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Module 4: Intellectual property and commercialisation

2.2: Stages and pathways

As discussed in the previous subtopic, there are 8 key stages in the commercialisation process (see text box opposite). The researcher and the university commercialisation office may be intimately involved in all 8 stages. The level of involvement for the entire process will depend on the commitment and resources of the researcher and the commercialisation office as well as the commercialisation pathway undertaken. However, it can be generally expected that the researcher will work closely with the commercialisation office from the disclosure stage through to the commercial pathways stage. It is very hard to successfully commercialise the type of early stage technology developed in a university without the involvement and commitment of the researchers who initially developed the IP.

In this section, the stages are discussed in more depth.

 

  Commercialisation stages
1 Research and discovery
2 Disclosure
3 Evaluation
4 Intellectual property (IP) protection and packaging
5 Proof-of-concept
6 Commercial development
7 Value adding
8 Exit

2.2.1 Disclosure

Disclosure is, as the name suggests, the confidential revelation of an innovation or idea. While ideally a researcher discloses their research early in its development, a disclosure can be made from the point of concept to the final stages of research and development. Ideally, the disclosure should contain all the information necessary to start the evaluation process, although that may not all be available at the start of the process. Most universities will want their researchers to disclose as early as possible as this will enable the commercialisation office to provide the best advice in a timely manner, and also allows the most flexibility in terms of publishing and patenting. The types of information required in a disclosure are:

  • Inventors/originators/developers
  • Not necessarily from host institution
  • Description of invention/innovation
  • Source of funding
  • Advantages over existing competition
  • Past or proposed publications
  • Potential partners where already identified
  • Potential market or use

2.2.2 Evaluation

After receiving a disclosure, the university commercialisation office will work with you to assess an innovation for its commercial potential. Extensive searches of academic and patent publications are conducted to define whether the innovation is unique or novel, its overall competitive advantage, and its marketability. It is also important to try and understand the scope of any IP protection that might be claimed, as this can have a significant impact on its value. The following questions are typical of those asked when undertaking an evaluation of IP.

The IP: what is it and how is it beneficial?
  • What is the technology/innovation?
  • How will the research benefit the community, industry, or business?
  • Can the IP be protected?
  • Could potential infringement of the IP be detected?
  • What scope of IP protection might be expected?

The IP contained within the research may be a compound, device, process, manufacturing method, or a service and it must offer a significant benefit for potential consumers. Additionally, it must be possible to protect the IP.

The product: what is it and is it of value?
  • What type of 'product' would the innovation be? That is, what will users want to spend money to buy (e.g. software program, vaccine, pharmaceutical drug, book, or community program)?
  • Can you identify who would pay money for the innovation and why?
  • How big might the impact of the technology be?
  • Who is the competition? That is, what is available that is the closest product/service/technology/business available that would compete with the product?
  • What is the competitive advantage over existing products or services in this space?

When it comes to a commercial opportunity, scientific value is necessary but not sufficient. The IP must offer a clear solution to a well-defined problem or issue and the application must have an advantage over existing products. Critically, there must be a 'market need' (that is, would customers be willing to pay for it?) and for this the IP's 'unique selling point' needs to be identified.

The market
  • What is the need for the improved technology?
  • How long will it take to develop the research to a product that consumers or other end users can purchase?
  • Who are the customers (identity, preferences, needs)?
  • What is the size of the market addressed by the innovation for the product and what are the market dynamics like?
  • What is the expected resource and funding required for taking the product to market?
  • What is the availability of industry or investment partners to help fund and or develop the product?
  • Are there significant barriers (financial, regulatory, technical, political) for new market entrants?
  • Is the industry receptive to new innovation?

Ideally, the market should have a large growing customer base with a demand for the 'product'. There should be no barriers to entering the market; the market may cover different geographical locations; and there should be the ability to make a profit from the sale of the 'product'.

The cost of development

When assessing the commercial potential of an innovation, it is necessary to weigh up the costs of commercialising the research against the potential returns. As a general rule, the larger the potential return the more risk that will be accepted. However, different parties in the commercialisation process will have different access to resources and different attitudes to risk, and these need to be considered. Key costs are:

  • Cost of development
  • Time to market
  • Cost of sales (marketing and distribution)
  • Risk
    • Technical
    • Market
    • IP
    • Commercial
    • Financial
    • Key person

Other factors taken into consideration:

  • People: the research (and commercialisation) team needs to be passionate about the project and committed to taking it to the market as well as able to work with investors/industry collaborators.
  • Growth: potential for rapid growth and scalability; a clear business strategy for growth; and a global vision.
  • Business model: is it a well thought through and articulated business model with identified customers who are willing and able to pay for the product. Early cash flow is viewed as highly advantageous and a clear path to positive cash flow and profitability must be mapped out.
  • Exit for financial investors: clear path(s) to possible exit; creation of significant royalties; value creation.

2.2.3 Proof-of-concept

Early stage research often lacks critical data to prove that it will work in an industry setting. Such qualifying research is often pivotal to securing investment or other funding. Known as 'proof-of-concept', this stage requires close assessment and a reduction of the technical and market risks associated with the project. These activities may be carried out by the research team, or by the commercial partner, or as a collaboration between the two parties. Essentially, the research team needs to provide convincing evidence that their research has market potential, as defined by the potential commercial partners. This may involve conducting a key experiment, building a prototype, or performing critical market research. Commercial input, termed “voice of market” is often very valuable at this stage as it will help determine how to achieve the type of proof-of-concept that industry wants to see. This may not involve any technical advance but, depending on the industry, there may be a range of key risk factors that they would wish to see resolved. These might include:

  • Comparisons with “gold standard” products or processes
  • Specific technical specifications met
  • Scale-up issues identified or solved
  • Prototype developed
  • IP and freedom-to-operate issues addressed
  • Understanding cost of goods.

Only by talking to potential partners will it become clear what their issues are as they decide whether or not to take on your innovation.

2.2.4 Commercial development

IP and innovation can be commercialised via many pathways. The pathways often considered are licensing (either directly or through an option), forming a start-up company, consulting, or conducting collaborative research. Other options include assigning IP to a third party or research collaborator, or entering into a joint venture. In general, the greater the commercial risk involved in the pathway, the greater the potential profits (see table below). It is worth noting that these profits are not necessarily distributed evenly, and should take into account the contributions of all the parties necessary to make the commercialisation process a success.

Table 4.2 Quick comparison between models

  Risk Profit Control Management
Assigning IP small low–high none none
Consulting small low-medium low low
Licence medium low–high low low
Joint venture med medium-high Medium - high high
Start-up high none-very high according to equity, usually low depends

When choosing between the potential pathways, a commercialisation office will first consider what the objectives of all the different parties involved are, particularly in terms of financial return, potential to achieve impact, resource implications, and risk management. It is important to discuss these early on in the process and aim to maximise alignment of the different parties (and understand the differences between them). Other considerations include evaluating the market, competition, funding requirements, stage of development, and investor appetite.

The two commercialisation pathways that are traditionally the most common at universities, both in Australia and internationally, are licensing or forming a start-up company. As a very rough average, universities typically expect to license 10 technologies for every one spin out, although this varies depending on a range of local factors. Over recent years, less direct routes – such as consultancy and research collaboration – have played an increasingly strong role in the process of translating university research into successful products and processes. It is also more common to see a combination of different pathways, so there may be a licence together with collaborative research back in to the lab that developed the original IP. These pathways are examined in more detail in the following.

The licensing pathway

The 'licensing pathway' involves granting a third party permission to exploit intellectual property without transferring ownership of the IP. The licence is a legally enforceable contract, which creates rights, duties, and obligations for both parties. The terms of a licence are flexible and are generally negotiated on a case-by-case basis.

Licensing IP has the advantage of being a relatively inexpensive pathway, which provides a return with minimal outlay. Depending on the contractual arrangements, the licensor may retain some control over the IP and place limits on the licensee's involvement in exploitation. It also may allow the licensor to overcome foreign barriers such as the inability of the licensee to enter overseas markets due to lack of capital or resources for expansion.
However, licensing generally results in lower returns to the licensor than direct commercialisation because the licensor will only ever receive a percentage of the value added by the licensed IP. This value is returned in a range of payments in consideration for the grant of the licence and can include:

  • Upfront payments
  • Annual fees
  • Royalties on sales
  • Percentage of sub-licensing income
  • Payments on meeting milestones
    • Technical
    • Regulatory
    • Commercial

The rate of royalties varies significantly by industry and stage of development of the IP towards a marketable product or process. It is often in the 1–5% range of net sales, although it can be higher or lower in specific circumstances.

Risks associated with licensing include:

  • Higher than expected administration costs associated with
    • Negotiating complex licence deal terms
    • Monitoring licensee compliance
    • Meeting licence obligations
  • The licensor may have minimal control over the IP management
  • The licensee may not perform, resulting in the underdevelopment or shelving of the IP.

When licensing, the burden of effort and risk generally rests more heavily on the licensee because they assume the costs of developing the research into a product and then delivering it to the market. As such, when negotiating a licensing contract, the lower the risks associated with developing the research, the greater the consideration for grant of the licence that can be negotiated.

When licensing IP, it is important to research the potential licensee. The licensee must be capable of technically, commercially, and financially developing the IP into a product and then have the capability and commitment to market it, as well as be capable of defending any patent infringement. It is important to ensure the licensing contract is reviewed by legal and commercialisation professionals. They will be examining a range of variables in the contract including:

  • Exclusive/non-exclusive licence
  • Fields, territory of use, term of licence
  • Performance requirements on all parties
  • Returns via royalties, milestone payments, and annual maintenance fees
  • Percentage from sub-licence fees
  • Leverage for research funding
  • Retention of research rights and publication rights
  • Warranties
  • Termination.
The start-up company pathway

A start-up company is a newly formed company with rights to commercialise the intellectual property. The company's management and board will raise funds to strategically develop products from the IP.

An advantage of this model is that funding for further research can be secured outside the regular university funding structure by accessing pre-seed capital, seed venture capital, or angel investment. Additionally, this pathway can provide the potential for greater return through research, as the inventor’s lab is often the best place to carry out the additional research by the company (although this will tend to change over time).

A start-up is a high risk, however. It is heavily dependent on successful research outcomes, a receptive market, human resources (and commitment), as well as financial variables. There are the risks that no one will invest, or only invest on terms not acceptable to all parties; the research fails to deliver the expected results; returns are lower than anticipated; and that you have to cede control to investors. For commercialisation offices, start-up companies also require more human resources to successfully start and manage, and they must comply with corporate governance regulations as well as cope with taxation consequences.

Key points for the researcher to note about a start-up company are:

  • The university licenses the research IP to the start-up company most commonly for a nominal up-front fee and shares in the company
    • It is not unusual for this licence to convert to an assignment on the company reaching milestones such as raising capital or selling the business
  • The general model is for the start-up company to contract the university research team to undertake further research and development of the IP.
The consulting pathway

Whether undertaken via the university commercialisation office or independently, consulting provides academics with invaluable opportunities to expand their research and commercial horizons. Benefits include:

  • Testing your intellectual capabilities in government and industry sectors
  • Disseminating ideas, models, and research outcomes outside academia
  • Opportunities to generate additional research data
  • Consultant/client relationships often create new research opportunities
  • The opportunity to give something back to industry and the community.

Consulting can range from a straight forward contractual arrangement through to forming a consulting business. Commonly, university researchers are contracted to perform specialised R&D or testing of projects for clients; undertake technical consultancies; or provide expert opinions for legal cases.

When undertaking a consulting contract it is essential for the researcher to ensure that they have appropriate insurance and that their contract is reviewed by a consulting or legal professional. The latter is particularly important to ensure that the contract facilitates the development and protection of intellectual property developed from consulting.

Undertaking consultancy for a company is often an excellent first step in developing a relationship that can lead to additional research or potential licence deals in the future. Companies have a strong preference for working with researchers with whom they already have an existing relationship.

Examples of commercial pathways

The following case studies are examples of university research, from a range of disciplines, which have been successful commercialised via these three main pathways.

Pursuing the topic further

Below are links to the Office of Technology Licensing at Stanford University and the Technology Licensing Office at MIT. While university technology transfer has a legal impetus in the US, Stanford and MIT have been extremely successful in commercialising their innovations and their sites contain several articles describing successful licensing of university technology as well as the formation of start-up companies.
http://otl.stanford.edu/
http://web.mit.edu/tlo/www/index.html

Other useful sources are Knowledge Commercialisation Australasia (KCA), the peak body for commercialisation offices in Australian and New Zealand: http://www.kca.asn.au/
The Association of University Technology Managers (AUTM) in the US http://www.autm.net/Home.htm
The Association of European Science & Technology Transfer Professionals (ASTP) http://www.astp.net/
PraxisUnico (UK) http://www.praxisunico.org.uk/
Licensing Executives Society http://www.lesi.org/

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