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Start-ups and Business Incubation: The Challenges and the Opportunities Presented to: Students to Start-ups By David Schetter Assistant Vice Chancellor for Research UCI Office of Technology Alliances May 6, 2008 Challenges Facing Universities and the Role of Start-up Companies Universities Need Research Funding Alternatives Federal funding becoming highly competitive State funding becoming highly restricted Many universities are growing rapidly, infrastructure being stressed Costs of research are increasing Conduct of research becoming more complex Regulatory requirements result in project delays Bottom line: Research now takes longer, costs more and competition for available funds is Intense Industry is a Significant Research Funding Alternative Industry offers universities a degree of freedom however, Larger companies have moved away from funding discovery research: preferring to buy proven technologies or start-ups that own them Start-up companies founded on University technologies offer a route to research funding and technology commercialization Requirements include: Strong Intellectual Property Coordination among University offices Flexibility on IP terms Attention to Conflicts of Interest and Commitment Challenges Facing Industry: The Bio/Pharma Technology Pipeline Example Top Ten Selling Drugs in 2003 Drug Company 2003 Sales 1 Lipitor Pfizer $ 9.2 Bn 2010 2 Zocor Merck $ 4.9 Bn 2006 3 Norvasc Pfizer $ 4.2 Bn 2007 4 Zyprexa Eli Lilly $ 4.2 Bn 2011 5 Paxil Glaxo $ 3.5 Bn 2006 6 Zoloft Pfizer $ 3.0 Bn 2006 7 Procrit J&J $ 2.9 Bn 2013 8 Pravachol BMS $ 2.8 Bn 2006 9 Fosamax Merck $ 2.7 Bn 2007 Effexor Wyeth $ 2.6 Bn 2008 10 Year off Patent • Total 2003 Sales - $ 40 Bn • Percent of Sales off Patent by 2010 – 82% Substantial Revenues at Risk Due to Patent Expiry 2003-2008 Merck 2009-2013 41 Pfizer 26 Glaxo 27 40 37 18 Wyeth 3 42 24 BMS AZ 15 16 17 JNJ 15 13 Novartis 21 4 Roche % Abbott 8 0 9 15 7 % % 20 40 % 60 Percent of 2003 Sales Coming off Patent % 80 % 100 Bridging Two Cultures UNIVERSITY COMPANY • Create and propagate Financial return to investors, knowledge for the public good founders and employees using knowledge • Narrow Scope of License License • Revenue Expense • Academic Freedom Confidentiality • Control of Intellectual Property Control of Intellectual Property • Diligent Development Commercial Flexibility and Uncertainty Why Should Industry Partner with Universities? Expands corporate R&D capabilities Lowers R&D costs and adds flexibility Provides access to matching grants and other sources of non-dilutive funding Provides access to scientific and technical expertise Facilitates recruiting of technical staff Enhances the corporate technology portfolio Licensing direct from University Start-up acquisition or strategic partnering Types of University/Industry Interactions Student Recruitment Internships/Externships Sharing of Materials, Equipment & Facilities Faculty Consulting Industrial Consortia Clinical Trials Gifts Technology Option or License Affiliate Programs Collaborative/ Sponsored Research Continuing Education UC Commitment to Industry Partnering Decentralizing technology transfer to campuses Principles for Industry/UC partnering Open dissemination Public benefit Informed participation Legal/ethical integrity - Accessibility for UC purposes Fair consideration Objective decision-making Impact on students Patent Policy changes and incentives Equity Policy Licensing flexibility for different industry sectors California Institutes for Science & Innovation The UC Discovery Grant Program National Academy of Sciences Convocation, Fall 2006 Theme: U.S. global competitiveness Focus: “Rising Above the Gathering Storm” report Challenge to participants: Recommend one action your community could take within the next six months that would address the issues in the Report Attendees: VP level executives from Orange County industrial firms, civic leaders, UC Irvine executives, community members, California Governor’s Office Rep Primary Recommendation: Orange County needs more business incubation Orange County Business Incubation Network (OCBIN) Enhancing economic growth in Orange County: New business incubation Collaborative R&D Leveraging investment capital, services and business resources OCBIN-Connections Secure communications for matching vetted start-ups with VCs and qualified service providers (screening process) Start-ups access “best in class” on most favorable terms Sponsorships by OCBIN-Connections members with visibility on www.OCBIN.org OCBIN Corporate Partners Technology scouting Incubating new company technologies Collaborative R&D Accessing UCI and the UC system resources The Incubation Ecosystem Service Providers Sponsors Incubators Portfolio Company Investors Economic Development Corporate Partners The Incubation Process Pre-Incubation Identification of Incubation Prospects Vetting of Incubation Prospects Incubation Seed Capital Provided by Incubator Fund Mentoring by Incubator Staff and Advisors Support from Service Providers Transition from Technology to Product Series A funding as needed Post Incubation Continued Growth Pursuit of Exit Strategy Incubation Business Models License-in/ Acquire Technology Sub-License Technology to Customers Improve Technology Productize Technology Sub-License Technology to Customers Sell Products via Channel or Direct Open-Source: Provide Services Advantages of Incubation Inventors Retain Control of Technology UCI and Inventors Increase Revenue Share Inventors Can Focus on Technology Mentors Provide Guidance Additional Assistance from Service Providers Funding Provided as Needed Economic Development Stays Local UCI Virtual Incubation Model for Start-up Companies Company founded on optioned/ licensed UCI technology and pre-seed capital Initial non-dilutive funding SBIR, STTR and UC Discovery Grants Provides for early stage technology development, leveraging UCI resources A web of agreements between the start-up company and UCI: Sponsored/collaborative research, license/option, Material Transfer Agreements, Sales & Service, sublease, gifts, consulting, subleases All standard terms with no exceptions to policy Management and integration of agreements is key UCI Virtual Incubation Model UCI Research Lab At Risk Patent Filing OTA Invention Proposal Matching Grant Grant $ UC Discovery $ New Company Virtual $ UC Discovery Grant Independent Company Physical Sublease Federal Agencies SBIR STTR Funding Sources $ Seed Funds Virtual Incubation Model (continued) Conflict of Interest Review “Without conflict there is no interest” (Conflicts can exist but must be managed) Review of financial interests (income, stock, board or management position) Percent equity holding allowed for UC founder based on stage of financing and dilution Board membership discouraged and no tolerance for management position – can serve on the Scientific Advisory Board but not as chair Virtual Incubation Model (continued) Sponsored Agreement Terms Full UCI overhead “Improvement inventions” rolled into license/option at no additional charge New inventions in the “Field” added to license/option for one-time fee First right to negotiate a license to new inventions outside the Field Virtual Incubattion Model (continued) Move to Non-virtual Status Company does strategic partnership with larger company including research funding, sublicense and co-development milestones UCI receives “attributed income” share of company partnering revenue and liquidity events Company raises next round of capital, moves out of virtual phase to own facilities & carries out product development, production & sales UCI receives license revenue on milestones and net sales Virtual Incubation with Incubators UCI Research Lab At Risk Patent Filing OTA Invention Proposal Matching Grant Grant $ UC Discovery $ New Company Virtual $ UC Discovery Grant Federal Agencies SBIR STTR Funding Sources Incubating Company $ Seed Funds Independent Company Physical Take Home Messages Diligence on IP absolutely critical Solid business plan essential from R to D to regulatory all the way through certification and reimbursement Assessment of University inventor current and future projects and potential overlapping obligations is key Understand inventor motivations and expectations Understand investor motivations and expectations Communication, Communication, Communication A business incubator can provide needed services, expertise & support, often on an equity basis Leverage University resources to the extent possible Thank you for your attention! David Schetter Assistant Vice Chancellor for Research 949.824.7297 [email protected] UCI Office of Technology Alliances www.ota.uci.edu Orange County Business Incubation Network www.ocbin.org May 6, 2008