Newsletter - Edition 27

From Laboratory to Limited Company - the new synergy between science and business

Oxford Innovation Society Lecture December 1998
Osborne Clarke

The relationship between science and commerce has been an uneasy, not to say, downright difficult one - until relatively recently.

In the late 1990's, the teaming of science innovators and business advisers is not as unorthodox as once it might have seemed. Biotechnology, like IT, is a fast evolving, even faster growing specialism within the legal services sector, and one in which law firms have developed specialist services geared to meet the demands of both the academic and the commercial world.

This isn't surprising, given that information technology and biotechnology are two of the UK's hypergrowth sectors. What perhaps continues to surprise the business sector is to the extent to which UK universities have not maximised the reward potential of the excellent know-how and intellectual property created by their own staff and students. UK Universities have traditionally permitted valuable know-how to be exploited commercially without receiving adequate (if any) financial reward - in marked contrast to the situation which has developed in the US. Thankfully this is now changing, and we are seeing what most lawyers might conservatively call a "boom" in the business of "spin-outs".

As many of its clients will testify, Osborne Clarke is not most lawyers. Regarded as one of the leading commercial law firms in the South of England, it also has a reputation as being one of the most progressive. For many people, however, the law is not readily associated with change. Lawyers don't just live in the past, goes the saying, they own the freehold. But as Andrew Gowans, Osborne Clarke corporate partner, explained to society members on December 9 last year, Osborne Clarke's profile - far from being wedded to the past - is synonymous with innovation. Rather than take a traditional back-seat role, the firm's approach is to encourage entrepreneurial flair by working closely with start-ups and to put them in touch with business angels or institutional venture capital providers. US companies in the IT sector have long enjoyed the advantage of working with professional advisers, such as law firms, who take this approach. UK firms such as Osborne Clarke are beginning to provide the same service and hopefully the results will be just as dramatic.

Happily, the firm also has a down-to-earth approach to commercial practicalities. According to Tim Cook, Managing Director of Isis Innovation, who welcomed more than 50 members and guests to the meeting, Osborne Clarke were recently responsible for organising 'the shortest completion meeting in history'.

The Science Bit

Andrew Gowans said that the spin-out is a prime example of the new synergy between science and business. Osborne Clarke, he said, genuinely enjoys working for fast-growing and innovative companies because they provide interesting work and, importantly, because they match the firm's own profile. The firm's approach to branding demonstrates its appreciation of the importance of intellectual property. In fact, the strength of the firm's brand - driven by its strategy - is responsible for its continued growth, and ultimately for its work with spin-out companies.

The firm continually benchmarks its business strategy against market developments and the needs of its clients. It actively assists its university clients to identify, protect and exploit their intellectual property rights. And it is no accident that the three key corporate areas of any spin-out - corporate finance, technology and employment - are also the firm's core practice areas.

The Key Areas

The initial stages of a spin-out involve core corporate finance skills such as company formation, share structures and debt and equity financing. The intermediate stage may involve further financings, joint ventures and acquisitions, whilst the final stages may be a trade sale or stock market flotation. Corporate finance being a core practice of many leading commercial law firms, this is perhaps the area where lawyers involvement might - and often does end. However, if the venture is to succeed in the longer term, there are key issues relating to the intellectual property which will need to be dealt with.

The actual technology and research which form the basis of the spin-out will need to be defined, developed and protected at the early stages, and ultimately exploited through appropriately drafted licences.

There is also an obvious need to ensure that the IP rights developed by employees are the property of the company. Technology businesses, like law firms, are invariably 'people businesses' and it is essential to their long-term success that the key people are properly incentivised and the business is protected to the greatest possible extent from problems should those key people leave.

The "One Third" Model

Jos Moule, a corporate finance partner and head of Osborne Clarke's biosciences unit, explained the importance of understanding the position of academics in relation to any spin-out. Having himself spent six years as a medical scientist, Jos is able to identify with some of the issues where the standpoint of the scientist may be somewhat different to that of the lawyer. By way of example, Jos addressed two particular areas which may have important implications in relation to technology spin-outs. These are:

how to balance the desire of academics to publish details of their research and the need to ensure proper patent protection and commercial confidentiality; and
how to determine who should benefit from the commercial exploitation of an innovation and who should make this decision.

Jos stressed the importance of open and honest communication. It is imperative that academics should be given freedom to publish but, on the other hand, it is vital that academics should keep the lawyers informed so that, if necessary, patent applications can be made prior to disclosure. If this relationship is managed properly, there should be no need for the lawyers to delay publication, although it may sometimes mean that the lawyers will have to move very quickly! [In managing this relationship, it is vital to ensure that the parties are quite clear as to who owns the intellectual property relating to any new technology. Difficulties can arise where intellectual property may be owned by individual academics. In such cases, the ability of an academic institution to delay publication may be open to legal challenge].

With regard to the question of determining who should be rewarded, Jos stated that the "one third" model was often taken as a useful starting point. This model envisages one third of the profits being paid to the University, one third to the relevant research department and one third to the individual scientists. Particular problems may be encountered with regard to the scientists in that certain individuals who have played a key role in the development of technology may go un-rewarded. For example, a PhD student whose research findings have formed the basis of a technology spin-out (but who has perhaps subsequently left the University) or a research assistant who has played an important but perhaps less pivotal role in the development of the new technology may both claim that they too should share in the reward. Jos said that there were no easy answers here but suggested there may perhaps be a role for an independent remuneration committee to determine precisely who should share the reward and how much each should receive.

The Business Realities

Mark Gostick, Marketing Director of Cambridge Display Technology Limited (CDT), confirmed the importance of good commercial advice. Mark is a member of a management team that was brought into a spin-out from Cambridge University. The innovation around which the company has been built is a particular type of light-emitting plastics, which are expected to lead to plastic screen TV's and other video displays. If you find a good adviser who understands your business, he said, keep hold of them. In fact, CDT itself had moved its work to Osborne Clarke's Thames Valley Office in pursuit of the office's head of technology, Russell Bowyer, because he understood their business so well.

According to Mark, there are a number of business principles that UK technology companies need to apply in order to achieve success. It is vital, he said, that the UK sheds the culture of shame which surrounds business failure. In the US there is no stigma attached to a business failure - indeed many US investors won't back an individual who hasn't been through a business failure.

Another key commercial principle is that it's the business which drives the technology, not the technology which drives the business. Most innovations can be shaped and developed in a number of different directions. Once the decision has been taken to commercially exploit the technology and take outside investors on board, the inventor will have to accept that no matter how much academic interest there may be in taking route A, if route B is the more commercially beneficial, then the business will drive the technology in this direction.

Mark Gostick described the next issue as unashamedly controversial. In his view, it's the risk-takers, particularly investors, should take the greatest share of the commercial benefit of the venture. The controversy arises because it is frequently not the case that the inventor is a risk-taker in the commercial sense.

Key employees must also be incentivised - often through share option arrangements. Mark urged companies not to be "mean" in sharing rewards; neither should the inventor try to hang on to too much equity.

The final, but perhaps most critical point to be appreciated is that institutional investors will not necessarily be in for the long haul; their aim will be to realise their investment and exit within a relatively short period, he said.

There is little doubt that times are changing; that the powerful synergy between innovators, financiers and business advisors such as Osborne Clarke is turning scientific innovation into commercial realism. The infrastructure for successful spin-outs is developing rapidly; and in this environment the entrepreneurial spirit - which has so long been a rare commodity amongst UK innovators - is beginning to thrive.