The Promise of Technology Transfer
October 20, 2003

By Margot Carmichael Lester

In this second of a series of articles on technology transfer, we examine the elements entrepreneurs need - and the potential pitfalls they need to be aware of - in order to be successful in the tech transfer marketplace. Watch for the rest of the series in the next three issues of Larta VOX, leading up to our Project T2 technology transfer conference November 13th.

All over the country, researchers are developing innovative technologies and materials that could radically improve your quality of life. Groundbreaking medical devices, more effective treatments and diagnostics, and space-age technological advances are being uncovered in companies, universities and federal government facilities.

This is the promise of technology transfer - the process of taking innovation from the lab to the marketplace.Yet commercializing these whiz-bang developments can be as challenging as creating the innovations themselves.

First, truly marketable innovations have to be identified from the vast research and development activity in federal labs, on university campuses and in the private sector. Then there has to be a policy environment that encourages and supports technology commercialization.

Evaluating Market Potential

Every innovation isn't a viable commercial play. A lot of factors go into the evaluation, but, says Dana Warren, a partner with Bingham McCutchen LLP, "The reality is that, in evaluating competitive approaches, the best technology doesn't always win. 'Good enough', delivered at the right time at the right price, is often an investor's best choice. They want to see technology that is as close to ready as possible and that addresses a real, existing problem that people are spending money on bad answers to solve."

Venture capitalists use the following criteria to determine the commercial potential for technology transfer deals.

· Strength of the intellectual property. Is the IP proprietary and protected? What are the barriers to entry? Is there scientific merit or other validity to the work? How quickly and inexpensively can it be presented as a product that has the right physical and technical specifications, the right price, and achieve the right level of market penetration? For life sciences: strong pre-clinical data, animal studies, ADME and toxicity data are also required (for products that go into humans or will eventually go into humans).

· Technology platform. Will the technology spawn more products later, or is it a one-trick pony? What is the value added to the R&D chain? Will other companies be willing to pay for it?

· A sense of the regulatory pathway and the cost of going down it. For life sciences, what are the clinical trials going to look like? Has the FDA worked with this type of technology or product before?

· An idea of the size and timing of the market. Is this serving an unmet need? Are people actually ready to pay for it? What are the competing products or technologies?

· What is the reimbursement potential? For medical devices, treatments or vaccines, is it something that will be reimbursed through the current (and future) medical payment system?
"Finally," Warren adds, "does the technology readily lend itself to being produced in quantities that are economically attractive? In other words, are there impediments to using semi-skilled assembly technicians to build the product? Does it require special materials or components that are particularly expensive or have a difficult procure or are hard to handle? A device that must be assembled by Ph.D.s had better have a huge per unit price."
The Patent Problem

Proprietary, patented innovations are the core of technology transfer. Without them, there's no sustainable commercial application. But the patent process itself creates significant issues for inventors/investigators, sponsoring organizations and investors.

"The cycle time from patent filing to the point at which an innovation is ready for equity financing has ample opportunity for improvement," notes Carl Schramm, president and chief executive officer of the Ewing Marion Kauffman Foundation in Kansas City.

"A venture capital firm or commercial entity that may acquire a technology has its view of the information content and format that must be available for commercialization, but the university technology transfer manager has a very different level of understanding of the criteria necessary for marketability," he continues. "If a university patents a technology too early, and critical work is required before commercialization can occur, these additional activities can then consume the patent life, thereby lowering the probability of commercialization."

"They must determine the broadest possible market for their innovation," Schramm says. "These activities require highly skilled business expertise for which a premium is paid…in the private sector. If the university or federal tech transfer offices are pushing volume through the process, they may be contributing to slow cycle times and numerous narrow patents. On the other hand, if these offices are screening too tightly, the public sector may miss an opportunity that could be the next cure for cancer."

For instance, the volume of life sciences disclosures and patents does not correlate with the number of commercialized products filed with the FDA. "Universities may have a closet full of patents that are either not marketable or that actually do have potential but lay dormant because of a lack of appropriate staff to evaluate data for real opportunities," Schramm says.

Are there opportunities to make these patents available for broader commercialization? Schramm says it depends on policy.

"We increasingly appreciate the importance of innovation on the economy, but we do not have enough data to determine the policy levers that must be addressed more fully to foster this innovation," Schramm notes. "The Kauffman Foundation believes that with appropriately focused initiatives, we will be able to work with partners in the industry to develop answers to these questions and help shape policy in the future."

Entering the Marketplace

Many venture investors prefer to focus on late-stage technologies, making it hard to sell a tech transfer deal that's based solely on emerging or early-stage innovation. In addition to air-tight intellectual property aimed at a large existing or potential market, Mitch Mumma, general partner of Intersouth Partners, a venture capital firm in Research Triangle Park, N.C., says viable tech transfer deals must have the following items:

· An experienced entrepreneurial leader. "This person is probably not the long-term CEO but is someone who can navigate the challenges of getting a company started," states Mumma. Often, outsiders with deep industry experience on the management side are recruited by the founders or early investors to shepherd early stage commercial ventures through their formative years.

· A capital strategy that makes sense. "Can you make significant value changing milestones on $5 million or less? Is the total capital need manageable?" asks Mumma. Too often, sponsors (lab, university, etc.) want to receive large cash payments early, extracting too high a royalty on the back-end. "Involve investors early so they can agree that the license arrangement will not create deal killers."

"Many of these technologies can create fabulous wealth for all involved and solve real problems for our society," says Mumma. "But too many companies stay in research mode forever and need, as part of management, people who have taken products to market. This allows the researcher to continue with basic research adding potential new intellectual property…down the road, and the [sponsor] gets to keep their star inventor."

That's often the best way to circumvent the issues that can arise when a scientist or engineer is placed in a management role.

"Things are of course a team effort," says Barr Dolan, founding partner of Palo Alto-based Charter Ventures. "So in general, one tries to match scientists with strong business people. Unfortunately there may not be a cure for 'deafness'."

Common Pitfalls

Moving researchers and developers from the lab to the corporation can be a challenge. Barr Dolan, founding partner of Charter Ventures in Palo Alto, identifies the following common pitfalls he has encountered in his more than twenty years as a Silicon Valley entrepreneur:

· Focusing too narrowly. "Scientists tend to be very interested in new things (i.e., research)," says Dolan, "So the idea of producing a product -- with no more tweaks -- is not natural to them. They may really be interested in new research, not developing a product."

· Overestimating the probability of success in research and development. "They often underestimate the difficulty of selling products. No matter how great the technology is, no technology sells itself," notes Dolan.

· Getting lost in the details. "They have trouble putting together strong 'business' stories," says Dolan, "Or seeing the business' big picture."

· Trouble relating to business types. Especially, adds Dolan, "Believing that marketing people can't be trusted."

· Not being very "practical" in a business sense. "In a right angle world, things should work a certain way," Dolan explains. "They don't get it when it doesn't."

Read Tech Transfer Q&A with Versant Ventures' Brian Atwood from the October 13th issue of Larta VOX.
Read Technology Treasure If You Know Where to Dig, from the August 4th issue of Larta VOX.

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