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Biotechnology, Health and Business in Canada, the United States and Worldwide

Why Technology Transfer Offices Should Focus on Sponsored Research and Ignore Royalties: In Praise of UNC’s “Express License”

A story by Xconomy’s Sylvia Pagán Westphal yesterday highlights a new approach to technology transfer licensing being taken by UNC Chapel Hill’s Office of Technology Development: The Carolina Express License. At first glance, the agreement looks, as Westphal puts it, “not very sweet for the university.” UNC takes 0.75% of any exit transaction, but no equity, no milestones and only a 1% or 2% royalty. Here’s Westphal’s description of the UNC approach (including a witty juxtaposition of religious imagery):

“They call it the holy grail of tech transfer, though critics, I reckon, think of it more as heresy. Either way, it’s gutsy.”

Count me in the group that considers it tech transfer Nirvana Nirvana.

Why? Maximizing revenue from individual licenses is the wrong priority for University tech transfer. As UNC’s Cathy Innes says:

“Where we hope to gain is that if we get a lot of companies started, more of them will be successful and have more products on the market, so we’ll be more successful…”

The University of California tech transfer system calls this the “Home Run Model,” (pdf) recognizing that even with 420 companies founded and 800 products on the market, nearly half of all licensing revenue comes from the top 5 products and the top 25 accounted for 75.6% of all 2009 licensing revenue. If more companies are started, there’s a better chance one of them is the home run.

Here’s another reason: easier licensing negotiations mean more sponsored research, and sponsored research is way bigger than licensing. For example, the USC Stevens Institute for Innovation took in $7 million in licensing revenue in 2008; but nets $500 million annually in sponsored research. Even tech transfer powerhouse Stanford takes in almost 7 times more money from industry-sponsored research than it does from licensing (PowerPoint). A small increment in sponsored research would easily offset the marginal licensing revenue sacrificed in UNC’s template.

Since December when the Express License was introduced, it has been used to found 6 companies out of UNC. Whether these six succeed or fail, I bet every person involved — the P.I.s, the founders and the funders — will be more likely to work with UNC again than if they had negotiated an individualized license. Westphal quotes Lita Nelsen, director of the Technology Transfer Office at MIT as saying the University license “is not the hard part of the problem,” but the UNC model sounds vastly less painful than every tech transfer story I’ve heard or been involved in.

Bottom line: a better tech transfer experience = an easier start-up = more companies = more sponsored research = more tech transfer wins. Here’s hoping that UNC’s Express License goes forth and multiplies.

Twitter connection: hat tip to @ldtimmerman and @Michael_Gilman for links to the Xconomy story. Follow Sylvia Pagán Westphal on Twitter at @sylviawestphal or as part of my Twitter list of Biotech Pharma and Health personalities.

3 responses to “Why Technology Transfer Offices Should Focus on Sponsored Research and Ignore Royalties: In Praise of UNC’s “Express License”

  1. Lee Taylor September 22, 2010 at 9:49 pm

    I am surprised you aren’t aware of U Hawaii’s Mahele Method. It works for both start ups and established companies.

    I recently came back to Hawaii to find the novel UH licensing method I created was the lead article in our journal of note, Technology Transfer Tactics, and was specifically mentioned in testimony given before the US House of Representatives by Lesa Mitchell of the Kauffman Foundation on June 10th.

    Tremendously exciting.

    Lee Taylor, JD, LL.M, MBA candidate

    Express-style licenses gain traction, new wrinkles emerge

    The University of North Carolina has attracted considerable attention in the press for its introduction of the Carolina express license, a set of standard terms that the university is using to speed and streamline the licensing process for UNC start-ups. Given the benefits of faster deals and higher throughput, it is perhaps not surprising that other TTOs have looked at similar “express” approaches, and alternative models designed to speed up deal-making process have emerged.

    One example was introduced just this past September when Lee Taylor, JD, LL.M, MBA, a technology licensing associate at the University of Hawaii (UH) in Honolulu, unveiled the “Mahele Method,” a streamlined approach to licensing that is designed to facilitate deals involving both start-ups and existing companies. The approach, which is named after the Hawaiian term for share, breaks licensing down into four key steps, beginning with a license issue fee, an element that Taylor is adamant about.

    “Licensees simply don’t respect the license or the technology until there is some earnest money,” he says. The license issue fee, designed to recoup patent expenses, starts at a minimum of $6,500. When patent costs are higher than that figure, the TTO allows the fee to be split into two or three payments over a six- to nine-month period.

    Taylor also insists that all license agreements include gradually increasing license maintenance fees. “You are increasing the payments further along when you hope the

    licensee is better able to pay, but it is also a major mechanism to get out of the license if the licensee is not performing all of [the requisite] milestones,” he says. “It is a very elegant way to break a license if progress isn’t being made.” Although there is some flexibility, license maintenance fees are typically due at the end of each full calendar year after executing a license. The first-year fee is $12,000, the second year is $24,000, and all subsequent years are set at $36,000. Royalty payments in the Mahele method are set at 5% of net sales. With regards to equity, under the Mahele Method the university never takes an equity position until after the first round of fundraising, explains Taylor, and he emphasizes that this approach offers appeal to all sides.

    “It is incredibly expensive and incredibly time-consuming for a start-up company to execute all these stock transfer agreements when it is really not necessary up front,” he says. “It is even quite burdensome for universities to retain equity in a company that may go dead in a couple of months, so we hold off on taking that equity until [companies] have proven that they are a sustainable entity, and that makes more sense for everyone.”

    “The most immediate [result] we have seen is a complete abbreviation of the time to license. We literally did a license agreement in ten days at one point,” he says. “That’s magical for Hawaii where things tend to move slower.” An in-depth article on the Mahele Method as well as another express licensing approach used at Carnegie Mellon University appears in the June issue of Technology Transfer Tactics. To start a subscription and access the full article, plus more than three years of archived issues filled with real-world strategies, advice, and best practices, CLICK HERE.

  2. Ken Polasko September 23, 2010 at 11:52 am

    Just wondering how the inventive faculty feel about trading off ISR for royalties?

  3. Wayne Schnarr September 23, 2010 at 7:17 pm

    Has anybody been able to pick winners consistently in the biotech space? Big pharma has not, as evidenced by their pipeline needs and their use of a portfolio of R&D projects to mitigate the risks. Biotech as an industry does not have a success rate that is substantially better than big pharma. Why would one expect that an overworked tech transfer office would be better able to pick winners? So the tech transfer office creates more shots on goal through more deals, and gets the chance to create even more shots on goal by getting funding for even more research.

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