia and the pharmaceutical industry. At Gilead, we
have tremendous respect for our scientific roots—U.S. universities and government
research labs—and this is reflected in the members of our board of directors. Benno
Schmidt, for example, served as Chairman of the President’s Cancer Panel under
Presidents Nixon, Ford, and Carter, and is the Chairman of the Memorial Sloan-
Kettering Cancer Center in New York. Don Rumsfeld, former Defense Secretary and
White House Chief of Staff, was the chief executive of a major pharmaceutical
company for eight years, and I know he values the productivity of the NIH.

Gilead has been fortunate to receive over $12 million in equity investment from
venture capital funds, the most recent round of investment having been led by J. H.
Whitney & Co. and Venrock Associates, a member of the Rockefeller investment
group.

As a young biotechnology company, we must devote a great deal of energy to
gaining patent protection, through our own patent filings, of which we have many,
and through a few licensing agreements with selected research institutions. The
importance of patents for Gilead’s future leads me to spend an average of two hours
every day on patent and licensing matters, and we recently hired a Ph.D. molecular
biologist from Johns Hopkins University specifically to work on our internal filings
and external license agreements.

I hope this snapshot of Gilead Sciences gives you at least an idea of the mission of
our ambitious young company, and the critical role technology transfer plays for us.

Now, please allow me to make a few comments about the special circumstances of a
small biotechnology and pharmaceutical development company vis-à-vis technology
licensing.

Time is our most precious resource. We are in a race against time; time brings a
depletion of our equity reserves and the possibility of significant competition.

This means that if we are seeking a license on a technology, it is out of genuine
interest. If we want it, we really want it. If one of our senior management
(comprising four people) pursues a patent license and enters into negotiations of
some sort, that represents one quarter of our entire management. We can’t afford to
dedicate that person’s critical time, even for a day, if we are not serious. That same
level of person-effort in a very large company of course represents a miniscule
fraction of the company’s resources, and that company can afford to entertain
licensing options about which it is not wholeheartedly earnest.

We work with many early-stage technologies that require lengthy development
time, in an industry notorious for having some of the longest product development
timelines of all. This requires that our licenses on patents from outside institutions
allow us to sublicense patent rights on reasonable terms as we generate an array of

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disease-specific applications for our technology. Also, since future products are
likely to require licenses and royalty payments on more than one patent, our
licensing agreements need sublicensing provisions and royalty provisions that
permit us to ratchet down royalty payments to an individual licensor if the final
product sale would require multiple licenses with additive royalties. Such additive
royalties would otherwise make it uneconomical to manufacture or sell the product.

My second comment with respect to the special licensing needs of a young
biopharmaceutical company relates to foreign patent filings. Despite caveats we
heard yesterday on the differences in clinical development practices in different
countries, the pharmaceutical industry is an international one. Many of the
substantial R & D costs of generating a pharmaceutical can be amortized across
market opportunities in many countries, if the product has patent protection in
those countries. If the product only has patent protection in the U.S., then the R & D
costs for generating that pharmaceutical cannot be effectively recouped from any
market outside the U.S. This means that there is a very high value to preserving
foreign rights on pharmaceutical patents, perhaps more so than for other types of
inventions.

Of course, research institutions are leery of paying the high costs of foreign patent
filings, and this is justified. However, I would suggest that institutions give special
consideration to pharmaceutically-related inventions when considering whether to
file abroad. At a minimum, for pharmaceutical inventions, the relatively inexpensive
mechanisms for extending rights to file within the Patent Cooperation Treaty should
be employed, to provide more time to find an industrial licensee who can further
support the foreign filings.

Foreign filing also requires, of course, that the U.S. parent filing be made prior to
public disclosure, a fact that should be reinforced among research investigators.

My next topic is university resources. Universities and research institutions in the
U.S. are an extraordinarily valuable asset for the U.S. and its industry. Whatever high
opinion you may have of U.S. university laboratories and research productivity, take
that and multiply it by three: that will begin to reflect the value of research
universities and institutions when viewed on the world scene.

Since many of you here are from research institutions, you may think I am saying
this to make you feel good. I am not. My comment derives from many visits to
biology and chemistry research laboratories, both industrial and academic, in Japan,
the U.S. and Europe. It is clear that in molecular biology, cell biology, and chemistry,
which are the disciplines that underpin biotechnology, the research and
technological productivity of research institutions in the U.S. is unrivaled by other
countries. Many, many of the finest young scientists in Europe and Japan seek
doctoral and postdoctoral training positions in the U.S. because of the caliber of the
intellectual environment and the resources with which to make major

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accomplishments in a short period of time. These university resources, especially
with regard to training, are highly prized by many non-U.S. companies.

In addition, in biotechnology and the life sciences, the U.S. enjoys far better industry-
university cooperation than in many other countries, where various historical
biases about the role of academia have severely impeded industry-university
collaborations.

On balance, however, our society and corporations in the U.S. undervalue
technology and undervalue our research universities and institutions, including the
National Institutes of Health. Many foreign companies in the pharmaceutical and
biotechnology areas have caught on to the opportunities presented by these
undervalued assets, however, and seek to tap the enormous capabilities and
information generated by our research institutions.

For example, last year a large Japanese pharmaceutical company set up a substantial
research laboratory near Boston to be managed by a prominent and very talented
chemistry professor at Harvard. Another major Japanese company announced six
months ago that it would contribute to Harvard University more than $80 million in
a multi-year agreement for dermatology research, following the lead of a similar
funding program provided a few years ago by a large European pharmaceutical
company. There are many other similar examples.

As a businessman and as one who highly prizes the productivity of our research
institutions, I must say that these companies have moved wisely.

Many small, venture-backed U.S. companies have also caught on to the fact that our
research institutions are underappreciated, and that they represent a wealth of
technology and ongoing intellectual property development. Certainly Gilead
Sciences appreciates this fact. As was pointed out earlier in this conference, most
U.S. biotechnology companies are direct offshoots from university technology,
research faculty, or both.

My final thesis is that there is a direct link between young biotechnology companies,
technology transfer, and capital gains taxation. My point here begins with a short
vignette: A friend of mine and business school classmate is an official at the Ministry
of Finance in Tokyo. A few years ago he expressed to me the sentiment that the
1986 tax law change in the U.S., which increased the relative taxation of long-term
capital gains, was silly. He noted that it removed one of the very few incentives in
the U.S. for the long-term investments required to build anything substantial. I
concurred, and commented that it appeared we in the U.S. were shooting ourselves
in the foot. “No,” he said, “It seems that you are shooting yourselves in the chest.”

This conversation has taken on a special significance for me in founding Gilead
Sciences and working with many others to build it. Let me explain why.

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In 1978 the venture capital industry began to flourish largely as a result of tax law
changes that enacted a decrease in taxation of long-term capital gains, and caused
substantial monies to flow into venture capital funds. One of the venture capital
funds that flourished was Menlo Ventures, which focuses on technology-based start-
ups, and which provided Gilead Sciences with its first $2 million in capital. It is not a
coincidence that the U.S. biotechnology industry also began to flourish in the late
1970’s and early 1980’s, in part nurtured by the new capital available for
investment.

As you know, biotechnology has long lead times, is capital intensive, and can be
risky. Achieving desirable returns on investment is difficult when the cost of capital
is high, as it is in the U.S. relative to, for example, Japan. If returns on long-term
capital gains are significantly reduced through taxation, it is even more difficult to
secure capital for this long-term, expensive product development process.

This in turn undermines the ability of a patent licensee to pay execution fees, annual
minimum fees and royalties, and on balance requires the licensing company to drive
a very hard bargain on the license, or not secure a license at all.

Thus there clearly is a direct link between capital gains taxation and rewards that
research institutions receive from technology licenses, especially in the long-term
industries of biotechnology and pharmaceuticals.

I will conclude by saying that I think the biotechnology industry in the U.S. has
enjoyed a grace period over the past decade. This has been provided by the
historical strength of our universities and university-industry relations, by the
enormous research productivity fueled by the NIH, and by the capacity of venture
capital funds to finance biotech companies through most of the 1980’s.

Another factor contributing to this grace period is the historical lag in R & D
capability of many overseas pharmaceutical companies, particularly those in Japan.
This, of course, is changing rapidly. The competition is waking up. The grace period
is over.

At the same time, however, the very forces that created and fostered biotechnology
in the U.S. are being undermined: Relative taxation on long-term capital gains was
increased in 1986. NIH funding for research in the disciplines underlying
biotechnology is now being decreased in real terms. And we have recently witnessed
a so-called “conflict of interest” initiative that would have significantly curtailed the
very university-industry collaboration that is the basis of the U.S. biotechnology
industry.

Are we shooting ourselves in the foot, or in the chest? Or can we foster and promote
the few features of the U.S. industrial economy and culture that dispose us to
industrial competitiveness:

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– Our enormously productive research institutions,

– Our fruitful relationships between industry and laboratories at universities and in
government, and finally

– The unique propensity in our country for new company formation, provided there
is adequate capital available for investment.

Thank you for your kind attention.

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