Universities turn to the middlemen

Helping UK universities turn their ideas into business has turned into a business of its own – with four IP management companies quoted on London’s Alternative Investment Market.

Surrey has become the seventh UK university to hand rights to exploit its intellectual property to IP2IPO Group plc, signing a 25-year deal in which the quoted technology management company will invest £5 million in spin-off companies in return for an unspecified equity stake in each.

IP2IPO has staked out significant territory since it raised £30 million when it floated on the Alternative Investment Market (AIM) in London in October 2003, and now has similar deals with King’s College London and Oxford, Southampton, York, Leeds and Bristol universities. IP2IPO also owns Modern Biosciences, a subsidiary which in-licenses medical technology from partner universities and elsewhere for onward development.

As Alan Aubrey, Chief Executive of IP2IPO commented on last week’s news, the Surrey deal, “further confirms our position as the leading university intellectual property specialist in the UK.”

But while it may be the leader, IP2IPO is not the only quoted technology management and commercialisation company in the UK. Peers on AIM are MMI, Biofusion and Amphion Innovations, while last week the defence research technology company QinetiQ joined BTG plc on the main market in London. Another company, Imperial Innovations, the technology transfer arm of Imperial College London, has expressed ambitions to join its counterparts on AIM

Why not elsewhere in Europe?

The curiosity is that this approach to commercialising public sector research is a uniquely British phenomenon. If nature abhors a vacuum, why haven’t similar companies arisen elsewhere in Europe to fill the evident gap between seed funding and larger, later-stage venture capital rounds?

Stephen Brookes, Director of Business Development at IP2IPO, identifies three factors that have promoted the development of these companies in the UK as world-class science, access to capital, and entrepreneurial and management talent. “Of course world class science exists elsewhere in Europe. The great advantage of the UK versus anywhere apart from the US is the strong financial system and the strong capital market.”

At the same time, the UK – with the largest and most mature biotechnology sector in Europe – has more experienced entrepreneurs and managers that start-ups can draw on. “As there are more and more successful UK biotechnology companies, we are seeing more experienced entrepreneurs,” says Brookes.

David Baynes, CEO of BioFusion agrees that AIM is an important element. “It is a very, very suitable market for what we are doing.” Biofusion has a 10-year contract with Sheffield University, giving it exclusive access to the outputs of the university’s £30 million per annum life sciences budget. The company raised £10 million when it floated on AIM in January 2005.

Indeed, such is the attraction of AIM that the US company Amphion Innovations chose it rather than listing at home. Amphion CEO Richard Morgan says AIM was more attractive New York because both the listing and corporate governance requirements are lighter.

“We also welcomed the opportunity to be listed with our peer companies – the market in London is receptive because there is a pool of companies to invest in.”

David Best, founder and chairman of MMI, took longer to reach the niche, incorporating the company in 1988, joining the over the counter market Ofex in 1996 and graduating to AIM in 2000. In 2005 MMI used the listing to raise £10 million to invest in its portfolio companies.

Best believes that the UK environment has fostered the development of quoted technology management companies better other European countries because of its greater maturity in creating venture-funded biopharmaceutical companies. “In Germany, for example, there is a lot of very good science, but the tradition is that banks will fund companies to quite a late stage of development, and they don’t fund high-risk ventures.”

AIM and investment

The AIM market not only provides a means for technology management companies to raise money on their own behalf, it also provides a route to float off investee companies. “AIM is a huge breath of fresh air,” says Brookes at IP2IPO. “Not only as a place where we can raise money, but also where our companies can raise money.”

Since IP2IPO floated it has been joined on AIM by five of its companies, Offshore Hydrocarbon Mapping, Synairgen, VASTox, Proximagen Neuroscience, and GETECH group. There has been one trade sale of Toumaz Technology.

But none of these was an IPO in the traditional or expected sense of providing an exit route for the private investors. “AIM is a way of providing money, not of providing an exit,” says Brookes.

In effect, AIM has stepped into the role fulfilled by venture capital firms before the dotcom bust forced them further up the food chain to nurture existing investee companies, rather than putting money into new ones. And the protagonists point out also that it takes less management time and effort to raise money on AIM than to put together a VC syndicate.

But why would an investor put money into a technology management company rather than investing in a VC fund?

Brookes argues that the two are completely different creatures. “In comparison to VCs we are quite diversified – as an investor you get a little bit of a vast range of technology. That’s different to the venture world where you commit larger sums to a relatively small range of technologies.”  

Baynes agrees. “Our proposition is very different: when you invest in us, you invest in Sheffield University and its £30 million per annum research spend… We’re saying something different from VCs: Universities are an under exploited resource. [In the UK] they spend £500 million per annum on research and they aren’t going to go bust, disappear into the ether, or be sold to the US.”

The shareholder base of the technology management companies consists mainly of institutional investors.

As Best points out, “The Pru[dential] has followed its money three times and has a 17.3 per cent holding, while the University Superannuation [Fund] owns 9 per cent [of MMI]. These are major institutional shareholders with a long-term view.”

“They’ve seen we’ve got a portfolio with real potential, whose value rises sharply when we do deals, and they can sit back and wait. Remember, investors need only one thing to come good to get a return on their investment,” says Best.

Pressure to deliver

The other element fuelling the development of technology management companies in the UK is the increasing pressure universities are put under to commercialise research. “But in specialist areas they don’t have the skill set – or even the money to file the patents,” says Brookes.

However, technology management companies are not the same as technology transfer offices, as Amphion’s Morgan points out. “We’re looking for one thing out of many. In technology transfer offices you are trying to process a range of different things.”

Accepting the bear hug of a 25-year agreement looks preferable to the status quo, says Baynes. “Traditionally, the university does all the legwork, but the minute it has a success it loses out because it can’t invest going forward. They might end up owning 1 perc ent at exit. Our solution is they do it vicariously through us. We own the IP but the university is our biggest shareholder.” BioFusion currently has nine companies in its portfolio.

Best says MMI presents universities with a different answer to the commercialisation question: “The end point for us is having products, not floating companies, as in the IP2IPO model. If you like, academia is where our research is carried out, but we look at the research from a commercial perspective, asking ourselves first where is there a good market. We find leading edge science at an early stage, where we can drive it forward – that’s what universities can’t do.”

Like MMI, Amphion is looking for early-stage companies where it can take a majority ownership position. “We’re sharp shooters,” says Morgan. “We can deal with any university because we have no close relationship with any one.” Amphion recently made its first post-IPO investment, putting £1 million into Durham Scientific Crystals, and is talking to eight or nine other companies about making investments.

Ideally, Amphion is looking for companies where the basic technology is proven and there is a substantial core of intellectual property, but the company and business model is flexible. “We like there to be some management in place, but not the full team,” says Morgan.