Boffins at Work

The UK’s universities, once the preserve of crusty old dons and purist professors, are getting a commercial makeover as entrepreneurs from all over the globe attempt to extract and exploit the technologies incubating in their laboratories.

Britain’s universities remain, as ever, at the very forefront of technological and scientific development. Yet, over the years, there has always been an alarming disparity between academic innovation and the widespread commercialisation of the knowledge they unearth.

Prickly and fastidious, academics are more often than not driven by the honour and recognition a breakthrough will bestow upon them, rather than the riches that could accrue from the exploitation of anything discovered.

However, the explosive expansion in higher education of the past few decades has thrown up many funding problems for universities. This has led them to diversify their income streams to ensure they are not wholly dependent on government grants and charitable donations. And what better way to secure income than to strike up partnerships with an appropriate (and suitably entrepreneurial) business partner to seek ways in which to transfer the technologies and discoveries from their labs to the commercial sphere. Over the past five years, this ‘tech transfer’ industry has been thriving.

In the beginning…
Without doubt the key figure in the UK tech transfer market success is David Norwood, chess grandmaster and former boss of City stockbroking firm Beeson Gregory.
In just two and half years on AIM Norwood’s IP Group (previously IP2IPO) busied itself establishing relationships with a pride of academic institutions, investing in and building a multitude of new tech businesses and even unleashing a flotilla of spin-out businesses on the market. In fact, the group’s work rate has been prodigious, with drug discoverers VASTox (now valued at £61 million) and Proximagen (£25 million) joining reaction surfaces innovator Oxford Catalysts (£54 million) and a host of others as AIM listed concerns in their own right.

All in all, IP Group has established more than 40 businesses from university intellectual property (IP) and boasts partnerships with the University of Bristol, Kings College and the University of Oxford’s chemistry department, among others.

Now listed on the Official List, its efforts have been rewarded with a market valuation just short of £300 million. And although the group does find itself in possession of some rather unique financial results – 2005 figures showed a £5.6 million pre-tax profit on just £1.6 million of revenue – such numbers are largely inappropriate as most of the group’s value is locked up in portfolio companies. At the end of the year IP Group’s shareholdings were valued at £44 million.

Recent weeks have seen Norwood and his team launch a £30 million venture capital fund, which they plan to use to finance even more spin-outs. The rate of activity is therefore unlikely to slow anytime soon. But with the market valuing IP Group so highly, investor attention is starting to switch towards several of its younger rivals.

The next generation
Where IP Group first boldly ventured, many others have raced to follow – each claiming its own ‘unique’ take on the tech transfer market.

Take AIM-listed ANGLE, for instance. To chief executive Andrew Newland, the opportunity available to his firm remains immense. ‘Universities are under enormous pressure to commercialise their technologies,’ Newland asserts. ‘But the big issue for them isn’t just finding money, it’s taking the IP into a business and putting a management team around it. We provide both the early-stage capital and the early-stage management.’ ANGLE says it can achieve this thanks to its other focus as a technology-consulting firm, targeting both the public and private sectors.

Of course in comparison to IP Group, ANGLE’s achievements on the tech transfer front have been more modest to date. The group has stakes in just 11 spin-out companies, including Geomerics, whose technology dramatically improves computer game graphics and Novocellus, which is working in the field of IVF treatment and embryo viability testing and should complete trials later this year. Only two of these firms have come to market themselves so far. Even so, it seems a little surprising that the group remains valued at around £22 million.

Newland’s hope is that ANGLE’s latest deal will change that. Having previously lined up various spin-outs with universities and research institutions on an individual basis, the group has, in the past few weeks, signed an exclusive agreement with The University of Reading. On paper, this deal looks a remarkably strong one for ANGLE. Not only does the group gain exclusive access to the IP of what Newland’s describes as a top 20 UK university, but it will also be offered a 60 per cent stake in each spin-out company in exchange for a set investment of £500,000. Moreover, ANGLE will receive a 15 per cent share of all commercial returns from the university’s IP (via either licensing or spin-out), whether it decides to invest in the opportunity or not.

Further similar relationships may follow. ‘There are about 40 universities in the UK of a high enough calibre to sign deals like this,’ Newland explains. ‘And we think most of those will sign a deal [with the likes of ANGLE or IP Group] in the next few years. This means there are still plenty for us to aim at and we’re in negotiations with a few at the moment.’

Floated in early 2005, after raising £8.2 million, Biofusion has adopted a similar strategy. Currently valued at £32.5 million, the company has links with the University of Sheffield that have thus far spawned ten health and life sciences portfolio investments. These range from female fertility and hormone specialist Lifestyle Choices, through to surface engineering business Plasso.

Like ANGLE the group is seeking to attract additional universities to its banner and has recently entered into an agreement with investment business NPI Ventures to create a £10 million fund for investment in Biofusion spin-outs. Chief executive David Baynes hopes this will enhance the group’s ability to seduce new partners.

Newest to the arena, meanwhile, is Imperial Innovations, which looks likely to be the closest to a direct challenger that IP Group could face.

Formed to commercialise technologies from London’s Imperial College, the company floated in July. It began trading with a £180 million market valuation after successfully raising £25 million from investors pre-float. More to the point, with 58 spin-outs already in the portfolio, Imperial Innovations has even more interests than IP Group. The list even includes AIM-listed fuel cell developer Ceres Power, which has entered into partnerships with the likes of Rolls Royce and Johnson Matthey and, in spite of its minimal historic revenues, enjoys a market cap of more than £170 million.

A different approach
While investors with little fear of risk and a weakness for the innovative should cast their eyes over each of the aforementioned companies, it’s worth remembering that not all tech transfer companies operate in such a classic manner. Recent Growth Company Investor recommendation XL TechGroup, for instance, is resolutely following its own path.

Headed by exuberant American John Scott, XL Tech bills itself as more of a venture capital business than a technology incubator and, as such, focuses much more narrowly on investment opportunities.

‘We don’t start with technology, we start with an unmet need,’ Scott explains. ‘Then we go to the [mostly US] universities and seek out the appropriate technology.’ The emphasis is on potentially stellar returns, rather than mere mild success stories. ‘We only start companies with the potential to be valued at $400 million after four years,’ Scott insists, ‘and of the 50-75 opportunities we see each year, we only tend to do one or two.’

This may all sound like the bluster and bravado you would expect of any aggressive entrepreneur, but perhaps more than any of its tech transfer rivals XL Tech can back up its claims.

Fully-listed carbon credits business AgCert, for example, is currently valued at in excess of £300 million and XL Tech retains a 24 per cent stake. And with non-toxic pesticides business TyraTech (still two-thirds owned by Scott and his team) eyeing a London listing of its own and having signed some significant commercial agreements, it could be only a matter of time before XL Tech’s own £144 million market cap starts to look modest.

Pull, don’t push
UTEK is another that has its origins in the US, and like XL, it continues to follow its own path, which is a more pragmatic approach than most of its rivals.

‘We have over 40 listed companies who employ us to identify technologies for them,’ chief executive Clifford Gross explains. ‘They contact us with a specific need and then we go to the universities and research organisations to identify a solution. What we do is therefore technology pull. The institutions engage in technology push (ie pushing their technology out into the world) on the other hand and that is much more difficult to make money from.’

Encouragingly for Gross, there appears to be no shortage of demand for this service. During the first half of 2006 alone UTEK successfully transferred 16 technologies from universities to its corporate clients. A further three were completed in July and in each case the group follows its established model of receiving a fee and a stake in the business in exchange for its services.

At present UTEK holds equity interests in more than 50 companies, which back at June’s half-year end were worth more than $76 million (£40.2 million). This is impressive in its own right, especially given the group’s current market cap of £101.4 million. The other thing that makes the UTEK stand out from its rivals is that, because it only transfers technologies to paying customers and seeks to neutralise its investments fairly rapidly, it is also capable of generating significant levels of revenue ($34.9 million for the six months to June) and profit ($21.4 million).

‘With us everything is market driven and that’s inherently more efficient,’ is Gross’ summation of how the model functions. It is difficult to disagree and UTEK therefore is perhaps the pick of the tech transfer sector at present.

Last, but by no means least, there is Cambridge-based Generics, which offsets its transfer activities with a consulting division generating annual revenues in the region of £20 million.

Like UTEK, Generics claims to be closer to the market than many of its rivals on account of this consulting arm. As Generics doesn’t buy in or invest in technologies from universities but instead develops them itself on its own science-park-style campus, it faces lower development costs too.

Valued at just £10.4 million, Generics is currently very much the baby of the tech transfer family. That could change, however, if the likes of Sphere Medical, which has developed a microchip sensor that can be used in operating theatres and intensive care units to monitor various components of a patient’s blood, makes it big.
Sphere has already attracted some heavyweight support – with Oxford Capital Partners, Herald Ventures and Artemis amongst those recently backing a £6.2 million funding round – and an IPO has been pencilled in for later this year, which should coincide with the completion of clinical trials.

That said, chief executive Martin Frost cautions that ‘anyone who can say at an early stage whether a technology will be commercially successful or not is either a genius or a fool. Every spin-out company will be different and all we can do is give them the best chance of surviving that we possibly can.’ This is sound advice for all investors seeking out opportunities in the sector as a whole.